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April 2, 2008
The economic pundits at the New Agenda for Prosperity were saying that Australia's economy is booming, will continue to boom, and that China and India's demand for minerals will see Australia through the recession in the US and the downturn in the global economy. This is the decoupling thesis and it is strongly held amongst Australian economists.
Australia's problems are held to be primarily inflationary ones. The short-term policy agenda is dampening demand, whilst the long-term policy agenda is Treasury's scenario of addressing of productivity, participation and population growth to make the economy more productive, efficient and internationally competitive.
This national discourse does not address the way the most severe and still ongoing –financial crisis in the U.S. since the Great Depression highlights the need to reform the financial architecture of the global economy. The U.S. Treasury Secretary Paulson's proposals for the reform of the financial system compare with the principles and ideas for optimal financial regulation and supervision represent a step forward.
However, they overemphasize the role of self-regulation, market discipline and reliance on principles rather than rules that have miserably failed to deliver an appropriate regulation and supervision of the financial system.
We have the biggest financial crisis in the U.S. since the Great Depression and the US Treasury is talking in terms of Wall Street self-regulating. Wall Street claims that too-harsh regulation would leave them hamstrung against countries with lighter-touch regulatory regimes. So the US Treasury protects Wall Street from ia reinvigorated London market and the emerging centres of financial power in Asia. The ancien regime re-emerges more or less intact.Great.
What the decoupling thesis ignores is that a recession in the US with its waves of firms collapsing, declining corporate profits, redunancies, and spillovers into consumer markets is less demand for Chinese exports amongst US consumers shopping at Wal-Mart That means closed production lines in China, despite the growing internal demand. That means less demand for Australia's raw resources.
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Gary,
I see that the Reserve Bank is patting itself on the back. It's monetary policy appears to have dampened demand and eased price pressures. There is growing evidence of domestic demand moderating and signs of lower economic growth etc etc.
So it is a 'no worries' scenario. The global economy economy is "slowing down" and global financial markets are" fragile" but commodity exports to China will boom with increased prices. It implies that East Asia's growth will would only suffer a slight slowdown as a result of recession in the US.