Does Australia have a plan B?

It will not matter what Australian investors want in terms of benefits from a booming China and its demand for Australian resources.

Nor may it matter what China has to say. Recently the Chinese have complained that their large portfolio of US Treasury bonds will lose value if the US dollar declines, while China’s Premier Wen Jiabao argued that a 20 per cent rise in the yuan would cost an unacceptable number of Chinese jobs.

So as Swan raves on about how well Australia is going, other nations are adopting measures in an effort to preserve their economic competitiveness, although to what extent they succeed remains to be seen.

The US is likely to act more aggressively in economic terms in coming years. After all, its unemployment levels are still 9.6 per cent, although the real figure could be over 20 per cent.

In response to a lower US dollar, Korea has instituted capital controls, Chile and Brazil have begun direct purchases of US dollars, and Japan and Switzerland have begun their own new rounds of quantitative easing. Brazil recently also doubled the tax on foreigners’ purchase of local bonds to make it more difficult for outside investors to buy assets denominated in reals, which pushes up its exchange rate.

While the European Union has been less aggressive than the US thus far, the head of the Centre for European Policy Studies Daniel Gros has declared China’s bid to have a lower yuan and support euro-zone debt to be “economic nonsense”. Gros suggests that euro-zone governments, and the US and China, introduce legislation to ban the sale of sovereign debt to countries like China, “which don’t allow foreign investors to purchase their bonds”. Paul De Grauwe, a professor of economics at the University of Leuven in Belgium, also suggests that the European Central Bank buy “large quantities of non-European government bonds to push up the value of foreign currencies”.

If a trade war breaks out, Australia’s economic well-being will be at risk given its high reliance on the resources sector. Along with much lower share prices, falling confidence may slow housing purchases (possibly ending the housing bubble.

While Australia may have more policy flexibility than many other developed nations given its relatively low public debt and higher interest rates, a plan B is needed just in case other more powerful nations do what it takes to preserve their own national interests in coming decades.

But perhaps I am asking too much. Linking all of the issues together to find an alternative policy mix may just be too hard for our political parties, despite this being a time when they should be considering alternative policies just in case everything falls apart. Perhaps it is all too hard for all of us with the relative peace and prosperity of Western societies in recent decades a mere blimp of history as we return to much tougher economic times. Time will tell.