Australia in the global wringer

Australia is being put through the global wringer.

Unless Europe, China and the US each embark on a massive stimulation (Three stimulus stars are rising, August 30) then there are some tough times ahead for Australia.

The now much more confident Julia Gillard is in for a shock because her budget numbers are wrong. But so are those of most of the Coalition state governments.

The global wringer is not about political parties.

This is how the wringer works. Federal treasurers from Peter Costello to Wayne Swan have claimed the credit for our prosperity and each in their own way got used to spending the cash. In fact it was the mining boom that delivered their joy. But that mining boom was really an iron ore, coal and gas boom. And now that boom has turned nasty.

The price of iron ore and coal has collapsed (Politburo pulls the floor from under iron ore, August 30).

Gas has held up better but we are looking at a longer-term global surplus of gas that could not have been imagined two years ago.

Normally such events would gave collapsed the dollar so we would have taken much of the commodity price crunch via our currency. The lower dollar would have stimulated other exports and imports would have been replaced by local supply where possible.

But at least to date the currency has held above parity with the US dollar because the world sees us as a safe haven; our interest rates compared to others are high and we are constructing vast projects that drag money into the country.

Of course the high dollar keeps inflation in check and normally that would plunge interest rates. But this time around our banks are replacing overseas borrowing with local borrowing so interest rates compared with the rest of the world are high.

Our federal and state government spending is geared to the boom. Most states are starting to wake up that the game has ended but in Canberra only Martin Ferguson understands what has happened.

If the global wringer kept squeezing us for a year then we would be in a real mess.

How can we get out of it? If China, Europe and the US take to the money printing presses again then we will get a respite – at least for a year or so. If we cease to be the darling of the currency markets, that might send the dollar down to where it would normally go when commodities slump.

By the end if 2014, most of the mining investment projects will be finished and given we have made our mining operations and construction the most expensive in the world, there will be only bolt-on mines or very profitable projects started. Accordingly, that pressure will come off the currency. Eventually construction costs will return to much lower levels. Interest rates will come down unless the lower dollar starts to rekindle inflation.

Meanwhile, Australians need to be on the edge of their seats for tonight's action at Jackson Hole and the words of ECB President Mario Draghi on September 6.