The Start of the Correction?
Makes you pine for Paul Keating's 'Banana Republic' days.
Yesterday, Australia recorded its worst ever trade performance.
Today, the RBA raised interest rates, the Australian Bureau of Statistics reported that the economy grew by just 0.1 per cent in the December quarter, and the government authorised health funds to raise fees by eight percent.
It's not looking good for a government re-elected on its economic credentials.
The RBA claims that the economy has to be slowed because it's reaching its limits of production. The government should take some responsibility for this. By halving capital gains tax in a climate of low interest rates, it created the conditions of a property boom that diverted cash away from more productive investments. A lot of the population borrowed heavily to buy homes or investment properties.
The problem for the RBA and the government is that these people are up to their eyeballs in debt. So much so that they are paying a similar proportion of their incomes in debt repayment as were people under Keating's 18% interest rates. There's not much room for rate rises this time round.
The risk is that pushing interest rates too high will cause much pain to Howard's inspirational voters in the outer suburbs. In these circumstances, property values would fall. Some may have to sell in the unenviable situation where their debt is greater than the value of the asset.
Raising interest rates also work against our poor trade performance by underpinning the high value of the Australian dollar; the double whammy of cheap imports and uncompetitive exports.
In short, there's not much that the RBA or the Government can do to rein in the economy without risking major economic pain to large sections of the population. Perhaps the economic slowdown will do the job for them, or perhaps it will make it worse.
After 12 years of continuous economic growth, a period where property and stocks rose to dizzy levels, it's not inconceivable that we're headed into a painful economic correction.
I feel we are in for some nasty economic times. I hope I'm wrong.
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No one seems to be mentioning that the Australia banking system has been insolvent since March 04. The RBA has them on life support printing money of thin air to purchase bank bills. Currenly at a net figure of 7 billion dollars and growing.
This is a recipe for hyperinflation if something is not done quickly. You can kiss the value of your savings goodbye, such as your superannuation.
The fright prone Howard's Cowards, are too scared to allow rates to rise to the needed level.
Steven, Melbourne.