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"...public opinion deserves to be respected as well as despised" G.W.F. Hegel, 'Philosophy of Right'

the standard economic narrative « Previous | |Next »
October 9, 2008

Mike Steketee in The Australian says that Labor governments in Australia are fated to deal with economic crises. He adds, with respect to the current financial crisis and spooked markets, that:

Less than a year in office, the Rudd Government faces the worst episode of global financial instability since the Depression. Its prospects of matching the Scullin government's unenviable record of losing power after one term hang on Australian financial institutions avoiding the collapses suffered by their counterparts overseas and the nation not sliding into recession alongside the rest of the developed world. Whether or not voters blamed the Government directly for a failing economy may be less important than the souring of the political mood that would come with mounting job losses and shrinking personal wealth.

Rudd faces the possibility of being undone by a Depression is the argument. Steketee adds that what the Government can do to influence these events is limited. This is the reality in a world integrated by trade in goods, services and finance and there is no way of insulating Australia against a worldwide recession.

This bleak scenario is then qualified. Australia's cushion is strong growth in China and India, its main banks, are "in first class working order", whilst it has "we have the best regulatory system in the world". It's the standard narrative ---trust our banks---repeated by Steketee without a critical edge.

What of falling house prices? The plunging dollar? The current account deficit? Consumer debt? The focus of this narrative is all on the banks, regulation and easing the liquidity freeze. Have faith in our banks is the sub message and the assumption is that things will return to normal. Yet we have a bursting housing bubble, highly indebted consumers who are facing falling house prices in Sydney and elsewhere, rising unemployment and reductions in household wealth.

What we know is that the long economic expansion in Australia is over. Market prices for coal and iron ore have dropped below the highs established in this year's contract negotiations. That means growth slowing and consumer spending contracting.

What about all the infrastructure spending that is needed to keep Australia growing. Who is going to finance that nation building? The assumption that it will be private public partnerships no longer looks realistic as the private investors flee from risk taking.

Are we looking at a Depression scenario in Australia ? What we can say is that growth slowing, consumer spending is contracting and market prices for coal and iron ore have dropped below the highs established in this year's contract negotiations.

| Posted by Gary Sauer-Thompson at 8:04 AM | | Comments (12)
Comments

Comments

What about NSW? It is very vulnerable to a deep recession.

And China? Exports are down, the property sector has slumped, construction is down, and manufacturing is soft. The risk of lower growth exceeds inflation.

Still China has heaps of foreign exchange reserves--$US 1.8 trillion with at least $US 500 of this invested in US Treasury bills.

The inference from the economic narrative is that without China it is all over for Australia.

While the focus is on banks and the stock exchange it's easy to explain things in global terms. When unemployment goes up and housing prices fall, it will be much harder. They need to be thinking about how they're going to explain those things. And help make sure Turnbull stays leader of the Libs.

Nothing much is being said about the ways that the banking oligopoly, is using the financial crisis to undertake a process of "consolidation".

All of the talking heads on TV avoid mentioning the housing bubble. Talking heads from the Govt, the Banks and the real estate and building industries don't want to mention the word 'bubble'. It's become a taboo word. There's been some really spectacular bubble bursting going on of late. Over the past 15 months we've witnessed some amazing crashes in the US, UK, Irish and Spanish property markets leaving a mountain of bad debt in their wake.

So what's up with the Aust market? For all bubble watchers out there, I think they're saving the biggest and best housing bubble of them all 'til last. Remember in '88-89 when property prices doubled in just a short space of 12 months. Prices went on to triple again from there.

The Govt, banks and RBA are attempting to achieve an orderly deflation of the bubble, but it's going to be very hard to achieve in the current climate of contracting credit markets, rapidly deflating stock and commodity markets, etc. The banks are playing for time, they need to deleverage down from their present 18:1 levels.

Steve Keen on the 7.30 Report last night on the housing bubble.

http://www.abc.net.au/7.30/content/2008/s2385821.htm

He sounded vastly more sensible to me than people arguing we'll be ok because we have a surplus and a bit of wiggle room on interest rates.

It's an especially nasty picture in Australia where we already have a housing shortage.

GS-T said

Labor governments in Australia are fated to deal with economic crises

It could be design rather than fate, as I mused back on 2007-05-08 that the libs might have wanted the ALP to win the "economic poisoned chalice" election.

Later, the same thoughts can from Ross Gittins of the Age (Poisoned chalice for economic neophytes)

Back (2007-09) I commented (assuming Costello would be the Lib leader)

To mix metaphors horribly, Costello is hoping that, after passing the poisoned chalice, the dead cat stops bouncing, the chickens come home to roost, the dollar will drop, but not the penny.

GS-T : You're last two paras are spot on. I'd note that given US 30-day T-bills actually had a NEGATIVE yield (momentarily) a couple of weeks back (implying banks trust nations but not other banks), government borrowing for infrastructure makes sense as governments will be offered MUCH lower interest rates than private enterprises. I'm hoping PPP's get consigned to the policy dustbin asap.

Lyn,
I guess Rudd 's talking up the strengths of the Australian economy and banking system is an attempt to help maintain confidence. It's all about reassurance.

But Rudd + Co for all their plain talk about levelling with us do downplay the way that Australia has been on a consumption binge and spending more than we've been earning. Easy credit and all that. Borrowers are in hock and they must reduce the size of their debt a time when the price of their property is inflated--so we have the downward spiral.

This is going to hit some parts of Australia harder than others eg., Sydney rather than Perth---Keen did not address that regional difference.

Dave
I see that the sates are lining up with their funding for their infrastructure wish lists and handouts. My guess is that the investment in infrastructure is going to be more about projects that expand the capacity of the resources sector, rather than urban transit.

Lyn,
so things are hunk dory in Australia--banks are strong, regulation excellent, the economy growing, and China demands our resources. We are a beacon of light in a gloomy doomed world.

Then Rudd guarantees savings deposits because the global crisis has entered a new and dangerous phrase. So the banks are vulnerable. Presumably they find it difficult to gain access to international capital.

Rudd allows the big 4 banks to take over regional banks, increasing the concentration of the banking institutions and turning a blind eye to the lack of competition in the mortgage market. It's all about the banks--finance capital-- and nothing about the real economy. But the financial crisis impinges on the real economy if firms cannot borrow to invest, consumers stop spending and economic growth starts slowing.

Gary said "more about projects that expand the capacity of the resources sector"....

Yeah... looks like we'll have an even worse case of Dutch Disease (unless we rename it "New Holland Disease").

Dave
the Dutch disease:

an economic concept that tries to explain the apparent relationship between the exploitation of natural resources and a decline in the manufacturing sector combined with moral fallout. The theory is that an increase in revenues from natural resources will deindustrialise a nation’s economy by raising the exchange rate, which makes the manufacturing sector less competitive and public services entangled with business interests.

I accept it. It's what had been happening to Australia this last decade under Howard and Costello.

The response by Rudd Labor has been to say that will boost the investment in education and infrastructure are able to increase the competitiveness of the manufacturing sector. Trouble is old manufacturing---cars--and new manufacturing ---renewable eneregy industry.