August 6, 2011
Opinion
"There is no way we can escape unscathed" Photo: AP
The first icy chill of a long and bitter winter began blowing through global markets this week.
It is not so much a rerun of the financial crisis of three years ago, nor is it merely a continuation. It is an entirely new and potentially far more dangerous episode.
There have been serious debt crises before, in Latin America in 1982 and Asia in 1997. But they were not of this scale, not in the world's richest countries and, before full globalisation, they lacked the capacity to unleash the kind of damage now possible.
The flashpoint was this week's farce in Washington, led by the supposedly patriotic Tea Party, whose members were prepared to push their nation to the brink of default for political gain, shattering already fragile investor confidence.
But the real troubles have been boiling away for more than two years in Europe and the United States, where politicians and financiers have refused to address the problem that caused the great 2008 meltdown. Instead, all they've done is exacerbate it.
It was debt that caused what Australians uniquely refer to as the GFC; private sector debt mostly poured into dud American real estate and even flimsier investments based on the dud properties. To combat it, the US spent big, first to bail out the Wall Street geniuses who created the problem, then to kickstart its battered economy.
The rescue didn't solve the debt problem, it just shuffled it from private investors onto taxpayers. And it was a debt the US couldn't afford. After a decade of slashing taxes and waging a war that could never be won, there was nothing left in the kitty.
So it solved the problem by borrowing more and cutting interest rates to zero. Then it began printing money, hitting the country with two economic adrenaline shots, financed by loading up on even more debt.
Unfortunately, the stimulus hasn't worked. But the debt has ballooned.
The stark choice now is: roll the dice again on more stimulus and more debt, or face recession.
It is a similar tale in Europe. The European Union has dithered for years about how to solve the debt fires sweeping through member states, initially opting to deny there was even a problem.
It, too, transferred private sector debt onto taxpayers in the aftermath of the global financial crisis. Then it belatedly realised banks had been lending way beyond agreed limits to Greece, Portugal, Ireland, Spain and Italy. This week, it conceded the situation was spiralling out of control, which stunned investors.
What does all this mean for us? If you could choose where to be in the developed world, it is here. Government debt is minimal, our export performance has been magnificent and we have plenty of room to boost the economy by cutting rates, should the worst fears be realised.
But we rely hugely on global trade and there is no way we can escape unscathed from the kind of storm brewing in the northern hemisphere.
