seven facts about howard's economy

  1. 228 Posts.
    These are the seven facts the Reserve's board should focus on today.

    1. Its mission is not just to ensure low inflation, but also "the economic prosperity and welfare of the people of Australia".

    Sure, inflation is not going to be a problem in Australia for years: low global inflation, the shift of manufacturing to China and other low-wage countries and the rising dollar will ensure that. But the Reserve's charter defines its goals far more broadly, and there is a much bigger threat to fight than rising prices: what Treasury secretary Ken Henry has deliberately called "the housing bubble".

    2. Bubbles burst, in ways that do a lot of damage to real people.

    The International Monetary Fund estimates that 40 per cent of housing booms end in busts that hurt the entire economy. The longer they go on, the bigger the damage when they burst.

    On average, the cumulative loss of output is equivalent to 8 per cent of GDP: roughly $60 billion in Australia today. Nothing else on the horizon matches this as a threat to our future.

    3. The bubble is getting bigger and bigger.

    Forecasts that housing prices would settle down without intervention have proved spectacularly wrong. In the six months to August, housing mortgage debts grew at an annual rate of 22.4 per cent, faster than at any stage in this six-year boom. Total credit in the economy grew at the rate of 14.5 per cent: after inflation, the fastest growth in debt since the 1980s boom.

    What is driving it? Tax breaks for speculation, and low interest rates.

    4. The Government will do nothing.

    Reserve governor Ian Macfarlane keeps hinting politely that since the speculative borrowing is tax-driven - by negative gearing rules that allow investors to shift their losses to other taxpayers, and capital gains tax laws that mean battlers pay twice as much tax on their wages as speculators pay on their gains - the policy response should be to remove the tax breaks.

    He is right, but Treasurer Peter Costello has made it very clear that won't happen. To try to deflate the bubble means taking the rap if it bursts, so no politician wants to touch it.

    5. The clouds over the global economy are lifting.

    The Reserve watchers think the board will wait until there is clear evidence of a global recovery before it starts lifting rates. The board has made that mistake before, so it may well do so again. But with Friday's news that the US economy put on 57,000 jobs in September, that evidence is getting clearer every week.

    The IMF is tipping global growth to accelerate to 4.1 per cent next year. Analysts are lifting US growth forecasts to 4 per cent. Business confidence has returned to Japan and in Europe the worst is over.

    6. Australia's economy is running hot.

    Real spending in Australia rocketed up by 5.6 per cent in the year to June and probably even faster in the year to September. Retail sales and business investment are climbing rapidly, and the breaking of the drought alone is estimated to lift 2003-04 growth by 0.7 of a percentage point.

    7. All bubbles burst: the sooner, the better.

    There is an illusion out there that house prices will settle peacefully on a new high plateau if the Government and the Reserve Bank leave them alone. This is wishful thinking. Prices will collapse, as the IMF shows they have done so often before. Investors will get burnt and try to quit, pushing prices down in a rush for the exits. The foreign lending that has funded most of it will dry up and, without it, prices will tumble further. Bubbles do burst.

    Get smart suckers - sell your un-needed real estate. And vote the liars out.
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