February 04, 2009 | Graham

Panic stations

The Australian government has announced a $42 billion “rescue” package for the Australian economy.
What sort of economic analysis says that we have gotten ourselves into trouble by maxing out the collective credit card to buy consumer goods, so here is another credit card, max this one out too and buy, buy buy, that will solve your problem?
These measures are ill-considered, yet publicly hard to argue against.
The economic debate has been framed around a number of fallacies.
1. Recessions are avoidable
2. Unemployment is avoidable
3. Governments have unlimited ability to spend
4. We can go on tomorrow as we went on yesterday
5. Consumer spending is good.
In fact we find ourselves in a situation where assets have become over-valued relative to those in the rest of the world and the over-valuations used to leverage-up consumer spending.
As a result economic growth continued long after it would normally have stopped, and there are people who are in jobs now, who would never have been in jobs in normal circumstances and businesses rolling in surplus who in normal times would have been doing OK, but not this brilliantly. We have larger houses, and they are filled with more and better furniture than ever before, with more and better cars sitting in the driveway for their owners to use when they aren’t on holidays.
The government pretends this can continue when it can’t. Assets have to come back to prices where investors will buy again, the banking system has to be sorted so they can do this without excessively relying on equity, and we have to wait and allow our entrepreneurs to work out how to make a living for the rest of us in the “new” environment. This statement does none of those things.
This economic statement is not just hair of the dog, it tries to keep the binge going.
At a time when a small economy like Australia’s should be working out how to redeploy assets to deal with the reassertion of reality we are trying to keep our assets (including our people) exactly where they are now. It’s like one of those herbal tea remedies for obesity.

Posted by Graham at 7:53 am | Comments (5) |
Filed under: Economics


  1. It’s interesting that, only 12 months ago Mr Rudd and Mr Swann were saying spending was too high and that we had to put “downward pressure on inflation.”
    This could have influenced Glenn Stevens and the Reserve Bank to keep increasing interest rates.
    Twelve months later, it’s “Spend, Spend, Spend.”
    Previous Treasurer warned of the forthcoming Financial difficulties:
    “THE Treasurer, Peter Costello, has warned of a “huge tsunami” set to engulf global financial markets, with China as its epicentre, in his strongest bid yet for the Reserve Bank not to raise interest rates next month.”
    Will this latest handout go to Liquor stores, Poker machines, Drug dealers?

    Comment by Taluka Byvalnian — February 4, 2009 @ 11:14 am

  2. So you blame it all on the consumer. Sure they must take their share of pain but how about some brickbats for your business friends? BHP unable to see a 57% drop in profits coming and make some provision, why the hell are these guys paid so much? Now you turn on the government because they try and make up for the wilfull neglect of the heads of our major firms. Are yes, in the end you’re not much different from the employers. When it’s good times the workers will damage the economy by pushing up inflation through wage demands. When it’s bad times the workers will drive businesses to the wall by asking for more wages. Can’t this blog for once have some balance?

    Comment by Patrick B — February 4, 2009 @ 12:09 pm

  3. I didn’t “blame it on the consumer” Patrick. These things are existential – they happen. The important thing is to correctly diagnose the problem so that you can adopt the right solutions.
    Are you suggesting we can just keep increasing our mortgages for ever without actually having to pay anything back?

    Comment by Graham Young — February 4, 2009 @ 12:39 pm

  4. Graham whilst agreeing with your post in the main I would put in one more dot point. (a lesson learned especially in the recession we had to have) that unemploymentis to a significant extent very long term.

    Comment by taust — February 4, 2009 @ 2:21 pm

  5. given that stagflation will be very much in evidence in say two years. What items of government expenditure would you be preparing for the cut?

    Comment by taust — February 4, 2009 @ 2:25 pm

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