Stimulating the Australian economy

Urgent message to the Australian government: The banks are curtailing their lending to struggling businesses because of the stimulus bill! Why? Because of the $42b of risk free commonwealth debt soon to come onto the market.

They are doing this because
1) The risk/return ratio on Australian government debt is far more attractive than what it is for commercial paper right now.
2) Purchasing a fixed A$ income stream now, by way of corporate bonds, would almost certainly make a loss when the Australian Dollar is expected to take a hit from massive discretionary spending on imported goods as a result of the $950 per household handout.

This is similar to the situation the US banks find themselves in. Obama's stimulus plan is considered a low dollar policy, making US corporate bonds less attractive now, compared to what they will be in the future. All the major banks are reducing credit lines to customers in response to this situation. Let's not follow their lead.

Brumby fiddles while Victoria burns

For politicians, the problem with bushfires is that it becomes necessary to throw money at the victims, but when people are hurting and looking for someone to blame, sometimes less is more. The guiltiest looking politician can be the one who shovels too much cash, sheds the most insincere crocodile tears, and engages in the most ridiculous displays of faked public sympathy (see Victorian Premier John Brumby's display on the Sunday night news).

When the politicians are finished handing out lollies and the reality of the situation sinks in, the victims will be looking for the reasons why so many structures, many of which had stood for over a century, were able to be swept away with such ease, and why so many people found it impossible to find places to shelter from the inferno.

It is only a matter of time before people begin to realise that the real reason for the loss of so many lives and structures was that state and local government environmental regulations, introduced in the 1980s and 1990s, prevent residents from felling large trees on their properties, irrespective of whether they pose a fire danger to structures. Now I'm not in favour of people felling forestland willy nilly, but there is definitely a case to be made for replacement of large eucalypts with less flamable varieties, especially where their canopies pose a danger to structures.

The lessons for state governments are.
Native trees = native scrub
Native scrub = bushfires
Bushfires = loss of life.
Therefore, alter environmental regulations to allow clearing of native bush around structures.

But am I missing the point? As Roman emperor Nero knew full well:
fires = a great distraction for the general public
great distractions = less public opposition
less public opposition = less incentive for government to prevent fires.

Are we likely to see change? Not unless it is made clear that the government is responsible for the fires and they are punished in the opinion polls.

Australia's stimulus package goes against treasurer's previous forecasts

The Australian treasurer has unveiled his four fiscal stimulus bills, which were rushed through the lower house in an emergency overnight sitting last week. In recent days, the government has chastised the opposition for holding an enquiry into the details of the bill in the senate, and blocking its immediate adoption as legislation.

The federal opposition, and other critics of the bill, note that the size of the borrowing that must take place in order for it to proceed would place Australia in the position of debtor for decades to come. The government has forecast the total cost to be in the order of $42 billion dollars.

The government claims that the most recent economic projections demand stimulus of this magnitude, yet only months ago, the treasurer's projections were for "slower growth, but solid growth" of 2% for the 2008-2009 financial year. Now, new economic data have shown that GDP is shrinking.

The reliance on borrowing, which will have to be repaid, is a big call, given the inaccuracy of previous predictions from the treasurer. Indeed, as the treasurer pointed out himself, "Given the new circumstances, ah, we are going to have to cut our cloth to suit those circumstances, and we're not going to be able to do, ah, the wish list that many people have for us to do. It's that simple". A $42 billion deficit spending spree is a big change of tune indeed.

Japan to give US$17bn in aid to Asia

Japanese prime minister Taro Aso has stated at the WEF in Davos, Switzerland, that his country would lend a minimum of $17bn to developing Asian countries.

This is not as generous a move as it may sound. Japan has a huge current account surplus as a result of it's successful manufacturing export sector. It's companies normally reinvest the money that they earn from countries like the United States and Australia back into these economies by way of loans to our governments. With the advent of the financial meltdown, risk free government bond prices have shot through the roof, providing very little yield for foreign investors, along with greater risk of declines in US dollar linked currencies eroding the marketable value of these assets for foreigners.

Japan is left with no option but to invest its US dollar earnings elsewhere, and the most likely recipients are developing countries in Asia, who would most likely invest the money in infrastructure or manufacturing plant and equipment... most of which is made in Japan.

This is good news for Australian commodity exporters though, as increased spending on heavy infrastructure in Asia will almost certainly increase demand for steel, base metals, lumber, coal and food.