Issue: 362
Sent: 10-11-2009 11:31:02
In this issue:

Managing Transitions: The New ChallengeEmail Marketing Business Opportunity - Helen BairstowIs Retirement Saving in the US Really Any Different? - Part 3The Easiest way to do a Client NewsletterThe How to Book of Self Managed Super FundsWhy Warren Buffett won't buy a NewspaperTwo Issues This WeekHow do I use ATC articles for my clients?
Return to full article list
HomeFree weekly newsletterSelf Managed Super Fund ArticlesContact usLogin

Managing Transitions: The New Challenge

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

Worries about 'imbalances' are likely to give way to anxiety about 'transitions' in 2010.

For most of the last decade, international economic policy makers such as those in the International Monetary Fund and World Bank repeatedly expressed concern about imbalances. Unsustainable exchange rates, large fiscal and current account deficits and housing price bubbles were the primary sources of their anxiety.

That gave way during 2008 to concerns about the viability of the financial system in many of the advanced industrial countries. While widespread failure of financial institutions is less feared than it had been, the problem has not gone away entirely. Last week, the UK government had to announce new measures to help stabilize the banks within its jurisdiction.

Nonetheless, the emphasis is now more on clearing the debris than on making judgments about survival. In the U.S., as the ATC e-mail highlighted last week, the emphasis is on securing the stable before the next horse escapes.

The bigger issue is now a macroeconomic one of guiding national economies through the transition from recession to recovery. This is likely to be a challenge for all policymakers.

The challenge arises in part because the economics profession is not especially skilled at making its way through such transitions.

Economists can be highly adept at describing current conditions. Hundreds of them are paid for doing just that as they get their heads and their employers names on the cable and free to air business programs every night.

They are also able, with slightly less dexterity, to describe alternative scenarios of where they would like us to be. So, for example, the head of the central bank can describe a 3½% pa GDP growth path with a 2-3% inflation rate and 5% cash rate as an acceptable norm to which we could aspire in the future.

However, economists frequently trip if not fall down completely in working out how to get from current point A to future point B. The tools they have are either too blunt or too uncertain in their impact for them to offer unambiguous prescriptions about how change should be initiated and managed.

Consequently, we are probably going to have a prolonged debate about when fiscal and monetary stimulus should be eased as we attempt to make the transition to more self-sustained growth. Australia's contribution to that assessment has already caught the eye of international commentators some of whom have noted querulously its decision to start tightening monetary policy so early.

One transition which will be of ongoing importance to Australia involves the forces supporting commodity prices.

Currently favorable monetary conditions driven by low interest rates, large budget deficits and central bank quantitative easing have helped keep prices aloft. These conditions cannot persist. Their withdrawal will potentially lead to a sharp fall in prices.

The early stages of an economic recovery typically bring with them a strong surge in demand for raw materials. An acceleration in growth among the advanced economies, of the type now expected in 2010, is the key to this happening.

With luck, one force will take over seamlessly from the other. But we have to consider the possibility that we do not get a seamless transition from markets dominated by favourable monetary conditions to markets depending on a surge in raw material usage. While it lasts a discontinuity between the two will give every impression of another bursting bubble.

I have canvassed these issues in more detail in an article entitled "Commodity Prices: The Transition Risk" to be published in the next edition of the ATC Digest, available on subscription from

Share this article
Click to share this article on Facebook Click to share this article on Twitter

Previous article         Next article

If you liked this article and would like more by email, subscribe! It's free.

[Bold fields are required]

Your details

Your alternate email address is used only if messages to your primary email address are returned to us.


Do you work in the financial services industry?

This email is general in nature only and does not constitute or convey specific or professional advice. Legislation changes may occur quickly. Formal advice should be sought before acting in any of the areas discussed. Be aware that the information in these articles may become innaccurate with time. Responsibility is disclaimed for any inaccuracies, errors or omissions. Particular investments are neither invited nor recommended and hence this publication is not "financial product advice" as defined in Section 766B of the above legislation. All expressions of opinion by contributors are published on the basis that they are not to be regarded as expressing the official opinion of any other person or entity unless expressly stated. No responsibility for the accuracy of the opinions or information contained in the contributor's articles is accepted by any other person or entity. Copyright: This publication is copyright. If you wish to reproduce this article you require a license, which can be purchased here, to do so.

Site design by Raycon