Ausbuy

The Economy

July 22nd, 2007

The media is full of stories about Australia’s buoyant economy. Details about our increased debt level get less attention. The boom is being financed by other people’s money. Australia is running a huge balance of trade deficit, yet the prices being paid for our minerals and the volumes being sold are the highest in our history. The deficit is being financed by borrowing overseas and by selling assets. We are proudly told that this is private debt and the government has a surplus and this increasing debt doesn’t matter. This, of course, is not a valid argument as the debt must still be serviced and the money required for servicing it continues to increase, and this, together with our insatiable demand for imported goods, means that Australia’s overseas debt increases at an accelerated rate. The shortfall in our Balance of Payments, can at this point in time, be met by borrowing and asset sales, but we should still be aware of possible clouds on the horizon. Among these are:

• We will run out of assets to sell.
• The mineral boom like all other booms will come to an end.
• Our manufacturing base is being destroyed by an overvalued dollar. This produces an increased propensity to import and a reduced export potential.
• An increased proportion of our national export income is required to finance the payment of dividend and interest on overseas loans.

At this point in time Australia has a good credit rating, but it must be remembered that the terms of trade can change, and this would cause our rating to be adjusted. There is a belief that we can continue to earn increased foreign income from education and tourism. Closer examination would cast doubt on this premise. Countries that currently send people to study in Australia are building their own universities and hiring expertise from other countries. Most of Australia’s tourism is internal and the distance from the main source of tourists would suggest that this state of affairs will remain.

Our Stock Exchange has shown an amazing growth over the last three years, but we have had previous booms that ended in tears. Part of this gain has reflected the increased liquidity generated by compulsory superannuation, but in the future this increased liquidity will be offset by baby boomers taking money out of superannuation to finance their retirement. However, the current increase in share prices is making people feel wealthier and spend money on items like overseas holidays and new cars. This requires foreign currency.

Inflation seems under control, but this is largely the result of an overvalued Australian dollar. The cost of this is high as it is destroying our manufacturing competitiveness. If the dollar weakens, inflation will take off, but our manufacturing will not as factories closed are gone forever.

We would conclude by agreeing that things are going well at the moment, but are concerned by the price we will pay in the future.

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1 Comment »

1. Abbot

   I do think you right on the spot with this post, i could use a lot a struff for my new study thank you very much.
   Greets

   Trackback by Abbot — September 28, 2007 @ 1:25 am

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