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inflation woes + Goldilocks « Previous | |Next »
January 24, 2008

Inflation in Australia burst through the Reserve Bank's safety zone to hit 3.6 per cent yesterday. The RBA now faces the dilemma of managing inflation while the global economy faced a slowdown as the US approaches a recession. However, the inflation result makes an interest rate rise next month a near certainty, with more to come.

inflation1.jpg Bill Leak

Not to worry though. Wayne Swan is reassuring us that the Australian economy is still strong and in a great position to withstand international shocks. Why so? The Reserve Bank and Treasury Secretary Ken Henry have reassured the Treasurer that Australia's reliance on Asia, particularly China, would absorb external world economic shocks. This is the Goldilocks' scenario.

Goldilocks says that the US will avoid a hard landing and that the rest of the world--including Australia--- could decouple from such hard landing if it happened. Those who think otherwise are just worry warts. The Goldilocks have a particular vision of globalization, one best described by Brad Sester as:

The new vision of globalization that emerged in the first part of the 2000s [is that] globalization offered the US cheap imports and cheap bond financing, a combination that proponents argued offered big benefits to the US, even if it hurt workers who had to compete with cheap imports. That vision is now coming under question: Chinese goods aren’t quite as cheap as they used to be, imported oil certainly isn't cheap and the emerging world no longer seems all that inclined to accept US bonds in exchange for its exports.

The boom in China and its demand for our natural resources depends on the American consumer buying cheap Chinese exports. Will they continue do so with falling house prices, rising petrol prices and increasing unemployment? Or is the debt burdened US consumer on the ropes and faltering?

Can China decouple from a US slowdown or recession? Will the latter mean a slow down in global economic growth? Is it still the case that when the US sneezes the rest of the world catches the cold? What if the US does more than sneeze? It catches a big cold that develops into the flu?

The answer to these questions are not clear, nor is the Treasury's and RB's Goldilocks scenario the only one. If there is a recession in the US then who replaces the US consumer as the engine for world economic growth. The Chinese or Indian consumers? That borders on fantasy land. Will Europe be the dynamic engine of the world? Few are suggesting that? So Treasury and the RBA are either banking on a slowdown in the US not a recession or they hold to the decoupling thesis.

Why do they not make their argument public? Why keep it behind closed doors?

| Posted by Gary Sauer-Thompson at 6:16 AM | | Comments (6)
Comments

Comments

So the Rudd Government is talking up expectations that it can solves Australia's economic problems (the war on inflation and its 5 point plan), whilst reminding us that they weren't responsible for causing them. It was them--the bad Coalition--that did it. Tim Dunlop has more on this.

It all sounds so familiar doesn't it. It's Costello's argument recycled. Mark Bahnisch looks the politics of managing the economy at New Matilda.

Nan,
everybody is rushing to buy the AFR to try and make sense of the global meltdown in share markets, the credit crunch, inflationary pressures etc. What the hell is going on? -I got the last copy at 8.30 am at my local newsagent. Normally copies are still there in the afternoon.

It will be interesting to read the AFR to see how they link what is happening in the US, the global economy, and what is happening in Australia re inflationary pressures.

Will they just repeat the Goldilocks scenario that Australia is insulated from any downturn in the global economy because of the Chinese shock absorbers? That the problem is just about managing inflationary pressures? Or will the commentators begin to question this scenario? I notice that the editorial says:

Australia's ability to weather the volatility on stockmarkets and the expected slowdown in global economic activity will in large part rest on a continued demand for resources, driven by China's continued growth. .. it is this growth that Mr Swan was relying on when he assured the nation that Australia remained in a good position to withstand the sub-prime and credit tightening shocks that are playing havoc on stockmarkets.

it does on to say that Swan and the RBA must be alert to the risk of stagflation, where growth slows but inflation remains high.

There is nothing about "China's continued growth." Yet that continued growth is export orientated --cheap consumer goods for the big US market. So what happens to "China's continued growth" when fearful and insecure US consumer's reduce their demand for cheap Chinese goods because they can no longer afford to put them on their maxed credit cards? Logically the continued growth lessens. So what does that mean for Chinese demand for Australia's resources. Logically the demand lessens.

The Goldilock's scenario says that nay that won't happen. Those who think otherwise are worry warts. The bears wont come and eat Goldilocks. That's fairy land stuff. It's just mythical thinking, not economic science based on hard data.

I notice that neither Tim Dunlop or Mark Bahnisch address this Goldilocks fairy tale about China ensuring that Australia really is the Lucky Country.

Gary,
the Goldilock's scenario holds that big developing cointries like China are not as dependent on export to the US for continued growth as they once were, and so are less likely to be affected by by the US slowdown.

Theirs is the decoupling story--China has been decoupling from the US since 2000--and there will a slowdown in the US not a recession. Their argument is that China's boom economy is increasingly self-determined and is not significantly dependent on US business cycles.

I'm quoting the words of a Stephen Koukoulas, a global strategist at TD Securities----who are providers of advisory and capital market services to corporations, governments and institutions, and the premier provider of liquidity.

Gary,
Bloomberg has a report on economists Stephen Roach, Nouriel Roubini and Yu Yongding, and Indian Trade Minister Kamal Nath commenting on the world economy, odds of U.S. recession and the Federal Reserve's emergency interest-rate cut at a panel at the World Economic Forum in Davos, Switzerland.

Yu Yongding, director of the Chinese Academy of Social Sciences and a former monetary-policy adviser to the central bank, says:

The number one priority of the Chinese economy is to fight against inflation so we're going to use a tight monetary policy. Tight monetary policy will have an impact on China's economic goals. We must strike a balance between growth and inflation .... China's reliance on external demand is tremendous. If there is weakness in the world economy, the impact on the Chinese economy will be very serious so we must do our best to stimulate the domestic market.

That's a different account to the Goldilocks scenario.

The financial economists and global strategists in the international securities firms in Sydney look as if they talking the market up so they can finance more deals to dig more rocks up.

Peter,
Thanks for the Davos link. I love this quote from the Davos conversation:

The Davos quote of the day comes from Cheng Siwei, vice chairman of the Standing Committee of China's National People's Congress, and thus a communist (well, in a Chinese kind of way). In one of the many discussions about the state of the global economy, several Americans called on Chinese consumers to spend more, to make up for the downturn in the United States. After all, China's savings rate stands at 50%, the US savings rate is in single digits. Persuading the Chinese to flock to the shops would be tricky, said Mr Cheng: "The Chinese save today’s spending for tomorrow, and the American’s spend tomorrow’s saving today."Touché. The whole room collapsed in laughter and applause

The world sure has changed. We should start reading more about wha the Chinese are saying. You never read anything in our mainstream press. All we get are the talking heads/Wall Street clones embedded in the money markets.

Is Wayne Swan growing in stature or is Rudd shrinking?
Funny.