“Complete charade” a strange game

Product differentiation is as essential in politics as it is in any other kind of marketing.

Even so, Brendan Nelson’s latest statements on inflation are puzzling.

In a speech he delivered in Brisbane yesterday, the Liberal Leader attacked the government’s plans to tackle inflation, describing them as  “a complete charade.”
He declared that there is simply no need for  “draconian” cuts in Federal spending, to tackle inflation. Even though Australia’s inflation is now running at 4.2 per cent.

The Reserve Bank is not nearly as comfortable or relaxed about that as both Mr Nelson – and his Treasury spokesman – Malcolm Turnbull appear to be.

Certainly, the Reserve Bank Governor, Glenn Stevens, admitted yesterday that higher interest rates and the US credit crunch are already “acting to restrain demand” in Australia.

But he also noted that Australia’s inflation is still high.

Stevens also and warned that inflation could well get worse, as the prices received for Australia’s resource exports rise, swamping the country with money.

And, although the Reserve Bank board kept Australia’s official interest rates on hold yesterday, Mr Stevens  also warned that interest would have to be reviewed, if that happened.

Nobody has to tell Australians, these days, just what that means.

The government can hardly believe its luck.

In interview after interview yesterday, the Federal Treasurer, Wayne Swan declared that the government must attack inflation, if it wants to get Australia’s interest rates down.

He said the arguments advanced by Nelson and Turnbull just get “more bizarre” by the day.

The Reserve Bank has now increased Australia’s official interest rate no less than 12 times, consecutively, to curb rising inflation.

By any reasonable standards, that has placed too much weight on the budgets of young families with big mortgages.

Relatively speaking, other Australians have escaped quite lightly, in the battle against inflation.

Cuts in government spending would, at least, spread the burden of fighting inflation more broadly and fairly.

And, despite its small government rhetoric, the Howard administration was both a big spender and a big taxer.

Private Briefing’s own research has showed that the Howard government both taxed – and spent – even more heavily than  the Whitlam government.

That is in terms of the one true measure, the size of the slices of gross domestic product both taken in taxes and later spent by a Federal government.

This makes the odd stance that Nelson and Turnbull are taking now quite risky, politically.

Why the Reserve Bank didn’t raise rates

The Reserve Bank has decided to leave Australia’s interest rates on hold, even though it is worried that higher export prices could fuel inflation in future.

The bank’s Governor, Glenn Stevens, announced the decision in the statement reproduced below:-

“At its meeting today, the Board decided to leave the cash rate unchanged at 7.25 per cent.

Inflation in Australia has been high over the past year, with the CPI rising by a little over 4 per cent and underlying measures at a similar pace. Price rises were widespread, in an environment of limited capacity and earlier strong growth in demand.

In order to reduce inflation over time, growth in aggregate demand needs to be significantly slower than it was in 2007. Evidence is accumulating that this is occurring. Indicators of household spending have recorded subdued outcomes over recent months, and demand for credit by both households and businesses has weakened.

As a result of the Board’s earlier decisions, additional rises in market interest rates and tougher credit standards for some borrowers, there has been a substantial tightening in financial conditions since the middle of last year. Conditions in international financial markets, though improved in recent weeks, also remain difficult. These factors are acting to restrain demand.

The rise in Australia’s terms of trade currently occurring, which is larger than had been expected a couple of months ago, will work in the opposite direction. It will add substantially to national income and ability to spend, even with the slowing in global growth to below trend pace that the Bank has been assuming for some months now.

Given the opposing forces at work, considerable uncertainty remains about the outlook for demand and inflation. On balance, the Board’s current assessment is that demand growth will remain moderate this year. In the short term, inflation is likely to remain relatively high, but it should decline over time provided demand evolves as expected. Should demand not slow as expected or should expectations of high ongoing inflation begin to affect wage and price setting, that outlook would need to be reviewed.

Weighing up the available domestic and international information, the Board’s judgement is that the current stance of monetary policy remains appropriate for the time being. The Board will continue to evaluate prospects for economic activity and inflation in the light of new information.”

Related stories:

1. Could the Reserve Bank do the unthinkable tomorrow?
2. Economy “moderating” so rates left on hold

Wall Street falls as Yahoo escapes

Share prices fell on Wall Street overnight, but oil prices – once again – surged to a new record.

The collapse of Microsoft’s bid for Yahoo discouraged traders, as did fresh criticism of the Countrywide Financial Corporation.

And a combination of unrest in Nigeria and a weak $US sent crude oil futures to a new peak of $US120.36  a barrel, before they eased to $US120.03

The Dow Jones industrial index closed 88.66 points down at 12,969.54,  while the S&P 500 fell 6.41 points to 1,407.49.

The tech-heavy NASDAQ composite index fell 12.87 points to 2,464.12.

Microsoft withdrew its $US50 billion bid for Yahoo, after it failed to reach agreement with its takeover target.

Countrywide shares fell sharply after the market was warned that its earnings were likely to be a drag on those of the Bank of America, which is planning a takeover of Countrywide.

There was, however, somewhat better news on the US economic front.

The Institute of Supply Management’s index came in just below the 50 per cent mark that separates a likely expansion, in America’s service sector, from a likely contraction.

But HBOS economist Alan Langford said:”…it is still a few points above the level that usually indicates a contraction in GDP.”

However Langford also said that falling house prices in the US still show no sign of bottoming.

And he warned that is constraining consumer spending in the US, which accounts for 70 per cent of the world’s largest economy.

Related stories:

1. Wall Street “panic phase over”
2. Wall Street falls, but oil rises

The worst of the credit crunch may have passed, but…..

The worst of the US financial crisis just might be over.

But that’s where the good news stops, at least for now, according to one well placed analyst.

The economist, Paul Krugman, says there seems to be little chance, even now, of any serious steps being taken, to prevent a recurrence.

The credit crunch occurred because US financiers lent recklessly, to people who had no real chance of repaying their loans.

The US already has regulations, that cover the operations of America’s banks.

But those have been circumvented, over recent years, by clever financial engineering that Krugman calls “shadow banking.” (see www.nytimes.com).

He praises America’s central bank, which is commonly known as the Fed, for the intervention which he believes helped to stabilise the US financial system, this time.

That was what he calls its “barely legal” rescue of the market operator, Bear Stearns.

“…a rescue not of Bear itself, but of its ‘counterparties’ – those who were on the other side of its financial bets,” he says.
A questionable action, certainly. But one which, at least so far, seems to have worked.

The bad news, according to Krugman, is that this success, itself, seems to be making broader regulation, which would cover those shadow bankers less likely.

And he says that is badly needed, at present.

Krugman may not be right.

And his views are, certainly, out of style right now.

But what he says is chilling.

Krugman says the credit crunch of 2005 is very similar to another which “ushered in the Great Depression of the 1930s.”

The danger of another credit shock, in the immediate future, might have passed, at least for now.

But the chances of the broader market regulation, which might reduce that risk, seem to be passing, too.

And the results could, ultimately, be catastrophic.

Related stories:

1. Almost passed over on the Passover, despite 2020 vision

Power plays:a “gutsy” decision

Wayne Swan has already hailed the NSW Premier’s decision to proceed with privatisation of the power industry in his State, describing it as “gutsy.”

And Kevin Rudd’s support was less direct, but still clear.

Addressing delegates at the New South Wales State conference of the Labor party yesterday, he said:”The time has come to dust yourselves off.

“The time has come to move forward once again.

“The time has come to get on with the business of building a modern Australian nation, capable of meeting the challenges of the 21st Century.”

In context, there was no room to doubt what the Prime Minister meant.

He was addressing Labor people who had just voted heavily against Morris Iemma’s plan to privatise the State’s power industry.

In doing so, they split the Labor party. Several State Labor MPs have already indicated that they will vote with the party, rather than the premier, when the issue comes before the NSW parliament.

The NSW opposition leader, Barry O’Farrell, is delighted. This has greatly increased his chances of winning the next State election in NSW.

History has shown, very clearly, that Australians will not vote for parties they see as divided.

Swan’s description of Iemma’s decision, to go it alone, is particularly prophetic. In a television interview yesterday, Swan described that as “gutsy.”
His boss, Kevin Rudd, had revealed just a few days ago, that he is still a fan of the old BBC comedy Yes Minister. Rudd did that when he told public servants that, in his own life, he had played the parts of all three main characters, first Bernard, then Sir Humphrey and now Jim Hacker.

(Younger readers might ask their parents for an explanation).

“Gutsy” of course, is an Australian word, meaning “courageous.”

And a “courageous decision” in Sir Humphrey’s words, was one that would cause his political masters to “lose the next election.”

The reality, though, is that this time, it was those recalcitrant delegates, wedded to the past, who took that “courageous decision” at the weekend.

The NSW Labor party is now hopelessly split.

Related stories:

1. US traders cautious ahead of Fed decision
2. Federal spending:expect savage cuts

Swan talks of corporate tax reform

Australia needs a more competitive business tax system.

Business leaders have been arguing that case for years, so far without much in the way of tangible results.

But the Federal Treasurer, Wayne Swan, has raised hopes, once again, in remarks he made at the NSW State Labor conference in Sydney yesterday.

“Just as we need a competitive income tax and welfare system, so too do I understand we need a more competitive corporate tax regime,” he said.

The observation was brief.
But other, broader remarks, that Swan added presented a context, that included some basis for hope.

“That’s one of the issues that we discussed at the 2020 summit” he said.

“And a message I, personally,  here loud and clear.

“There’s a whole lot of reform energy in this government, I can assure you,” Swan said.

Enough reform energy, though, to produce results on this one, in Labor’s first budget on Tuesday next week?

We will all have to wait, just a little longer, for the answer to that question.

But corporate taxes are not often discussed, at  rank and file Labor meetings.

So don’t be too surprised, if there is some substance to Swan’s remarks.

Related stories:

1. Economic reform:the new climb

Wall Street soars

Spirits soared on Wall Street overnight, pushing the Dow Jones industrial index up almost 190 points, to close at 13,010.00 points.

A delayed, but warm welcome for the likely pause in cuts to US benchmark interest rates helped. So did good news from high tech players.

Shares in both Intel and Microsoft advanced overnight.

The high tech NASDAQ composite index leapt 67.91 points to 2,480.71.

The S&P500 also gained ground, rising 23.75 points to 1,409.34.

The new floor, under US interest rates, is likely to encourage American banks to expand their lending.

This, in turn, was seen as likely to boost US business and commerce.

In other developments, oil futures fell $US1.04 to $112.42 a barrel, while gold prices fell $US14.20 an ounce to $US850.90.

The financial sector of the S&P 500 rose 4.1 per cent overnight.

But there were falls in the blue chip sector, too.

Exxon Mobil led the way, falling 3.4 per cent.

Related stories:

1. Wall Street soars
2. Wall Street lower, but…

WA’s economy races ahead

Although Western Australia has not formally seceded from the Commonwealth, a quick look at the latest statistics suggests that its economy may have split from the rest of the nation.

Housing approval figures, that the Australian Bureau of Statistics released yesterday, tell the story.

They show that after 12 straight official rate rises, plus a few unofficial ones as well, home-buyers throughout the nation are, understandably, discouraged.

As a result, in March this year, the number of home building approvals, for Australia as a whole, was 0.7 per cent below that for the same month last year, on seasonally adjusted figures.

That’s not a big fall, but in a country like Australia, in which families have traditionally placed a very high value on  homes of their own, it is significant.

The fall, in New South Wales, was 1.8 per cent, while home building approvals plunged 17.8 per cent in Queensland and 23.5 per cent in Tasmania, over the year.

Western Australia, though, saw a 16.5 per cent rise in home building approvals, in that time.

South Australia came close, on percentages, with a 14.4 per cent rise.

But the number of home building approvals in Western Australia was more than twice that of South Australia, in both March last year and March this year.

Broad figures, like these, can be misleading. And there are special features, in the latest WA housing approval figures, as the State’s Confederation of Commerce and industry points out.

It notes that the growth in the State’s housing approvals, over that time, was not in the single house sector, but in medium density dwellings.

The CCI said the approvals for flats, townhouses and other medium density projects had leapt by 74.2 per cent, over this 12 month period.

And it pointed out that general housing approvals had actually fallen by 3.1 per cent, over the year.

But the new workers, moving to Australia’s resource-rich western state have to be accommodated, somehow.

And other figures, just published, show why so many are doing just that.

In $A terms , overall commodity prices have risen by 15.1 per cent over the past year.

And even non-rural commodity prices rose 13.6 per cent.

Those increases have given the term resource rich real meaning in Western Australia.