Return of Volatility- $A no longer considered safe bet

The zombies have hit the streets in the US to protest the protection of the financial markets whilst the ordinary citizen receives little support. There are no zombies in Australia (yet) in fact normality has returned.

In what is a return to normality for the $A it has fallen to 95c/US. (this is fall of 13%) Ironically this is due to the concerns with the European markets and failing US economy as investors have dramatically left so called risky currencies for the 'safety' of the US$.
This is despite the solid news regarding the Australian economy. In summary the information that has surfaced in the last week;
# The Trade surplus is the second highest on record at $3.1 billion.
# Building approvals have improved signalling increased confidence in the domestic economy.
# The terms of trade have continued to rise (highest in 140 years) Chinese manufacturing continuing to expand.
# Despite the EU market voting to allow stability expenditure of E440 Billion contagion in the European market continues with Greece close to default, previously Portugal, Spain and Ireland have been mentioned as having financial risk. The risk has now spread to Italian and French banks.
# Protests regarding corporations being saved whilst people continue to lose their jobs spread across the United States.
# News of global financial issues has meant that the RBA is now preparing the market for a cut in interest rates. Interestingly 'jawboning' regarding a cut in interest rates will mean the $A will fall further which will be positive news for sections of the Australian economy.

Supply is important for the long term

Whilst supply side economics has taken a temporary back seat at present it will need to return in importance for Australia to shake off the underlying issues that existed prior to the recession. That is the recession we didn't have, although we are still in it. The issues of competition, low savings, underlying inflation due to skills shortage, infrastructure and a appreciation in the $A all will serve to lower our international competitiveness.
Sidenote why is the $A about to appreciate? Well the financial markets are already predicting that by the end of the year our interest rates will have risen by 0.5 and a further 1.0 next year to slow inflation. If you compare our interest rates to the rest of the world there is already a major differential. This means that if our cash rate moves first it will attract investors and speculators, leading to lower returns for our exporters.

So as Gittins has pointed out recently in PM won't be a great leader the Rudd government needs to make some hard decisions and why not now? Politically there is no serious competition and secondly the time is ripe when the economy is in the need of injections. The article points out 5 areas that Rudd has already considered; competition, innovation, skills, infrastructure and tax reform. There is debate whether all of these involve micro reform however there is a need for change.
In light of this as Henderson (Rudd will need reform for recovery) points out that flexibility is key to future growth. It is of particular interest to compare this article to Gittins' No such thing as a free market. to see a contrasting view regarding the direction of labour and financial regulation.
Which one do you believe is the direction Australia should take? It would be great to see some responses to hear your thoughts???

p.s if you are after some more reading on micro policy and another viewpoint check out Mr. Woods (VCE link to your right) in Topic 4- micro and Topic 3- Allocation of resources.