Friday, May 7, 2010

The Second Wave.

The dramatic plunge on the Wall Street share market overnight demonstrates just how fragile the presumed economic recovery really is. It appears that an erroneous trade made for billions instead of millions, triggered the panic in an already nervous market, jittery over the unfolding crisis in Europe. Greece is on the verge of bankruptcy, and Spain, Portugal, and even the United Kingdom are not far behind. The result was that the Dow Jones index suffered the largest ever intra-day fall in value, dropping over 1000 points in a matter of minutes, before recovering about two thirds of the losses before the closing bell. The massive plunge may have been the result of a glitch, but for people buying and selling at the wrong moment it represents real losses of real money. It also represents a clear signal of just how sensitive to bad news the market really is.

Of more concern to most of us is just how such ructions might impact on our day to day lives, and once again Greece provides an example. As nations allow their debt to spiral out of control, it is inevitable that sooner or later it will be the taxpayers who are left to pick up the bill. In Greece the problem has become so extreme that the taxpayers have taken to the street to express their contempt of the government which has failed them. Sadly people have died, and it is possible that there is worse to come. All of this might seem to be half a world away, but as we have already seen through the global financial crisis, Australia is not immune to the impact of events of a global nature.

So far we have been a little bit clever and a lot lucky. Australia has been lucky to have been in a very strong economic position before all this trouble started. Australia has been lucky to have the benefit of vast mineral resources. Australia has been lucky to have a strong trading relationship with China. The steps taken by the Australian government to bolster the economy through the economic stimulus plan have been a genuine benefit in containing the damage, but unfortunately there are two problems with that. One is that a significant amount of the money spent appears to have been wasted on overpriced projects or frittered away without lasting benefit. And it was borrowed money. The second problem is that if today’s drama really is the beginning of a second wave of the global financial crisis we won’t be in anywhere near as strong a position to fight it.

The chances are that ongoing growth in China, and the slow but positive improvements in the United States will mean that rather being a second wave this should turn out to be a series of ripples. But either way, it’s time for our government to start thinking about containing the debt we have acquired over the past couple of years. Next week’s budget will need to be a balancing act containing spending, while not pulling the rug out form under economic recovery.

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