Wednesday, September 19, 2007

Australia's good economic management

Photo: Customers queue outside a Northern Rock(UK) branch to get their money out.

As I write, Australian radio is reporting that queues have again appeared outside Northern Rock Branches in the UK. Who would have thought that a US problem would spread so far?

There has been criticism about the UK Government's decision to guarantee Northern Rock depositors, but in practical terms I suspect that the Government had no real choice. We haven't seen seen something like this for many years.

Troubled economic times have emerged again. I think that they will get worse before they get better, but Australia has a better chance than most in riding them through.

I see from David Anderson's After the Vote that Alan Greenspan (ex Chair of the US Federal Reserve) has been promoting his new book. That explains a story in the Sydney Morning Herald suggesting that Australia and New Zealand were countries that Greenspan watched.

We all select things that suit our own local perspective. So David focused on Greenspan's view of the Iraq War, while the SMH looked at the Australian references.

I think that Greenspan is right. Australian and New Zealand are literate in economic terms in a way few other countries are - just look at the economists from the two countries - and have both gone through fundamental economic reforms. I may disagree with elements of those reforms, but there is no doubt that both countries are stronger as a consequence.

I think that three things are critical here.

The first is the floating exchange rate. This provides a buffer between global forces and local interactions.

The second is the independence of the Reserve Banks. This takes monetary policy outside the political arena and allows the respective banks to focus on their core responsibilities.

The third is the nature of Government budgets. Our budgets, now, are in surplus or balance. At national level, Australia has no net Government debt. I am not opposed to Government borrowings. Far from it. However, there is no doubt that a budget surplus plus no debt provides a strong base for managing fluctuations. This holds especially for smaller countries.

I am not close enough to the data now to really venture a forecast. My best guess is that Australia faces troubled economic times. I also think that we are in a remarkably good position to ride through this.

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