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GFC far from Over

Despite the cheering from the mass media that the GFC is over economic data suggests otherwise. Global unemployment is on the rise, business and private sector deleveraging although substantially reduced still has has a way to go while Governments' who have stepped in to stimulate economies must now start considering strategies for reducing their budget deficits.

In particular, the USA (a GPD of USD16 trillion and still the largest economy by a long way) must act as the global recover is dependent on the USA economy. If not, Chairmont foresees a possible Japanese like situation ('the lost decade") developing in the USA where all the economic levers, e.g. monetary and fiscal policy are used and the Government has no where to go. We hasten to add that the USA economy and in particular the labour market far more flexible than the Japanese, however tough decisions are required.

 

Hidden Unemployment & Underemployment

The level of hidden unemployment and under-employment should be at front and centre of the minds of the Federal Government, Treasury and the Reserve Bank of Australia (RBA). Business continues to re-structure and flexible work arrangements are critical, if the economy is going to change gears and move into a sustainable upswing.

Handouts Debate - Intellectually Dishonest

There has been significant commentary about the "rights" and "wrongs" of the Federal Government's stimulus handouts. We believe that the debate is intellectually dishonest when considered in the context of Australia's progressive taxation system. Namely, all our political parties support the concept of wealth/income re-distribution through the taxation system whether it be in the form of welfare payments to individuals or Government subsidies for business. Handouts are just more transparent than the re-distribution that occurs through the budgetary/fiscal mechanism with the benefit of not having a structural impact on the budget.

Perhaps Ken Henry as part of the Federal Government's Tax Review should consider a flat tax regime?

Foreign Investment Review Board and Terms of Trade

The recent comments by a member of the Foreign Investment Review Board (FIRB) that its preference is for foreign investment in greenfield projects and major producers to be limited to 15% and less than 50% respectively should be considered in a historical context. Readers may recall that during the 70s, 80, and 90s Japanese investors supported the mining industry by lending and investing in Australian companies/projects. Once they had control over these companies/investments they drove the price of the resource down impacting on the projects/company's profitability, etc. This strategy also contributed to Australia's Terms of Trade(ToT) being artificially low during those years, whereas in recent years with control of Australian companies being in Australian hands our TOT has been at an all time high.

If the percentages outlined above are Federal Government policy, then the resources sector is headed for a market correction, while our ToT will continue at favourable levels.

Credit Markets Hold the Key

We caution readers to remember that stockmarkets trade on expected future performance of companies, and that the Global Financial Crisis (GFC) started in the credit markets, not the equity markets. Until the credit markets return to a "new" normal level, then economic growth will be constrained by our ability to save. Specifically, the amount that banks can lend is determined by their ability to raise funds in both the retail and wholesale markets. The wholesale markets continue to price credit risk at a premium, so until those markets return then the banks will ration access to their balance sheets. ME Bank's Residential Mortgage Backed Securitisation (RMBS) priced 175 basis points (2 years ago this would have been 5-8 points) without the Federal Government's assistance last week is a another positive step, as is the major banks now raising funds without using the Federal Government Guarantee.