Australia has a hung parliament (a interesting trend that has occurred in the last year with commonwealth goverments, an sign of political upheaval to come?), or shared government the first time in 75yrs. So far the Australian government with it's shared minority have been relatively quite. Why? Well they are probably trying to gauge populous worries and fears before announcing some political/economic policies. Meanwhile the central bank of Australia: The Reserve Bank of Australia (RBA), who operate, like most central banks in their own paradigm as a pseudo government. As we know from the US Federal Reserve, the power that a central bank has is almost above government. Pulling the cash value or the countries economic value levers at will, run by 'not in the real world' academics and arrogant individuals, who somehow think that they, being custodians of our economic system, know what is best for us. Of course they don't, they never did, in fact they cause more harm than good. In the case of the US Federal Reserve and the Fed Chief Ben Bernanke, it is questionable how mentally competent a person like that is and why on earth he wields so much power over a global currency that being the US Dollar. Which as we are all aware, he wishes under is instructions, to debase the USD.
The flipside of central bank extremities, as opposed to the US Fed, is the Reserve Bank of Australia which is governed by Glen Stevens, a Christian family man, who has been uber bullish on the Australia economy even pre 2008 global meltdown (when we were just about to meltdown). There was of course usually central bank denial of how severe the crisis ended up being and the fact that central banks of the world are now essentially still holding up the whole banking system. The point is the same arrogance and belief that a central bank/s operate
in some kind of shielded impunity away from reality of the real world and markets. The RBA has been extremely clueless to modern markets trends (as most central banks have), in fact the questionable aspect is how they are reading inflation numbers. They have been in denial of a mega bubble in housing, yet they feel it is manageable. But the Australian boom, or consumption driven boom after 2008 and when governments of the world/central banks flooded the world with the Keynesian stimulus/bailouts theory, fed directly into the Australian housing markets, which was re-inflated after 2008 recession. The housing market had still maintained inflated prices from 2000 when housing boom took place; Australia's housing boom had not corrected substantially in the 10ys included the 2008 recession, rather it maintained it's bubble with government stimulus. The mining sector enjoyed feeding off China's stimulus after 2008, but it has since waned after 2009, the US dollar began to slide, and commodity producing countries currency's began to increase in value; namely the Brazilian REAL, South Africa RAND, Colombian PESO, Argentinian PESO, New Zealand DOLLAR. Exports became more expensive China bought less at a low volume per price, so as 2010 begun, exports to China decreased but the marked up distribution/or price increases went upward. This explains why most export countries including Australia posted trade surpluses in 2010.
But, central banks/governments from Asia/South American and South Africa began to worry about their currencies appreciating too fast, hence the term Currency War, as followed on this blog. All these countries began to deprecating the currencies, or at least attempt to devalue their Foreign Exchange values in the last 6mths of 2010. Brazil being Australia's main competitor, particularly for Iron Ore, started to tax foreign bond holders, and inflows of foreign capital buying Brazilian assets. Australia didn't attempt any devaluation, or tax on foreign held assets, instead we had a government that played ball, a central bank that was caught in the headlights of rapid AUD appreciation played ball. Meaning? Well they didn't know what to do and with a astute arrogance towards social and economic conditions in Australia decided to sit pat. In the meantime massive bidding of the AUD took place via High Frequency Trading from Hedge Funds, banks etc. Instead they followed, a unadaptive central bank rule book mixed with old and antiquated polices to deal with (what they thought) is inflation based issues internally based. One being, as mention, the trade surplus and housing (which has peaked). The fallacy is that Australia isn't earning like it did in 2006 and 2007, if so the Australia's GDP would be going through the roof, it's CPI would blow out and lastly it's housing market (prices) would still be going upward. None of this is happening, CPI is weaker than an expected quarterly rises. Housing prices are flat to negative particulary in the mining states such as Queensland and Western Australia
The RBA's very ruff and not convincing argument is of course the China boom which, as discussed, we don't see in huge volumes of Iron Ore, as China is now hitting full capacity of Iron Ore stockpiles ; in other words a glut of raw material is now building up in China. If China is paying more for a smaller amounts, this would definitely not indicate that mining induced inflation is blowing out in Australia, especially when the biggest miner in the world (BHP) says the global economy is still vulnerable/fragile. So why have the RBA begun a tightening bias on the Australia economy? When most economies are loosening up monetary policy to accommodate a weak USD and a possible hard landing of China in 2011? It's anyones guess.
As discussed the RBA have no idea how brutal bidding takes place on the AUD. What they have done in all their infinite wisdom of global markets by trying to stop an inflated bubble in mining (which is what Stephens rambles on about but if a inflationary spill over was taken place we would see it in Perth Western Australia's property markets which has come to a grinding halt refer to ABS housing stats), is they (RBA) have created a speculative bubble in the AUD. Australia apart from mining relies on it's manufacturing, consumption (retail), services (financial, legal, consulting), medical research (Biotech), engineering, migration for it's economic growth. The RBA has ignored this as it's adjusts it's tightening bias upward thus causing overbidding via HFT's trading on the AUD. The export pressures will now be immense on the above industries. On top of all this is the housing bubble, which in fact was the consumption engine in 2009 after 2008 economic crisis. It was the wealth effect that drove internal consumption. Not mining, the GDP measured with CPI shows this throughput out 2009 and into 2010.
But still as discussed, the September quarter 2010 CPI has come in weaker, mining is hanging in there on low volume high priced exports, there is is a bubble in housing and a speculative bubble on the AUD. What does this all mean and lead too?:
1. the RBA is lead by a masochistic styled governor (Glenn Stevens) who has lost the plot on real Australian ecomomic conditions.
2. The speculative bubbles in housing and the AUD will probably burst in tandem, which will happen quite soon. If we do get a panic sell in the AUD it should spill over to Australian bonds as yields will plummet and the bond holders hold high yields (for a Aust housing risk) will sell. Of course the huge pressures on mortgage holders, worth the banks using the recent RBA 25% increase to increase their own with all banks passing on funding costs from 20% to 40%; with the Commonwealth Bank passing on the a huge 40% ontop of the RBA's 25%.
3. The RBA will destroy Australia's competitiveness
4. Credit inflation will begin to eat into small business/medium size business margins as profits/sales will plummet from interest payments.
So in conclusion, the RBA with the banks have created a smoke screen to pass on their own blow out funding costs using the Australia's terms of trade/surplus as the excuse. On a scale of central bank irresponsibility the RBA matches the Federal Reserve (US), with the Fed too low rates and the RBA too high. Another indication of central banks having too much power which end up being detrimental to the broader ecomomy/social structure.
The RBA will be responsible for bursting the housing bubble in Australia and the AUD bubble.
Australian cash rate now @4.75%
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