Well here’s the good news. The Australian economy has gone for 17 years without a recession. That’s a pretty impressive growth spurt. But if the economy were a teenager, you’d wonder how much growth was left.
The economy is not a teenager, of course. Australia’s $1 trillion economy is much more complicated than the mind of a 17-year old, probably. But for the record, growth in the second quarter was just 0.3%. Year over year, Aussie GDP grew by 2.7%, which is better than the U.S. (2.2%), the U.K. (1.4%), and Germany (1.7%).
Former U.S. Senator Everett Dirksen allegedly once said that the main purpose of GDP is to make everything else look small by comparison. And really, who goes around and ads up the value of all the transactions in the economy in any given quarter? Aren’t these numbers a bit of a fraud? And isn’t the obsession with them based on another fraud, that the economy is finely tuned machine that can be tweaked, prodded, and manipulated by policy makers?
In any event, the share market was not sufficiently cheered by Australia’s relative out-performance in GDP terms. Shares got shellacked. Even the decision by the Reserve Bank to cut the cash rate to 7% was not enough to kick start the market higher. And the decision actually kicked the Aussie dollar down its lowest levels in a year.
So has anything really changed this week? It sure doesn’t look like it. Buried in the GDP data is the fact that Aussie household spending fell. What did you expect? We are starting to find out how much consumption in the economy was financed with credit cards or borrowing on other assets like cares or shares.
In terms of personal virtue, more saving and less spending is probably good for a man. In the aggregate, it leads to lower GDP growth. But if the growth comes at the price of debt, well, perhaps we should try doing without for a few quarters. You’d get a different kind of economy over time, but it might be more productive and less indebted.
Here in America, it’s all politics all the time. It’s enough to make a man sick to his stomach, which is how your editor has been for the last few days. It could be the jet lag. But we reckon it’s the spectacle of tens of millions of people who sincerely believe that it’s possible to live at one another’s expense. Yeesh.
In the markets, all the action is in the currencies, which is in turn setting of reactions in oil, gold, and commodities. The U.S. dollar has started to look like the least ugly currency on the market lately. The British pound is reeling under the staggering incompetence of Gordon Brown and Alistair Darling (and Britain’s housing and debt bubbles.).
You know what we think of the greenback over the long haul. But the dollar rally may have some legs, especially if you keep seeing increased political risks in Asian markets (Japan, Thailand, Indonesia). We had lunch with an old colleague yesterday who said it looked like shades of 1998 and the currency crisis, but with a few variations.
What variations? Well, in 1998, the U.S. was coming off a rare (and truth be told fictitious annual budget surplus). Tax profits were pouring into Federal coffers faster than the Federal government could dole it back out. The dot.com boom was entering its irrational phase, and the dollar looked like a King.
Today, U.S. Federal finances are not nearly so rosy. The government is going to run an annual deficit of nearly half a trillion dollars. But still, in the game of global fiat currency competitive devaluation, other countries are following what the Fed began last year.
The stronger dollar will put a lid on oil and gold, and probably deal a few more kicks to the mining companies, and the morale of resource investors. We wouldn’t be foolhardy and average down. But you should still keep a careful list of good resource projects with excellent mineral deposits. And then try to buy them on sale.
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