Friday, October 3, 2008

But What If There IS A Recession?

Lindsay Tanner says that talk of a recession is premature. But is it? What if there is a recession?

At the risk of sounding like a cracked record, the Global Financial Crisis, or GFC as it is apparently now known in Government circles, is far from over. Despite the efforts of authorities here in Australia to reassure us that our nation is in a stronger position than most, and the efforts in the United States to pump massive amounts of money into the collapsing markets, there are many indications that we are in for worse before we can expect better.

No matter how much the authorities try to talk up the market, or prop up the market, there are some fundamental realities that cannot be escaped. One is that the United States national Debt is now $10 Trillion and climbing. Whatever rescue package is put together by the U.S. Government will essentially be funded by borrowed money. While it is perfectly reasonable for governments to run deficit budgets during an economic downturn in order to ease the pain, the fact is that the United States has been running a deficit budget even during the good times. As a result, the capacity of the U.S. Government to bail out the economy is limited.

No matter what happens with the proposed bail out plan, it is now widely expected that the United States will experience a deep recession, and possibly a depression. And it’s not just the United States which is struggling. Reports indicate that nine out of Australia’s top ten trading partners are also sliding into recession. It’s not rocket science to work out that this will have a direct impact on our country’s fortunes. Chances are, if they all have recessions, Australia will also suffer a recession.

Here in Australia our Government has no debt, so is better placed to ride out the storm, as our politicians keep telling us. But that’s not the whole picture. Another fundamental reality which cannot be escaped is the reality that Australian household debt is at historic highs. Any economic slowdown has the potential to trigger an avalanche of defaults. In turn this will drive down Real Estate prices. In a scenario where average house prices are way out of step with average incomes, it is only a matter of time until there is a market driven correction. In fact we are already seeing that, although the extent of the potential downside is something that many people still have not recognized.

It is an irony that as things become worse, many people will blame the Rudd Government, when they have not been responsible for bringing these conditions about. They merely had the misfortune to be elected at a time when the inevitable started to unfold. Even so, many people will expect the Government to somehow miraculously prevent the problems ahead.

The real question is not whether our Government is able avert a recession, but whether it will be able to cushion the blow to ordinary Australians who become caught up in it, should it come to pass.

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