Ausbuy

Is This Another Recession We Have To Have?

February 1st, 2008

The commentators are baying for blood. They tell everyone who will listen that we must control inflation and the only way we can do it is by increasing interest rates. We know that interest rate increases in Australia initially add to inflation. Company investment decisions are not swayed by ¼% increases so it is obviously that it is the general public who are being targeted. If their confidence is reduced it is reasonable to assume that, provided there was no wages break out, inflationary pressures would be reduced. However, in today’s period of high employment that is wishful thinking. However, if Australia goes into recession and unemployment rises, the dynamics of the situation changes. There is no doubt that a recession controls inflation, but a lot of people remember Mr Keating’s era including, I presume, Mr Rudd.There is a lot of instability in the world. The Reserve Bank’s planning is based on India and China continuing to power ahead, even if their vital export markets go into recession. They quote IMF experts to justify their reasoning. They say that China will grow at 10% this year and the US will have a small growth. However, these same experts completely underestimated the impact of the US sub prime mortgages, which is now counting Swiss, German, Chinese and Japanese banks among their victims. Perhaps they are wrong again. If they are, the public will blame Mr Rudd.

Since the early 1990’s we have vigorously moved to dismantle our manufacturing capabilities. Our high interest rate has left us with an overvalued dollar. The combination of these means that it is not possible to export our way out of trouble.

If the rate rises do not reduce inflation and the economy is tipped into recession we end up with the worst of all worlds - stagflation, or inflation without growth. The world is an uncertain place and I wish I had more faith in the forecasters.

Another way of fighting inflation would be to severely cut government expenditure. That is being talked about, but I suspect that the new government will not face the political pain and will instead concentrate on meaningless PR announcements which will involve moving public servants from one department to another. Another problem is that we badly need expenditure on infrastructure which adds to the inflationary pressure. The inflationary pressure is world wide and in a global economy is difficult for any one country to combat.

In previous days the government of the day would limit the banks ability to lend and this should be revisited. I realise that the multinational giants like BHP and Rio Tinto bypass the banks and borrow directly in the New York and London markets, but even so a change to bank ratios would curtail lending to smaller companies and the general public.

Whatever we do we must evaluate the comparative effects of inflation and recession. Faced with this same choice the USA has reduced interest rates to support economic growth. In the midst of the mindless chatter about raising interest rates there is no consideration being given to alternatives. This is a very important issue and the decision should be made after input from our elected leaders and treasury not just by an independent unelected Reserve Bank.

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