I have never doubted that the coming recession/depression will be particularly nasty. It will be interesting to see just how much it will dislocate world trade. The temptation for the US especially to pursue policies of economic nationalism will be very strong.

The Australian economy is particularly vulnerable to the vicissitudes of world trade. So if the US does follow protectionist policies, Australian economic activity will be hard-hit.

Obviously the global economy will recover at some point, and which time Australia will resume its role as provider of dirt to Asia, but in the meantime we don’t have much in this country apart from banking and construction, and both of those sectors look pretty sick ATM.

Our dirt-based economy is acutely exposed to the global business cycle. When commodity prices are high, and the cash is rolling in, we conveniently forget about all other sectors of the economy. The AUD follows commodity prices upwards which crushes non-resource exporters and import-competing businesses. When the commodity cycle turns (as it always does) the non-resource sectors of the economy are so run down and so weak its very difficult for them to bounce back, even with the help of low interest rates and a lower currency.

The problem is particularly bad this time around. The resources boom has been running hot for 6-7 years, which means the non-resource sectors are weaker this time than most business cycles, and the global downturn is particularly vicious, and likely to be much longer than previous recessions.

Its very Australia will have to survive an extended period of low global growth and low commodity prices, with a severely weakened manufacturing and non-resource export sectors.

This is the inevitable consequence of allowing our productive capacity to be decimated while we fooled ourselves that the resources boom would last forever.

There is nothing to fall back on. Nothing.

This dire prediction was made after:

1. The Gold Rushes of the 1850s.
2. The wool-driven boom of the 1880s.
3. The debt binge of the 1920s.
4. The minerals boom of the 1970s.

Yet somehow we survived to lose it all forever (again) in the post meltdown world of the 2000s.

I guess it could be seen as a matter of some regret that Australia doesn’t produce its own cameras, televisions, t-shirts, cross-trainers, etc., etc.

And if the world economy sours enough, as it did during the 1930s, perhaps Australian entrepreneurs may decide to attempt to manufacture some of these items in Australia using Australian labour. The world economy would have to suffer a tremendous collapse for that to happen.

For the record, I don’t think that will happen. Somehow, the Australian economy will resume its customary position as a provider of raw materials for the renaissant world market. And as usual, the Australian political economy will be organised to ensure that the proceeds of that form of engagement with the world economy will be spread quite widely among Australian residents.

Boring, but oddly comforting.

fghvhhcff

It was a version of a song written by Lee Hazlewood of “Some Velvet Morning”. Wikipedia says of it…. “As with many psychedelic songs, its overall meaning is somewhat obscure”. Te he.

This is the original with Nancy Sinatra but not as good as the locals.
http://au.youtube.com/watch?v=Sb-SVPJM4L4&feature=related

This China crash challenges the national conceit that, while the global financial crisis is producing the deepest worldwide economic downturn since the 1930s, Australia will be spared the worst of it. Sure our banks are holding up, in part because Australia’s resources boom meant they didn’t have to get exotic to turn big profits over the past half decade. But now our blessed strength in mineral resources is turning into a Lucky Country curse. For Australia, the transmission of the US-sourced global financial crisis is being amplified via China through a sharp fall in commodity export prices, the exchange rate and national income.

“We have gone from the phase where China was protecting us to the phase where China is dragging us down,” says Access Economics director Chris Richardson.

In time, Australia’s China crash will force some needed national soul searching. What is Australia left with after half a decade of the mother of all commodity export booms? How much of this temporary bonanza have we invested in the future? How much have we put aside for a rainy day? What should we do if the China growth machine picks up again? What if it doesn’t?

The answers won’t be pretty. In the meantime, two successive quarters of declining output of goods and services won’t be the worst of it. “We do forecast a recession for Australia,” Richardson says.

“It is now inevitable.”

This is the inevitable consequence of allowing our productive capacity to be decimated while we fooled ourselves that the resources boom would last forever.

There is nothing to fall back on. Nothing.