Australia's economic situtaion (update 1)

Australia's economic situation (update 1)

Australia is an amazing country, but poorly governed (like most countries). In fact politicians in Australia (like most countries) are out of touch with reality. Australia unfortunately is a follower, it's political system follows America's flow. What the Obama administration (and previously Bush's) implicates into it's polices, Australia does the same. Which is a big shame as Australia has an economic disaster unfolding.

You don't need to really look at the complexities of economics and the different theories to know one thing; if a value is taken out of an equation it needs to be brought back to complete the formula, simply put you cannot spend money with out getting that money from somewhere else. With the Australian budget recently released, it is all but a muddled spending spree, with no thought or foresight and a dreadful bet that the world will boom in 2 years for 2009. This simply will not happen. The global economy is on a de-leveraging rollercoaster ride and the bottom has yet to be reached and you can be ensured that several 'other' crisis are lining up. From a currency crisis on the US Dollar through to widespread protectionism, food/environment, oil, viruses and so on.

Creating massive deficits now, as Australia has, following the US and the rest of the world. Is not a good thing at all, in fact Australia is in a serious situation if the commodity markets do not return to 2004 levels (which they won't). So it will leave the Government no choice but to sell it's debt to the Reserve bank which will then print money (like the US). The housing market in Australia will eventually collapse and significantly, the problem is the goverment is trying to underpin a 'boom' housing market. But continuing the first home owner grants, this was not cut from the budget as it should have been. This is going to put further strain on the deficit as it blows out more, but the private sector and the banks will cut down on growth and lending. So essentially the market will go bust with or without home grants.

If the US gets a credit down grade, in which it may very soon. Australia will also get a downgraded at some point. Exasperating a inflationary precursor as the Australian goverment will have to devalue the Australia dollar, they will have no choice. Commodity producing countries that trade with China will make sure that their exports are cheaper. An Australian dollar collapse is very possible, especially when unemployment begins to peak in 2010.

The problem with increased governmental spending it reduces private demand in two ways, the main is eventual tax increases and the second is an increase in interest rates. It would appear that Australia, like the US will opt for tax increases rather than raising interest rates (to return to surplus). Tax increases will shrink private expansion as companies will still try and keep costs down - so to believe that companies will expand rapidly and employ on mass in the near future is unfortunately a fallacy. You can thank Government's for creating deficits on public accounts for this.

As mentioned regardless all central banks will print money, lead by the Federal Reserve to keep economies flush with capital. Still private business will find it extremely hard to remain profitable in a high taxed and "crowding out" by goverment spending.

Japan is a good example of how stimulus plans and goverment deficits cause extended slumps, especially the lost decade era after the economy tanked in the early 90's. Japan's stimulus measures attributed little to stimulate the economy, as the Japanese goverment built roads and bridges to 'nowhere'. The Keynesian argument is that they (Japan) didn't spend enough, a rational economic view would argue that reckless goverment spending crimped private demand and made borrowing costs too high for company expansion. Either way, Australia is heading down that path as is the rest of Asia. China's over capacity and stockpiling of commodities mixed with a collapsed export market is frightening, not only for commodity producing countries; but for China it's self as it's private sector will shrink (demand).