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February 03, 2009

Economic Realities and Opportunities

In the lifetime of most people there has never been the depth of economic instability which is in evidence today. Seismic shifts in economic activity in every sector are apparent as we see the unwinding of an economic boom which has lasted nearly two decades. Governments are working furiously in the hope to prevent this turning into another depression. The Australian government is still operating under the belief that it can stop the recession and prevent the falling in house and other asset prices. When you remember that the ultimate catalyst for this economic downturn (I use the term advisedly) was the collapse of the house of cards which propped up share and house prices in the USA – ill-secured debt. A perfunctory perusal of graphs showing the shift in share prices, house prices and household wealth over the last 60 years shows that we had long abandoned any attachment to the long-term trend line. But… such trend lines cannot be ignored unless there has been a quantum shift in the economy, such as happened during the industrial revolution. Such a shift is not yet evident, although the emergence of environmentally-sensitive technologies might be the basis of one (though not yet).
No Western government whose citizens have experienced this asset bubble will be able to escape its unwinding in this downturn. Long-term relationships are evidence of a deep-seated connection between the price of assets and absolute wealth. This bubble was created by profligate use of debt, which has ultimately been its undoing, and cannot be left behind until the debt has worked its way out of the system, either by repayment (unlikely in many cases) or in declared losses by corporations carrying the debt. No economic stimulus package can escape this reality.
So what are governments to do?
In the best interests of the country, the governments should invest in the next generation of infrastructure. In Australia, the targets are obvious: solar technology, public transport infrastructure, education, and communications are clearly areas of underinvestment which would benefit from government investment, which would not only provide employment in the present, but would also lay out a foundation for a more environmentally friendly and efficient future. We don’t need further tax cuts to be spent on plasma and LCD TVs. We need to move our economy away from dependence upon coal, iron ore exports and uranium to prop up (I use the term loosely) our current account. Let’s get ahead of the game. The country’s budgetary position is better placed than most to auspice such development at the moment.
The next two to three years will be difficult as the economy absorbs the realities being unwound. Now is the time to shift the paradigm. Now is the time to recognise opportunities. While companies are dealing with a shifting economy, let them factor in a serious carbon trading scheme, and let households be encouraged to invest in solar technology and water capture and recycling.
We dare not prop up industries and companies which we would be better off without in the long-term. Our task is not to maintain what is, but to facilitate what will be.
I fear, however, that our governments will squander the opportunity, to the detriment of us all.

Posted by gary at February 3, 2009 03:39 PM

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