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Running a national economy is no easy task |
Not only do you have to deal with international factors far beyond your control but you also have to deal with human beings who by and large refuse to be predictable.
Unfortunately for central bankers and the others who try to influence the economy, economics has as much to do with psychology as it does with numbers and statistical relationships.
It’s the sleeping dog syndrome that economists find particularly difficult. Kick a sleeping dog once and it will probably move out of the way. Do it a second time and it is just as likely to turn around and give a nasty bite. Same action, different reaction.
The current problems in the Australian economy are caused partly by a downturn in both consumer and business confidence.
The Howard government has blamed the Reserve Bank for a downturn in consumer confidence because it raised interest rates several times last year. The Reserve Bank puts a lot of the blame on the introduction of the GST. It was probably a bit of both.
Hopefully this fall in confidence will be temporary and that by the end of this year we will be happy and prosperous once again. The Reserve Bank seems to think so and the Howard Government is desperately hoping so. But as usual the international picture will affect what happens here.
The biggest players naturally enough are the US and Japan. They represent 40 per cent of the world economy. If they go down together, Europe, the rest of Asia and Australia - all showing signs of weakness - will go down with them.
Ironically both the US and Japan are teetering on the edge of recession – and for opposite reasons.
One of the biggest problems in Japan is a reluctance by consumers to spend.
They would rather save. The Japanese are currently saving nearly 15 per cent of their income. This is cutting into consumer demand and weakening the economy.
In the US consumers for the past two years have been partying big time. Savings in the US have been negative as consumers have borrowed money to support their lifestyle.
The US economy is suffering from this imbalance. If Americans decide they should save more, then a recession is more likely.
A number of studies have shown that there is a wealth effect in relation to consumer spending. As US share investors – now more than 50 per cent of the adult population - see their wealth grow on paper they tend to spend more and borrow more.
The fear now that we are officially in a bear market in the US is that the reverse could also be true.
Meanwhile the Access Economics Group has described Japan as a big worry for the world economy. It says Japan is teetering at the edge of an abyss. Japan is experiencing deflation with prices on a wide range of consumer goods actually falling.
Consumers have apparently made a rational decision and decided to hold back their spending to benefit from falling prices later on. The Japanese Government can do very little about it.
The normal policies adopted to counter recession are to lower interest rates and increase government spending. These are not available to the Japanese Government.
Interest rates are effectively zero already and the Government has taken on so much debt from previous rescue packages that interest on debt consumes more than half of Government revenue already.
If Japan cannot avoid recession then we could see a spiralling down even further.
Japanese banks are struggling with high levels of bad debt – much of it left over from the collapse of the Japanese bubble more than ten years ago. A recession would only exacerbate these problems.
What can they do? There is one solution that is every economist’s nightmare but one that is apparently being seriously considered. Simply print more money. The hope is that this will stop the deflation and lead to rising prices. This may encourage Japanese consumers to start spending again. It may also give a boost to the share market.
But it is a policy that carries big dangers. It’s no wonder they call economics the dismal science.
David Tomlinson is a freelance finance journalist based on the Northern Rivers.
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