Disconnected? The Oz Real Economy and US debt.

The global markets have held on for a wild ride recently with the increased volatility connected to the ongoing US debt concerns. Despite the last minute deal that was passed in the US Congress the move by Standard & Poor to downgrade the US government's ability to repay debt to AA+ has triggered an incredible amount of volatility. (see causes for more)
In Australia the fundamentals remain good however the financial marketplace has fallen with the ASX declining 20% since April. The report card of 4.9% unemployment, 3.6% inflation, high business investment in the resource sector and record of export prices compared to import prices (terms of trade) indicates a strong economy. The last quarter did have negative growth (however this was in comparison to the previous quarter) which added to the low retail sales (50 year low) has meant the concern and fear from consumers has become self perpetuating.

In Australia this means that the more people are fearful of the economy the worse the problem will become. As recognised by Chris Richardson of Access Economics

" People always think the markets and economies are the same thing. Markets are reasonable economic forecasters, but they are not economies" .

There are a number of factors which might in future impact upon the real economy of jobs, wages and living standards.

• Firstly the main result of the fall in the ASX will be felt by people about to retire regarding the fall in their superannuations savings.


• The slowdown in the global economy may mean that government policy is needed to assist consumption as exports slow down and domestic spending also slowing down.


• Thus the planned 2012/13 Budger surplus may be delayed.
  


• The RBA may need to drastically loosen monetaary policy. This is linked to the new found stability of the A$. In 2008 when the GFC hit the $A was considered a risky speculative prospect and dropped to 60cents from almost $1US. This time it has falled from $1.11 to a low of 99 cents. The result of this change in perceptions about the Australian currency is that exports remain costly and thus manufacturers, plus other service sectors have high costs and this will mean that interest rates will need to be dramatically cut to prevent the $A becoming an anchor on the economy. (see Help and hinderance for more)
  

How to be a Happy Economist

A mathematician, an accountant and an economist apply for the same job.
The interviewer calls in the mathematician and asks "What do two plus two equal?" The mathematician replies "Four." The interviewer asks "Four, exactly?" The mathematician looks at the interviewer incredulously and says "Yes, four, exactly."
Then the interviewer calls in the accountant and asks the same question "What do two plus two equal?" The accountant says "On average, four - give or take ten percent, but on average, four."
Then the interviewer calls in the economist and poses the same question "What do two plus two equal?" The economist gets up, locks the door, closes the shade, sits down next to the interviewer and says "What do you want it to equal?"

Economists are thought of as people who bring bad news and that their theories do not represent reality- then why do they have so much power?? The reality is that decisions and future decisions involve choice and every choice involves something that has been forgone. (this is known as opportunity cost in economics) Often this choice involves a political decision and a particular group or region will lose or gain which means that as the politicians have to make a difficult decision - economics is often the reason or the stated reason.

Look at the picture and work out how this relates to Economics (try opportunity cost and choice)

So how do you be a happy economist- well by realising that humans are irrational and accepting that despite all the ideas and forecasting that economists are never totally correct.

Budget Leaks and Wrecking Balls

As May comes around the chatter amongst economists and interested people regarding the Budget begins to build steam and this year it appears to have started to have happened quite early. With the background being the global financial crisis (or GFC as some have named it- sounds better) this means that many items on the ALP wish list will be placed on the chopping block.
Here are some of the items that have been considered;

• paid maternity leave (min 6 weeks)
• upgrade to the aged pension and unemployment benefits
• increased funding for universities
• continuation of 'Education Revolution'
• whether the incentives for first home buyers should be continued
• environment incentives e.g insulation
• tax cuts (which were introduced as part of election campaign in 2007)
  

However with unemployment heading towards 7% (which obviously increases transfer payments), company and income tax revenues down it is obvious that a number of these items will be merely wishes. At the least Australia is heading for a Budget deficit of $30-50 billion.

Compare these issues to this article from the SMH (by Jonathon Pearlman) regarding defence spending. What are your thoughts on defence expenditure and where the funds could/should go???

Illustration by Rob Homer , SMH.