Obama's printing of billions of new dollars likely to create an even bigger world financial crisis
Comment from an Australian expert below
Reserve Bank board member Warwick McKibbin has warned that Australia is being caught up in a global bubble that could hit us much harder than the global financial crisis and expose the weaknesses of Labor's economic settings.
Professor McKibbin told The Australian the bubble in global commodity prices and property markets in Asia threatened to dwarf the US housing market bubble that led to the GFC in 2008. He warned that the inevitable bursting of the bubble would reverse the surge in Australia's record high terms of trade, push down the dollar and leave the Reserve Bank struggling to fight off rising global inflation pressures.
"This is shaping to be much bigger than 2004 to 2007," he said in comparing the new excess of global liquidity with the global financial bubble that led to the worst global financial crisis since the 1930s. "This cycle is even bigger."
Professor McKibbin suggested the surge in global liquidity fuelled by US monetary expansion had echoes of the early 1970s surge in food, mining and energy prices that led to global "stagflation", or the combination of high inflation and high unemployment.
An internationally renowned macroeconomist at the Australian National University, Professor McKibbin has been a Reserve Bank board member since 2001. He is not expected to be reappointed by Wayne Swan when his second term ends in July following his criticisms of Labor's budget stimulus spending and now its flood levy.
His analysis suggests much of the surge in mining, energy and food prices is being driven by the near zero official interest rates and so-called quantitative easing of credit conditions in the US and Europe in the wake of the GFC.
The Reserve Bank's commodity price index has jumped 49 per cent in the past year that includes a recent 9 per cent jump driven by a surge in food prices.
Reserve Bank governor Glenn Stevens last week noted strong demand from China and India had fuelled the surge in Australia's terms of trade -- the ratio of the prices we get for exports compared to the prices we pay for imports -- to their highest sustained level for at least 140 years. This was producing the biggest mining development boom in a century.
But Professor McKibbin suggested that perhaps 40 per cent of this terms of trade surge was being driven by US and European monetary expansion, which is feeding generalised inflation pressures. "That is why inflation is taking off all over the world," he told The Australian.
"It is already out of the bag. As interest rates go up, a whole bunch of assets and balance sheets will get crunched, so I am not optimistic."