Once more into the abyss, dear friends
NOT this again. One financial meltdown in a decade is unfortunate two look like carelessness. The plunge on world sharemarkets which began on Thursday continued yesterday on Australia's stock exchange. With the plunge, cold reality has broken through into the tepid optimism - if optimism is the right word - from the US Congress's deal to raise that country's borrowing limit, and the earlier rescue of Greece.
NOT this again. One financial meltdown in a decade is unfortunate two look like carelessness. The plunge on world sharemarkets which began on Thursday continued yesterday on Australia's stock exchange. With the plunge, cold reality has broken through into the tepid optimism - if optimism is the right word - from the US Congress's deal to raise that country's borrowing limit, and the earlier rescue of Greece. NOT this again. One financial meltdown in a decade is unfortunate two look like carelessness. The plunge on world sharemarkets which began on Thursday continued yesterday on Australia's stock exchange. With the plunge, cold reality has broken through into the tepid optimism - if optimism is the right word - from the US Congress's deal to raise that country's borrowing limit, and the earlier rescue of Greece.Cold reality takes several forms. One is the residual worry about the US's huge debt, and whether as a result its credit rating will be downgraded. Another is the trouble brewing in Europe over the debt burdens governments are carrying there.Could the trouble have been avoided? Could governments have been more careful and managed things better?Possibly, but it would have meant acting contrary to politicians' instincts. They would have had to cut spending during the boom in the first years of this century. That was when governments should have been paying down debts - not extending their borrowing to fund tax cuts for the wealthy and two simultaneous wars, as the Bush administration did, or continuing with profligate spending, as European governments did. Politicians find prudence extremely difficult: saving money during a boom goes against the grain. And once the financial crisis hit in 2008 it was too late, because then it was the time to borrow and boost ailing economies through increased government spending.If the markets are right in presaging an economic downturn, the need for government spending is about to return.This time round, though, many European governments are at or beyond their borrowing limits. Markets, which have benefited from the stability bought when governments took over failing banks, fear that Italy, Spain and the other borderline economies will default, and that fear will push interest rates to unmanageable levels. Panic is rising and stocks are plunging. Market behaviour last seen after Lehmann Brothers collapsed is being repeated as investors rush to safe havens. For governments, which suddenly look vulnerable, the normal fiscal mechanisms to deal with recession are not available - and even if they were, the political will to use them is not, in the face of the fear of incurring debt. As often happens, the herd instincts of peoples and politicians combine to make difficult situations worse.How will this play out in Australia? As in the first leg of the recession, this country is much better placed than either the US or European countries.True, Australia's government is in debt, but unlike the debt those governments owe, Australia's is a small fraction of its GDP. The sharemarket shock has induced currency markets to move - almost in 24 hours - from predicting an interest rate rise to predicting a fall. At least Australia has the scope to cut interest rates to stimulate the economy - unlike the US, where short-term interest rates have reached zero. Unemployment in Australia is low, too - thanks to the mining boom and the boost it has given the economy generally.Australia does have problems. Through dependence on the minerals boom, its fortunes are closely tied to China's. A downturn there would probably be far worse for Australia than collapses on Wall Street, or in London or Frankfurt, and China's fate is linked to that of the US and Europe because they provide markets for many of its exports. Australia is also recovering from devastating floods and cyclones that have clipped economic growth.Consumers, too, appear to believe bad times are threatening. They are saving, not spending - repaying the debts they ran up in the past two decades. At least they have the jobs and incomes which make saving possible. The general air of caution means what is a prosperous period does not feel like a boom. And with sentiment fragile, the sharemarket plunge may be enough to produce the downturn that many seem to fear.If indeed it becomes necessary, Australians should expect the government to do as it did last time, and stimulate the economy quickly, and early.Australia was kept out of recession in 2008 by the Rudd government's stimulus package.Of course the government can expect to be roundly criticised for taking the responsible course. Paradoxically, borrowing and spending which averts an economic downturn will be criticised all the more when it is successful - because no downturn will have occurred.Critics take no account of what might have happened if the stimulus had been too late or too small. That, unfortunately, is politics. But Australians should not be swayed by political game playing. Opportunities to act with the benefit of hindsight occur rarely, but the downturn that sharemarkets seem now to be announcing may be one. Australians know from recent experience that stimulus spending works.Don't tread on the linear acceleratorHUMANITY'S thirst for knowledge is unending - so it is not surprising that a Swede, Richard Handl, has been trying to split atoms on his kitchen stove. Handl was arrested, which seems rather harsh in the circumstances. He had contacted Sweden's Radiation Authority after he had created a small meltdown on his stove top, to ask if a home meltdown was all right. It responded not by offering hearty congratulations or a job on staff, but by calling the police. The story has been reported with barely restrained glee, as if Handl was doing something silly. This is most unfair. The Herald believes amateur scientists like him deserve a break. Our own modest contributions to humanity's understanding of the universe include our simulation of the Large Hadron Collider in the office car park. (The most interesting results are obtained, we have found, by driving in just after knock-off time.) We have also conducted a long examination of the nature of dark matter, with our most fruitful research being carried out underneath the coffee machine in the lunch room. The results of this important work remain, alas, unpublished. But given what happened to Handl, perhaps they should stay that way.