Australia Commits Policy Error by Prematurely Raising Interest Rates
Posted by Michael A. Kamperman on October 6, 2009
Historians look back on the Great Depression of the 1930’s and assure us that things turned out much worse than they could have because of policy errors from both central banks and governments. Australia just committed a significant policy error by raising their short term interest rate by a quarter of a point to 3.25%. This sparked a surge in the Australian dollar. It also sparked a surge in gold. Only last week Australia pledged, along with all of the other G-20 nations, not to prematurely withdraw stimulus spending plans or to raise interest rates. But Australia quickly waived that pledge off by assessing that a short term liquidity driven speculative bubble in commodities prices brought about by artificial demand from China indicates their economy has recovered sufficiently enough to withdraw stimulus. Australia isn’t even going to wait to see if Chinese demand will continue once its 60 year anniversary eight day long holiday is over. Since much of the recent demand from China has gone into building inventories in warehouses rather than into finished goods for which few firm orders exist, it remains to be seen if China will continue to purchase commodities at a rate that significantly exceeds demand. I would not be surprised to see Australia reverse course and lower interest rates in a few months just like the European Central Bank was forced to do an abrupt about face when they prematurely raised interest rates last summer. Have Australian central bankers forgotten that only 6 months ago the prices of many of the commodities they track were much lower than they are today? Does Australia realize real final demand for most commodities has not risen substantially from 6 months ago?
Australia’s go it alone strategy will hurt strategic global efforts to coordinate economic recovery strategies between the major industrialized nations. Just how good is the word of any nation that participates in the G-20, including ours? It was only a few weeks ago we started a tariff raising tiff with China over tires. What the world needs from the G-20 is a firm understanding of the depths of the crisis and a clear and united vision on how to lead the world out of the crisis. It is clear Australia just doesn’t get it. Could beggar thy neighbor policies be far behind?
The question Bob Herbert raised in today’s New York Times is does President Obama get it? Bob questions why there is no bold job creation plan coming from the Whitehouse. The radio talk shows are now all quoting the U-6 unemployment rate of 17%. The pressure is building on the Whitehouse to create jobs. The early word is they are planning on extending jobless benefits and the first time home buyers tax credit. We already had these programs in place this September and still lost over a ¼ of a million jobs. Obviously we need something much bigger and much bolder than the $3,000 tax credit for new full-time jobs the Whitehouse is considering. Would you spend $30,000 to open up a job position your company doesn’t need just to get back $3,000? The economy needs real final demand to return. Real demand will not return until the global credit markets are fixed for small businesses and consumers, not just for mining giants in Australia enjoying a temporary windfall.
