Best of the Week
Most Popular
1. US Housing Market Real Estate Crash The Next Shoe To Drop – Part II - Chris_Vermeulen
2.The Coronavirus Greatest Economic Depression in History? - Nadeem_Walayat
3.US Real Estate Housing Market Crash Is The Next Shoe To Drop - Chris_Vermeulen
4.Coronavirus Stock Market Trend Implications and AI Mega-trend Stocks Buying Levels - Nadeem_Walayat
5. Are Coronavirus Death Statistics Exaggerated? Worse than Seasonal Flu or Not?- Nadeem_Walayat
6.Coronavirus Stock Market Trend Implications, Global Recession and AI Stocks Buying Levels - Nadeem_Walayat
7.US Fourth Turning Accelerating Towards Debt Climax - James_Quinn
8.Dow Stock Market Trend Analysis and Forecast - Nadeem_Walayat
9.Britain's FAKE Coronavirus Death Statistics Exposed - Nadeem_Walayat
10.Commodity Markets Crash Catastrophe Charts - Rambus_Chartology
Last 7 days
Stock Market Uptrend Continues? - 4th Aug 20
The Dimensions of Covid-19: The Hong Kong Flu Redux - 4th Aug 20
High Yield Junk Bonds Are Hot Again -- Despite Warning Signs - 4th Aug 20
Gold Stocks Autumn Rally - 4th Aug 20
“Government Sachs” Is Worried About the Federal Reserve Note - 4th Aug 20
Gold Miners Still Pushing That Cart of Rocks Up Hill - 4th Aug 20
UK Government to Cancel Christmas - Crazy Covid Eid 2020! - 4th Aug 20
Covid-19 Exposes NHS Institutional Racism Against Black and Asian Staff and Patients - 4th Aug 20
How Sony Is Fueling the Computer Vision Boom - 3rd Aug 20
Computer Gaming System Rig Top Tips For 6 Years Future Proofing Build Spec - 3rd Aug 20
Cornwwall Bude Caravan Park Holidays 2020 - Look Inside Holiday Resort Caravan - 3rd Aug 20
UK Caravan Park Holidays 2020 Review - Hoseasons Cayton Bay North East England - 3rd Aug 20
Best Travel Bags for 2020 Summer Holidays , Back Sling packs, water proof, money belt and tactical - 3rd Aug 20
Precious Metals Warn Of Increased Volatility Ahead - 2nd Aug 20
The Key USDX Sign for Gold and Silver - 2nd Aug 20
Corona Crisis Will Have Lasting Impact on Gold Market - 2nd Aug 20
Gold & Silver: Two Pictures - 1st Aug 20
The Bullish Case for Stocks Isn't Over Yet - 1st Aug 20
Is Gold Price Action Warning Of Imminent Monetary Collapse - Part 2? - 1st Aug 20
Will America Accept the World's Worst Pandemic Response Government - 1st Aug 20
Stock Market Technical Patterns, Future Expectations and More – Part II - 1st Aug 20
Trump White House Accelerating Toward a US Dollar Crisis - 31st Jul 20
Why US Commercial Real Estate is Set to Get Slammed - 31st Jul 20
Gold Price Blows Through Upside Resistance - The Chase Is On - 31st Jul 20
Is Crude Oil Price Setting Up for a Waterfall Decline? - 31st Jul 20
Stock Market Technical Patterns, Future Expectations and More - 30th Jul 20
Why Big Money Is Already Pouring Into Edge Computing Tech Stocks - 30th Jul 20
Economic and Geopolitical Worries Fuel Gold’s Rally - 30th Jul 20
How to Finance an Investment Property - 30th Jul 20
I Hate Banks - Including Goldman Sachs - 29th Jul 20
NASDAQ Stock Market Double Top & Price Channels Suggest Pending Price Correction - 29th Jul 20
Silver Price Surge Leaves Naysayers in the Dust - 29th Jul 20
UK Supermarket Covid-19 Shop - Few Masks, Lack of Social Distancing (Tesco) - 29th Jul 20
Budgie Clipped Wings, How Long Before it Can Fly Again? - 29th Jul 20
How To Take Advantage Of Tesla's 400% Stock Surge - 29th Jul 20
Gold Makes Record High and Targets $6,000 in New Bull Cycle - 28th Jul 20
Gold Strong Signal For A Secular Bull Market - 28th Jul 20
Anatomy of a Gold and Silver Precious Metals Bull Market - 28th Jul 20
Shopify Is Seizing an $80 Billion Pot of Gold - 28th Jul 20
Stock Market Minor Correction Underway - 28th Jul 20
Why College Is Never Coming Back - 27th Jul 20
Stocks Disconnect from Economy, Gold Responds - 27th Jul 20
Silver Begins Big Upside Rally Attempt - 27th Jul 20
The Gold and Silver Markets Have Changed… What About You? - 27th Jul 20
Google, Apple And Amazon Are Leading A $30 Trillion Assault On Wall Street - 27th Jul 20
This Stock Market Indicator Reaches "Lowest Level in Nearly 20 Years" - 26th Jul 20
New Wave of Economic Stimulus Lifts Gold Price - 26th Jul 20
Stock Market Slow Grind Higher Above the Early June Stock Highs - 26th Jul 20
How High Will Silver Go? - 25th Jul 20
If You Own Gold, Look Out Below - 25th Jul 20
Crude Oil and Energy Sets Up Near Major Resistance – Breakdown Pending - 25th Jul 20
FREE Access to Premium Market Forecasts by Elliott Wave International - 25th Jul 20
The Promise of Silver as August Approaches: Accumulation and Conversation - 25th Jul 20
The Silver Bull Gateway is at Hand - 24th Jul 20
The Prospects of S&P 500 Above the Early June Highs - 24th Jul 20
How Silver Could Surpass Its All-Time High - 24th Jul 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Australian Economy Heading Into Stormy Seas

Economics / Austrailia Dec 20, 2007 - 09:16 AM GMT

By: Gerard_Jackson

Economics The problem with Terry McCrann's economic opinions is not that they are terrible but that they are largely shared by the rest of our economic commentariat. For instance, McCrann cheerfully reports that over the year to October credit for business rapidly expanded. Now he did temper his enthusiasm with the observation that the trade deficit jumped from $1 billion in July to $1.8 billion in August before jumping to $3 billion in October. As he put it: "Import volumes are soaring, thanks to the high Aussie dollar."


He should have said over-valued dollar. What is missing here is anything resembling economic logic. This is why he ? along with his fellow commentators ? has been unable to make the link between the Reserve's reckless monetary policy, soaring imports, an increasingly burdensome foreign debt and business investment.

I am truly sick and tired of having to point out to our brilliant commentators some basic monetary facts. The most important of which is that money matters . From March 1996 to July 2007 currency grew by 101.6 per cent, bank deposits by 177.7 per cent and M1 by 169 per cent. Ponder these figures for a moment and then ask yourself this simple question: How can any economic commentator worthy of the name pretend that these money supply figures have had absolutely no influence on the economy? Older economists would have had no difficulty in making the connection. As one economist said:

In a free economy the principal cause of a cumulative deficit in a country's international payments is to be found in inflation. . . In a country whose currency is not convertible into gold, inflation leads to its continuous devaluation in terms of foreign currencies. (Michael A. Heilperin, International Monetary Economics , Longman?s, Green and Co., 1939, p. 123).

At the time of writing Heilperin's economic thinking was well within the mainstream. These economists understood that a country that ran a heavy current account deficit year after year was in a state of monetary disequilibrium. If prices in a

. . . particular country have become so high in comparison with prices abroad as to weaken that country's competitive position, a price adjustment would have to take place to restore equilibrium. (Michael A. Heilperin Aspects of the Pathology of Money , Michael Joseph LTD, 1968, p. 22).

We can conclude that by raising nominal incomes monetary expansion has fueled the current account deficit. It follows that a monetary tightening is the only way out. There is no gainsaying the fact that a monetary squeeze would send the economy into recession. But it needs to be stressed that a recession would have its roots in the Reserve's previous loose monetary policies. Moreover, delaying a recession will in all probability make the situation even worse. The signs are about that emerging bottlenecks and rising inflation along with the trade deficit may force the Reserve's hand early next years.

It can be argued that because Price Waterhouse Coopers Australian manufacturing index (Australian PMI) stood at 53.8 in November this proves that the currency is not having a detrimental effect on the economy. Things are not always what they seem ? particularly in economics. A great deal of manufacturing inputs are being imported. This, I believe, has helped to avert a profits squeeze. There is another point that needs to be addressed. Because the structure of prices has been distorted manufacturing has probably become more oriented to domestic production while other manufacturing enterprises have been driven overseas by the over-valued dollar. In other words, the country's capital structure has become badly distorted.

The response of the Treasurer Wayne Swan to these problems was not reassuring. It is his belief that the solution to the deficit lies in expanding the country's productive capacity. Swan has committed the glaring error of thinking that the deficit and bottlenecks are structural and can be overcome by increased investment. Like everyone of his predecessors and their advisors Swan is completely ignorant of monetary and capital theory.

Even if the Reserve does not turn off the monetary spigot real factors will eventually move to terminate the boom. Any attempt to overcome this with a monetary binge will only serve to aggravate the inevitable financial hangover.

 

By Gerard Jackson
BrookesNews.Com

Gerard Jackson is Brookes' economics editor.

Gerard Jackson Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules