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This time around, Australia will probably be better off than in the Great Depression. We will be better off for similar reasons to the ones that made us worse off then. It is just that we made different choices 80 years on.
80 years ago, Australia was still politically tied to England by its constitution, legal system and even things like the Honours system which bestowed British Knighthoods on Australians. Then there was the emotional attachment of people who mostly had a British ancestry. Today, there are echoes of those things but we have moved on a lot. We have more in common with China, India, Indonesia and the USA than we do with Britain. Australia is considered an important political force in the Asia-Pacific region.
Australia in the 1920s was still tied to the British banking system and had a huge and unsustainable debt to Britain to pay for the Australian accommodation and equipment of Australian troops. 1] Now, Australia has no such foreign debts and has a strongly independent financial system that is less prone to excess after major problems that were addressed in the 1990s.
The Australian economy is also more diverse than it was in the 1920s. Instead of agriculture dominating, mining and other commodities make up more of the economy than agriculture. Services and other trade tend to be less sensitive than food exports to global recession.
There are even some areas where a slow down could even benefit the Australian economy. Firstly, with lower foreign debt than in the past, a lowering of the $A means that we actually get more for our sales overseas. with the $A at 0.70 $US a sale of $US 1 billion of iron ore returns $A 1.42 billion where as at 90 cents to the dollar it produces $! 1.11 billion. Lower oil prices means that our import bill goes down by about the same as the cost increases because the $A is lower.
A slowdown globally even gives our mining and finance sectors a chance to catch up with building of infrastructure which lagged behind. Government was reluctant to invest in infrastructure projects when the economy was booming. This would have added to inflation and placed more pressure on an under-supply of workers to undertake these projects. Now the projects can be started and the resulting infrastructure should provide an opportunity to better address the next up cycle with lower inflation pressures. There is even time to make some changes to our education and training institutions to better meet the skills shortages that will re-emerge.
This down cycle is predicted to last 2-3 years from now. It will reach its worst in most parts of the world in 3-6 months. Then it will probably be back to where it is now in 12-18 months. 12 months after everything will be on the rise for a lengthy time. The deeper the shock, the longer the recovery after and the less taste for doing the things that create the deep recession anyway.
Why can I be so confident of the recovery?
- It is clear that world Governments have learned a lot over the last 80 years. The recent action by national banking organisations and the co-ordination of many countries to do similar things shows this
- There is still a large amount of unmet demand that was not being addressed. The slowdown will in many ways bring supply and demand into line
- the crisis is in the financial system, not in any productive area of the economy. Economies are much more diverse now and the financial sector is not so monolithic as it once was
- The thing that would have destroyed world trade would have been to shut off all liquidity in credit. This has been effectively handled.
So, Australia will be not too badly off overall. Some will suffer. Mostly those people are the ones who accepted risky investments hoping to gain high rewards. Some will be quite innocent victims. Some will be absolute winners out of it. You can already see the Commonwealth Bank buying up a competitor for only half the price it would have needed to pay 2 weeks ago. The owner was a British bank.
Commodities prices (coal, mineral ores etc) have been set in contracts that will cover the next 1-2 years. The world demand for basic necessities (food, clothing, industrial materials) was not being met so a slowdown will probably allow the demand to better match supply. With luck the equity of distribution of supply might be improved. 2 Domestic demand in Australia, India and China will still be strong. That means that is is likely that these trade links will be more important than they are even now.
It is likely that there will be a global shift of economic power after all this. Most likely it will mean that finance will be re-directed into productive growth rather than pure financial “funny money” growth like the NINJA loans. It also means that some of the cultural imperialism will reduce.
- Sadly, it was forgotten that some 60,000 Australians in the prime of their lives were killed fighting a war for European countries. This debt was really only a way of getting Australia to subsidise Britain ↩
- if there is less demand from wealthy consumers then the prices for poorer consumers like Africa etc will be more affordable. ↩