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Sent: 03-11-2010 11:31:02
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A Big Week in PolicyA How To Book Of Self Managed Super FundsEmail Marketing WorkshopsSuper funds and TPD insuranceEmail Marketing Business Opportunity - Helen Bairstow
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A Big Week in Policy

Click here to buy - A How To Book of SMSF's by Tony Negline
John Robertson

Melbourne cup week will be a time of rare importance for policymaking with monetary policy settings up for review in Australia and the USA. An unusually important mid term US election could also change the landscape.

The Australian reserve bank and the U.S. Federal reserve are faced with very different options this week.

The U.S. economy is growing, as the release of third quarter GDP data last week showed. However, the growth is well below the pace necessary to make a dent in unemployment.

The U.S. consumer is doing its best but the production gains are flowing offshore. Production growth is weakening and the contribution of inventories to growth was a warning sign that fourth quarter production might be under even more pressure.

With just a few days to go before mid term elections in the USA, a swing to the Republican Party in both the Senate and the House of Representatives seems a foregone conclusion. This is more than a simple backlash against incumbents at a low point in the economic cycle.

A large part of the U.S. voting population is worried about and determined to effect a change in fiscal policy. The so-called Tea Party has thrown up a mixed group of zealots and eccentrics as well as some serious policy advocates. They are all bound together by an intense dislike of government deficit spending. They will tip the congressional balance in favour of a more aggressive review of government spending.

The U.S. housing market remains a drag on a stronger recovery. There are signs the market is working. One example of this was a recent ABC television report on Australians selling their homes here and buying in Las Vegas and Florida, two of the areas most acutely affected by the disastrous slide in real estate values and where pressure from foreclosures remains a market depressant.

Inflation appears an insignificant threat allowing Federal Reserve chairman Bernanke to consider more monetary stimulus. The so-called QEII has been a while in coming. Perhaps the Fed was hoping the threat of something more happening would be enough to generate more confidence and improve conditions. That does not appear to have been the case and real action now seems more likely.

Another round of quantitative easing will be controversial. It will be an admission that the U.S. economy is not on a strong enough trajectory for the recovery to be self sustaining. It will also play into the debate about the role of government. Does government borrowing provide the antidote when the original problem was too much borrowing? This is the question being posed by the political conservatives.

For many of them, the appropriate policy response should involve tax cuts and business investment incentives to help create jobs and build momentum.

Meanwhile, the Australian Reserve Bank wants a better balance between the natural resources related segment of the economy and the rest. However, U.S. policies that lower the U.S. dollar will make operating conditions for the miners even more attractive. This poses a problem. The cheaper funds become in the USA, the more aggressively the Australian Reserve Bank will need to tighten.

In a tug of war between policymakers in Australia and policymakers in the USA, the Australians will be considerably outgunned. Australian policymakers will be able to do little to contain a globally oriented resources industry which just happens to be physically located in Australia but, in all material respects, is a genuinely global business.

Ultimately, prospects for the resources industry will be dictated by some combination of global demand and US moenetary policy. Nothing Australian policymakers do will affect this.

The more vulnerable parts of the Australian domestic economy will take the brunt of any policy tightening with a potential loss of confidence among consumers and businesses not exposed to the natural resources sector.

That seems a remote possibility at the moment but the history of economic policymaking is dotted by one change too many forcing a subsequent reversal after the effects have become evident.

Whatever happens in Australia this week, some of the biggest and most far reaching decisions about the Australian economy will have been taken in Washington and not in Sydney.


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