The Reserve Bank of Australia’s independence is an illusion. The RBA exists because the Menzies government passed the Reserve Bank Act 1959 to create it, and subsequent governments, while occasionally tinkering with the operational framework, have seen no reason to abolish it. I have long found it interesting that even relatively minor fiscal decisions of
The “miracle” Australian economy (with its famous run of 24 years without a recession) is an amalgam of pre-modern and post-modern industries with very little in between.
Most economies run at least partially upon the productivity gains produced out of manufacturing and ‘making things’ but in Australia productive investment is supplanted with commodity exports (which make up half of exports) and the recycling of the resultant income is deployed as cash flow for borrowings offshore to pump house prices.
The former step is basically the selling of dirt, a pre-modern activity. The second step is managed via the sophisticated use of derivative markets and is essentially a post-modern activity.
Not that GDP cares given it is only the mindless measure of whirring widgets.
However, both of these activities systematically reduce economic competitiveness by inflating both input costs and the currency. “Dutch disease” by another name. This continuous “hollowing out” of productive activity means the broader economy relies heavily upon the non-stop import of capital, either in the form of debt or in the form of assets sold to foreigners, to generate ongoing income growth.
So long as the underlying income from dirt keeps flowing then the leveraging into house prices that supports consumption can continue, supported by both tax distortions and government spending.
If, however, the dirt income flow halts the hollowing out of modern industry will leave the Australian economy very exposed to a current account adjustment. We saw this in the global financial crisis but the flow of dirt income was restored sufficiently quickly to prevent any deep adjustment.
A second risk is that the debt accumulation simply becomes overly onerous for the underlying economy to service, also resulting in a current account adjustment. Well north of $1trillion of the debt is owned externally and household debt is a world-beating 186% of GDP so this is a real risk.
It is offset by a relatively clean public balance sheet that deploys fiscal stimulus in times of economic stress. However, in recent years, as both of the two above risks have increased, the public balance sheet has deteriorated as well, setting Australia up for a famous adjustment to end its famous bull run.
MacroBusiness covers all apposite data and wider analysis of these issues daily.
Westpac and the ACCI today released the 200th edition (started in Dec 1961) of their quarterly joint survey of Australian industry and it does not make comfortable reading. Westpac says in the summary conclusion that: This is a survey which is sending a very clear message. It is time for the authorities to ease financial
As no doubt many of you are already aware, Wayne Swan has been declared Finance Minister of the Year by Euromoney magazine. As someone who has created and engineered similar types of magazine executions, let me establish first that I really don’t think this is worth the bally-hoo it has received. Such special issues are
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