The "lucky country" still



The late Donald Horne wrote a miserable carping book about Australia under the title "The lucky country". Donald intended his title to convey that the happy state of life in Australia was all just luck, not due to hard work and good judgment.

Australians generally however took the title to their hearts as a good summary of how well off Australia is compared to most other places. So Donald became famous for saying something that was in fact the opposite of what he intended -- perverse fame indeed.

And the "luck" held throughout the recent global financial crisis. Australia's banks continued to prosper while much more famous banks elsewhere failed completely.

But it wasn't "luck" then any more than it ever was. It was good judgment. Australian banks were extensively DEREGULATED in the 1980s so had acquired very realistic lending policies by the time the GFC struck. So their bad debts were minimal. Banks in the USA, by contrast, had GOVERNMENT IMPOSED bad lending policies so the resulting explosion was inevitable.

The report below is a small survey of the happy state of the Australian economy to date. The RBA is Australia's central bank. The mention below of a "Super Aussie" refers to the Australian dollar and the fact that it is highly esteemed among international money managers -- and has hence risen in value against most other currencies


While most of the developed world spasms with the pain of stubbornly high unemployment, our biggest worry is that the strong full-time jobs growth we saw from the ABS yesterday will continue, eventually building into some inflationary pressures next year that will require the RBA to tap the interest rate brakes a little.

Those rates, mind you, are only average for our economy now, so it's hardly an earth-shattering prospect. The RBA wants to sustain growth, not stop it – the pain is meant to occur at the margin.

Yes, our housing is expensive, especially our most desirable inner-city housing that seems to concern so many of those who comment about this column. We should indeed be doing whatever we can to increase supply, but contrary to the hopes of the doom'n'gloomers, or those who don't own and carry an ideological hatred of the landlord class, there is no spectacular price collapse in the offing.

“Mildly overvalued,” as the IMF described Australia's house prices, is a long way from the bubbles that have exploded catastrophically in the US, Spain, Ireland et al. With so very many different factors at work, everything from our tax and mortgage systems to our culture, when parts of our market do run away with themselves and correct, it is an unhappy grind rather than a screaming plunge.

It would be nice if prices stayed flattish for a while and the RBA would like investors to collectively be smarter - and I would like to win the lottery.

It's arguable that there is a shortage of housing and the industry that builds houses would be happy to build more houses – no surprise in that – but the history of our housing market is that it eventually sorts itself out, albeit in fits and starts. Wiser federal, state and local government policies would help – but I revert to my wish to win the lottery.

Super Aussie

The rise and rise of the Aussie dollar creates problems too, although as headline writers we tend to be torn between the good and bad aspects. There's a degree of somewhat nationalistic pride as the Super Aussie struts the world stage, kicking sand in the face of grovelling greenbacks, simpering sterling and edgy euros. There's also the positive feedback for keeping our inflation rate subdued and the self-interest of many in the chattering class at the prospect of cheaper international holidays and the greater job of online shopping.

But of course Super Aussie also creates problems for some industries – the most obvious being domestic tourism and education, but also every company with foreign income that isn't being boosted by higher resources prices. The CSL annual meeting next week will no doubt have a tale to tell about that.

And local manufacturers competing with imports do it tougher, forcing them to be yet smarter and add more value. Does a strong Aussie mean the end of manufacturing? Well, a high cost base hasn't done German manufacturing much harm.

While the usual overshooting as speculators pile aboard for a while and with the caveat that no-one has a track record of accurately forecasting our currency, it's also worth remembering that it's not all about us - the much bigger problem is the weakness of the US dollar.

(As an aside, it is bemusing to watch the Americans accuse China of currency manipulation when the out-of-control American debt and the Fed's threat of printing more money is taking the greenback down and undermining confidence in the world's reserve currency.)

The nation's economy is a mightily complex beast that doesn't lend itself to simplistic analysis in half a dozen paragraphs, but that's what it's subjected to every day. The long story is a lot better than the short headline, the silver cloud right now vastly bigger than the dark lining.

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