It's the Economy! Will Anyone Notice?

How nice it is to see J.W. Howard having a few problems with his back bench. Even better to see that a least a few 'Liberals' are really that; liberal, rather than just hard nosed ideologues.

John's back bench problems aside, another event that he and the rest of us should be focussing on is the record current account deficit reported today. Coming in at over 7% of GDP, it dwarfs the event that prompted Paul Keating to warn Australia it was at risk of becoming a Banana Republic.

This time, we're in the big league of indebted former Soviet Eastern Block countries.

The problem's simple; as a nation, we're spending more than we earn. If only the solution was that easy to define.

We really are in a difficult situation. Australians have lots of debt. Many have borrowed heavily to pay inflated prices for housing. Many others have increased their commitments by borrowing against rising home values to buy consumer goods. On the whole, the country is very sensitive to interest rate increases. Only small increases will cause lots of pain. Slightly larger increases could cause a real estate fire sale as heavily indebted home owners bail because they can't meet the mortgage repayments.

The government has just given a huge tax break to the wealthy. More money in the economy to buy imported products. The Reserve Bank may feel they need to raise interest rates to try to control the deficit. Apart from the direct pain that will cause the locals, it may also increase the value of the dollar as it attracts investment cash from overseas. Higher dollar equals cheaper imports equals more current account woes equals ..... a spiral.

The country is walking an economic tight rope and no one seems to notice. Let's hope that our foreign creditors don't notice, either.