Richard Farmer’s chunky bits: Gillard singing Swannie’s praises

Losing the economic debate but keeping Wayne. Treasurer Wayne Swan can be forgiven for thinking that there is no justice in politics. Here he is, the man who acted so promptly and correctly to keep Australia free from the ravages of the international financial crisis, finding himself in the position where the mob are judging his opponents, who opposed much of his stimulus measures, as better economic managers. This morning’s Newspoll judgment surely is harsh but that makes it no less troubling for Labor. The figures purporting to show that the Coalition has turned a one-point deficit on its handling of the economy into a 12-point lead, 47% to 35%, will give the Coalition great heart and spur it on to keep talking about the evils of the Budget deficit. Clearly, Swan failed to explain well enough how vital his spending plans were to keeping people in jobs and the Australian economy growing. That his party acknowledges that failure is now seen every day as the junior Financial Services Minister Chris Bowen is trotted out to handle media questioning on many of the economic issues. At least Swannie can console himself that his leader is sticking by him. Julia Gillard said this morning that Swan, as her deputy, is the only frontbencher guaranteed his job if Labor wins the election. But then again, perhaps that statement was made for the simple reason that Queenslanders are annoyed enough with having lost a Prime Minister without having to worry about losing a Treasurer as well.

And the winner is … Our first Crikey election contest of the campaign — the one to pick the election date — has been won and our congratulations go to Penny Dorsch. She’ll be getting the promised goodies and no doubt she will be inspired to now have a go at the big one and win the $5000 on offer in our contest to find the Top Election Tipster.

No policies for the warmth to come. Given the sad truth that the so-called governing majority Democrats in the United States now have given up the attempt to introduce any form of cap-and-trade scheme to limit carbon emissions, I suppose the decision of both major parties in Australia to adopt the same position makes more sense. There is little point in us making some heroic gesture to limit carbon emissions. Without an internationally agreed approach that sees the major polluters such as the US and China leading the way, anything Australia does is irrelevant in actually solving the growing problems being created by a warming planet.

It is all very depressing when you bother to think about it because the evidence of global warming keeps coming. Consider this update from the Discover website using data from the NOAA-15 and NOAA-16 satellites giving global atmospheric temperatures are measurements at multiple levels from the lower troposphere to the stratosphere. I have chosen the data for the 14,000 feet level because it gives figures for the highest temperatures on the 20 year-plus record, plus the average temperature along with those for individual recent years.

The green line is this year to date, the red the highest recorded for the day in any year and the blue one the 20 year+ average reading.

Given the increasing likelihood that there will be no internationally agreed approach to what is clearly a problem, it would have been reassuring if our political leaders during this election campaign gave us some idea of what their policies will be to prepare Australia for the inevitable warmth to come.

Two different worlds. Two different countries. Two newspapers. And two quite different economic problems. In India the Economic Times is warning its readers that the country’s central bank is expected to put up interest rates by a quarter of a percent this week to cool double-digit inflation.

In the United States the Los Angeles Times has brought fears, not of rising prices but of deflation striking the economy, from up the back of the book on the finance pages to become the front-page lead.

For Australia, comfortably caught at what was thought to be the end of the global financial crisis between a still rapidly growing Asia and a stagnant or slowly growing United States and Europe, there are clear dangers from the quite different problems of both regions.

The Indians are not the only Asians confronting the problem of the inflationary pressures that come from rapid growth. China is experiencing problems of its own as the authorities try to confront the dangerous social tensions created by a housing price boom that is making basic shelter unaffordable by the workers whose toil is generating the export-led development. Dearer housing has not yet been matched by price rises in other areas and in June China’s consumer price index rose 2.9% from a year earlier, down from May’s 3.1% rise. Yet the People’s Bank of China clearly is concerned about future possibilities. On Monday it laid out how a more flexible exchange rate will help alleviate inflationary pressures in the Chinese economy and generally improve the effectiveness of its monetary policy. The central bank vice-governor Hu Xiaolian explained in a statement reported by the Asian Wall Street Journal that especially since China joined the World Trade Organisation in 2001, foreign capital has flowed into the country via its massive payments surpluses with the outside world.

To preserve the relative stability of the currency, the central bank has been forced to buy up the incoming foreign currency with yuan, thus increasing domestic money supply, she said. To prevent that new money from causing inflation, the central bank has in turn been compelled to “sterilise” that new money creation through various measures that soak up liquidity such as issuing bonds and raising the reserve requirement ratio for banks.  Hu said that in recent years, those sterilisation measures “have had some effect,” but the central bank hasn’t been able to fully counteract the capital inflows, and “excess liquidity pressure has been difficult to fundamentally resolve.” In addition, the costs to the central bank of undertaking sterilisation operations have been rising, she said.

A more flexible exchange rate can therefore help the central bank curb inflation and asset price bubbles, help alleviate imported inflationary pressures, and help deal with external economic shocks, she said.

It would be prudent for Australians to interpret those remarks as indicating that the recent 10% plus Chinese growth rate will slacken at least a little in coming months taking away some of the boom in prices for our commodity exports.

While the emergence of a rapidly growing China and other parts of Asia has taken away the simplistic truth of the old saying that when America sneezes Australia catches a cold, it is wrong to think that we would escape unscathed from an America in a deflationary spiral if for no other reason than exports from those Asian economies would be seriously affected. Hence, the reason to be at least disturbed by the LA Times discovery of a deflationary problem. As the paper explained in its page one story:

The White House prediction Friday that the deficit would hit a record $1.47 trillion this year poured new fuel on the fiery argument over whether the government should begin cutting back to avoid future inflation or instead keep stimulating the economy to help the still-sputtering recovery.

But increasingly, economists and other analysts are expressing concern that the United States could be edging closer to a different problem — the kind of deflationary trap that cost Japan more than a decade of growth and economic progress.

And as Tokyo’s experience suggests, deflation can be at least as tough a problem as the soaring prices of inflation or the financial pain of a traditional recession.