Abbott must promise stability, not revolution

Our politicians must realise the economic rules have changed and tell voters how they will avoid the very real threats of a spike in inflation or worse, a recession.

There are two unexamined themes that should frame the 2013 election, but probably won't – judging by current news cycles the election will be fought on Tony Abbott's 'real' thoughts on women and aborigines, and the significance of various scraps of diary or old receipts pertaining to the renovation of a house Julia Gillard once owned.

But if the national media can put those worthy topics on page two or three, there are two grave threats to our prosperity that should get more of page one.

Firstly, the 'risk' that our currency will devalue sharply – the orthodoxy being that this will be a good thing, and that such a development would only be a good thing.

Secondly, that the current fashion for strict fiscal austerity will, regardless of currency fluctuations, send us into a deep recession.

Your erstwhile correspondent is often accused of being to the left of Leon Trotsky (except by those who really are on the left of politics, who just spit as I walk by), but what follows is in no way an exhortation to revert to failed socialist economics.

Rather, these arguments should be seen as part of a growing awareness globally that we are not in normal economic times – it's as if a bunch of Newtonian physicists were looking at quantum particles for the first time, and growing uneasy that the rules of just a few years ago don't apply.

Earlier this week, I pointed to a post-ideological era of political economy – something most easily seen by voters largely oblivious to economic theory. Yes, the voters who re-installed President Obama.

And the same thing could happen here. Australians have much more to lose than US voters in economic terms, and so while many see the Gillard government as rotten and 'illegitimate', there is likely to be a strong element of self-interest expressed at the polls late next year – an acknowledgement that 'they might be rotten bastards, but they've been pretty good for my bank account'.

The coalition has to promise to take the world's best performing economy, and make it even better.

That's a hard sell, and one would have thought that coalition strategists would be building a platform to sell the opposite message: "Only the coalition can preserve the wealth we have in the face of growing threats."

And so back to those threats.

More immediate than either of the two listed above, is the current fear that commodity prices will tumble if the US administration careers over the 'fiscal cliff'. Jackson Hewett's article (Rio to ride the commodity bull, November 11) on Rio Tinto's view of this threat is essential reading – in fact, long-term thinkers should be printing it out and pinning it to their office walls.

Because that 'threat' is really about short-term price fluctuations, not some kind of structural decline in demand for iron ore and coal. The structural underpinnings of our resources industry, clearly illustrated by the Rio Tinto charts in Hewett's piece, will not vanish if China's growth trajectory experiences a few largish dips. Billions of Asians in China, India and a host of small nations are moving from flimsy dwellings scattered across agricultural regions, to steel-reinforced multi-story buildings in cities.

Rio, BHP and Xstrata know this and do not get nearly as excited as our national media when prices falter – the hundreds of billions of dollars that have underpinned the investment stage of our 'boom' are dollars chasing decent long-term returns, not a stellar short-term boom.

As Alan Kohler noted (What crisis? This crisis, November 14), the capital inflows required to expand our resources sector, or the currency requirements of our major export customers, are not the only forces pushing the Australian dollar sky-high. We are also a safe-haven for two major kinds of money – the 'hot money' borrowed in the US at near-zero interest rates and invested in short-term carry trades here, and the money from overseas pension funds that have to find AAA-rated government debt, simply because it says so in their investment mandates.

While the second kind of money won't have to move anywhere suddenly, the hot money can jam the exits when better returns appear elsewhere, or risk grows Down Under. Currency risk, in particular, is a vicious cycle for carry-traders – as the Australian dollar falls, the rush to shift capital back into US dollar-denominated assets only accelerates the fall in the dollar.

And what does a falling dollar mean to voters? Its main impact in the short term, would be to remind all Australians that we've been importing dis-inflation through much of the GFC era – leaving aside the major tumble following the Lehman Brothers carnage, the Australian dollar has risen from around 80 US cents to 104 cents today.

That has given us more buying power for overseas goods than ever before, and it will be difficult to adjust when a washing machine costing $1000 today, in the space of a few months creeps up to, say, $1200. Multiplied across thousands of lines of imported goods, the effect on inflation is potentially very large.

And orderly retreat to an 80 cent dollar is, of course, something our manufacturers and exporters have pined for – but a sudden tumble would cause political havoc as the major parties trip over each other promising to tackle inflation.

Then again, inflation might be the least of our worries, particularly if the current Abbott agenda is put into practice from late 2013 onwards. Tony Abbott has repeatedly said we'll see his full suite of policies 'in plenty of time before the next election' – but as I argued on Tuesday (The second lesson of Romney's defeat, November 13) the expenditure-slashing plans he has hinted at (and in some areas already detailed) could have a disastrous effect on the fragile sectors of the economy such as retail and services.

And why is this not being discussed? Because we are still in the grip of the othodoxy that slashing public expenditure and cutting taxes – both of which Abbott says he will do – is assumed to stimulate private sector demand.

Oh yeah? In normal times, perhaps. But banks have been telling us for some time that interest rate cuts are helping households to deleverage at ever-faster rates – my strong suspicion is that the Abbott tax cuts would do the same thing.

For better or worse, an expenditure/GDP ratio of around 23 per cent (the level at which Labor is running) is forced demand, and is keeping thousands of small businesses and contractors busy. If Australian voters use Abbott's tax cuts to pay down debt (something the SME community seems to be just as intent upon doing), we've got a real meltdown on our hands.

Worst of all is that the two problems find a nexus in the Australian Office of Financial Management – issuer of all those lovely AAA-rated securities that overseas investors want to buy.

I have been a strong critic of the Gillard government's attitude to debt – borrow today, because a coalition government will have to pay it back tomorrow! – but again, an orderly return to surplus, and a paying down federal government debt at a steady pace looks wiser that suddenly slashing the amount of AAA-rate government paper on issue.

If an Abbott government did that, even that pension fund money would be looking for another home, thus creating another vicious circle for the Australian dollar.

In short, the 2013 election should be a competition between two parties promising a steady hand on the tiller of the Australian economy – not sudden changes to our settings, but a gradual reorientation for a national economy sailing way too close to the wind.


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