Australian economy heading for meltdown, warns Access Economics

[Kevin_Kennedy]

Allowing a recession to do what it needs to do is not teaching anyone a lesson, it's simply allowing the recession to happen. Which is what needs to happen to help the economy.

 

[Diuretic]

Allowing a recession to do what it needs to do is not teaching anyone a lesson, it's simply allowing the recession to happen. Which is what needs to happen to help the economy.

But I think the causes are important. I found this link:

Causes of Recession - Economics Help

Case Studies of Recent Recessions in the UK

The recession of 1981 was caused by:

High strength of the pound which made exports more expensive and reduced AD.This recession particularly effected British manufacturing.
High interest rates, The govt was committed to reducing the inflation of 27% they inherited. They maintained a tight monetary policy which reduced inflation but at a cost of falling spending, investment and outpur.
Tight Fiscal Policy, To control inflation the govt were committed to reducing the levels of Government borrowing. This was influenced from Monetarist beliefs that controlling excess government borrowing was essential to the economy


The recession of 1991 was caused by

BOOM and BUST. In the 1980s economic growth was too fast and unsustainable therefore inflation increased, to reduce it the govt deflated the economy.
Joining the Exchange Rate Mechanism. The govt wanted to maintain a high value of the pound this required high interest rates of 15% which caused a big fall in AD.


Recession of 2008/09

Credit crunch - shortage of finance (Credit Crunch explained)
Falling house prices - related to shortage of mortgages and credit crunch
Cost push inflation squeezing incomes and reducing disposable income
Collapse in confidence of finance sector causing lower confidence amongst 'real economy'

This one has causes which look like they're not exactly helpful in getting an economy back on its feet.

 

[Paulie]

Diuretic let me first mention that I'm quite impressed with the way you're handling this discussion. You've admitted to learning a few things, and it seems as though some of it hsa at least caused you to take a second look, think twice, whatever...even possibly form a different opinion about this mess in the end. It's a shame that others here apparently aren't capable of that.

One thing the Austrian followers have going for them is that we don't have the burden of proof on whether a true free market response would be the best way to handle things. The Keynesians do, because it's THEIR ideology that's been at the forefront of government fiscal and monetary policy for decades now. All we can really do is point out the negative consequences of the Keynesian approach, and it's amazing that some refuse to recognize ANY of them. At least you've been able to see it from our perspective rather than stick your fingers in your ears and hurl ad hominems about Ron Pauls and laissez faire market failures (as if the US has even seen a REAL one anytime during their lives).

Much respect for that.

 

[Diuretic]

I appreciate those comments Paulie and I'll do my best to live up to them.

The Austrian (I keep wanting to type "Australian" ) economists aren't really in the popular discourse here (I mean us mainstream types who read in order to try to understand) so on top of my own ignorance about things economic (I'd say I'm a reasonably well informed but stubborn bugger) I have to try and understand their position (or the position I suppose).

I'm really only used to a mix of Keynesian and Friedmanite (or is it better to say "monetarist"?) economics. If I can digress a bit (but the thread topic allows me to get this in I think) there is no huge difference in economic policies between the two major parties here, it's really about the mix and the spending priorities. Both support a mixed economy, neither are 100% pure free market types. I will have to say that the previous Howard government was profligate in the boom times and didn't prepare us for the end of that boom (it was basically a resources boom coinciding with the industrial development of the Chinese economy which in turn benefited from its relationship with the US). There was nothing smart about the previous government's economic policies, they could have had a bunch of idiots in there (must.......resist..........) and things would have gone okay for a while simply because of the amount of Chinese money coming into this country. It's a shame no-one bothered to look at the widening current account deficit. We were basically exporting dirt to China and not doing much else. We were importing goods that would have been made here at one time (yes, manufacturing went offshore).

The dumb part about this is that the Howard government was swimming in money as a result of the resources boom. But they wasted it. Unnecessary tax cuts (really, they were electoral bribes) and handouts (one scheme gave people money for having children, yes, that's right, have a kid and then get a plasma tv) which made absolutely no sense. They were completely undisciplined but returned surplus after surplus simply because the money was pouring in from China (and latterly India).

Now, as Chris Richardson has alleged, the federal budget is buggered. Well maybe it is, maybe it isn't. There are few more sober economic voices thinking Richardson has gone off half-cocked on this. But we are facing trouble, for sure. Our numbe one trading partner is Japan, I think China is about 3 or 4, the US is in the top ten as well, from memory. I don't need to be a JK Galbraith to know that means we're in strife.

Anyway good to keep things civil, I am learning and thank you and Brian for your contributions. I may not agree on principle - I do lean left in these things, ideologically I'm wary of idea of a pure free market, I will disagree where I think I can make a valid point (and have the good sense to shut up where I can't) - but looking at new ideas never hurt anyone.

 

[Paulie]

The toughest part we deal with when trying to push our view, is that people seem to think they've somehow already seen our ideology in action, and that it's failed, when that couldn't be further from the truth. An Austrian advocates a currency not monopolized by a central bank that controls its value, independent of market actions. Meaning, basically, that in its current form, the currency and the credit isn't dictated purely by the market. Right now, what happens is the central bank sets a target rate, and does as much as it can with its power on the open market to keep credit moving at that particular target rate (buy and sell treasuries, for example). So the most basic tenet of supply and demand is being undermined, because the market does not have autonomous power in establishing the going rates of credit. The going rate of credit is ultimately being controlled by the actions of only a few people with the power (Bernanke and Geithner, for example).

Therefore, we hold the belief that there really isn't a "free market", banking regulations (Glass-Steagal) or not, because the most important part of the market (credit, currency) is not even FREE!

So you have the Federal Reserve setting target rates at 1% in 2002, which enticed a whole slew of people to borrow money for a house, jack up their credit cards, borrow against their equity, etc, many of whom probably WOULDN'T have, had rates been more sensible. But that's what the Fed does when the economy takes a deflationary downturn, it's ALL they know how to do. After the tech bubble burst, and we went into recession, they eventually set the rate that low to entice borrowing and spending, and give a "boost" to the economy. We're paying for that boost now, because too many people got credit that they shouldn't have even been attempting to get in the first place.

Some argue the deregulations caused it, we Austrian advocates argue that the artificial interest rates caused it. I see it as a chicken/egg scenario. If the Fed didn't manipulate interest rates in such a way, just to get people to indebt themselves more so we can have an artificial "boom" for 5 years, those regulations wouldn't have even been necessary, in my opinion anyway.

Instituting a policy where you entice irresponsible borrowing, is just that...IRRESPONSIBLE. The consequences are what we are seeing today.

What the liberals argue for is the regulations, so we can all still be irresponsible idiots with our money, and not have to worry about all the difficult stuff like learning how to properly manage our finances and actually KNOW whether it's right for us to be borrowing at that particular moment or not. Just have regulations instead, so we don't have to be bothered with all that "boring, tedious" crap. It's sad, really, when you get right down to it. You'd think people would want to come out of this being smarter, not being insulated from their own risk-taking out of nothing more than apathy.

 

[Diuretic]

Interesting points and persuasively put. I know what you mean about being pooh-poohed, I've done it myself. But has it ever been tried anywhere? The critics of socialism do the same thing but they can point to failed experiments without allowing for the fact that the failed experiments were twisted versions of socialism. I think your lot suffer from a bit of that but in a different manner.

In Australia we had our dollar pegged against the greenback at parity until 1983 when the Hawke Labor government came to power. They floated it. I can tell you that our economy went from being ossified to thundering along, almost overnight. The old, pointless, dead hand regulations were kicked out of the door and our economy loosened up. If Hawke and Keating (Treasurer) hadn't done that we'd have gone the same way as Argentina a little later. The old protections were removed and we faced the world – and I have to say, it did us a lot of good. Yes we had a recession and at one point interest rates were skyrocketing (help me here, the idea of high interest rates is to fight inflation isn't it? Stop all that loose money slushing around?) and people were hurting. But it did cool down the economy and we successfully put a lid on inflation and avoided the horror of stagflation.

So, I'm not one to ask for regulation to protect us from the natural outcomes of our actions (individually or collectively), but I do believe in a well regulated market (but our financial watchdogs have been weakened by the previous government due to ideology and failed us although not in a truly spectacular fashion), the regulations being there for the insiders to adhere to so that there's as little skullduggery as possible.

Now, correct me please, but it seems to me that a central point of your argument (above) is that interest rates must be set by market forces and not subject to the command of a central bank. Is that correct? Here that isn't the case, the RBA (Reserve Bank of Australia) sets the rate although it is – and it really is – free of government control.

If I've got that right then that's an interesting point.

 

[Paulie]

Interesting points and persuasively put. I know what you mean about being pooh-poohed, I've done it myself. But has it ever been tried anywhere? The critics of socialism do the same thing but they can point to failed experiments without allowing for the fact that the failed experiments were twisted versions of socialism. I think your lot suffer from a bit of that but in a different manner.

In Australia we had our dollar pegged against the greenback at parity until 1983 when the Hawke Labor government came to power. They floated it. I can tell you that our economy went from being ossified to thundering along, almost overnight. The old, pointless, dead hand regulations were kicked out of the door and our economy loosened up. If Hawke and Keating (Treasurer) hadn't done that we'd have gone the same way as Argentina a little later. The old protections were removed and we faced the world – and I have to say, it did us a lot of good. Yes we had a recession and at one point interest rates were skyrocketing (help me here, the idea of high interest rates is to fight inflation isn't it? Stop all that loose money slushing around?) and people were hurting. But it did cool down the economy and we successfully put a lid on inflation and avoided the horror of stagflation.

So, I'm not one to ask for regulation to protect us from the natural outcomes of our actions (individually or collectively), but I do believe in a well regulated market (but our financial watchdogs have been weakened by the previous government due to ideology and failed us although not in a truly spectacular fashion), the regulations being there for the insiders to adhere to so that there's as little skullduggery as possible.

Now, correct me please, but it seems to me that a central point of your argument (above) is that interest rates must be set by market forces and not subject to the command of a central bank. Is that correct? Here that isn't the case, the RBA (Reserve Bank of Australia) sets the rate although it is – and it really is – free of government control.

If I've got that right then that's an interesting point.

To answer your later question about interest rates...Yes, we would like to see interest rates set exclusively by supply and demand, not via a target rate that a central bank works extensively on the open market trying to maintain by manipulating the currency. I'm not familiar with how yours is operated, but I suspect it's probably similar. This is dabbling dangerously into the conspiracy theory waters, but central banks like yours and ours work in collusion with each other, that is, they operate within a network. That network is the brainchild of banking dynasty families like the Rothschilds, the Morgans (JP Morgan Bank, also a Federal Reserve visionary), the Warburgs, the Schiffs. They all had a stake in the creation of the US central bank, and I have no doubt in my mind that they have a stake in most others as well. That really is for a completely different discussion, though.

And don't think for a second that your central bank is independent of your government. Ours is technically, as Congress has no authority to control its actions, and very LIMITED oversight of it, but that doesn't mean the bankers and the politicians aren't bosom buddies.

All in all, I admire the way your government runs things for the MOST part. It must be nice to have leaders in power that are willing to oppose deficits so much that you actually still run surplusses. If god forbid your government just HAS to step in and spend, at least it's not debt.

 

[gonegolfin]

Now, correct me please, but it seems to me that a central point of your argument (above) is that interest rates must be set by market forces and not subject to the command of a central bank. Is that correct? Here that isn't the case, the RBA (Reserve Bank of Australia) sets the rate although it is – and it really is – free of government control.

This has been a focal point of many of my posts and essays.

Just from earlier posts in this thread ...

http://www.usmessageboard.com/econo...own-warns-access-economics-3.html#post1005214
"What free markets?

- Do you mean the free markets where the supply and demand for money and credit is ignored and instead, bank reserves are manipulated to get the short term outcome the central banking system and government desires?"

http://www.usmessageboard.com/econo...own-warns-access-economics-3.html#post1004809
"Massive manipulation of the supply of money and credit by the Federal Reserve that led to a 1% target for federal funds. This is anything but a free market. This cheap money and credit circus led to the biggest housing bubble in the nation's history."


Note that a Central Bank (RBA included) is never free from government influence and control.

Brian