Free trade has had its time

Some 2010 figures refer to 2009

So what are the answers? While they are difficult, the acceptance of recent policy trends is limited in the longer term, notwithstanding Australia's benefit from supplying raw materials to the fastest growing region in the world (especially China).

At present, Western governments desperately cling to a misguided hope that more and more debt is needed to save banks, boost share prices and somehow restore the magical days of economic growth. As the Bank for International Settlements declares,

...there is a clear linkage: high debt is bad for growth. When public debt is in a range of 85% of GDP, further increases in debt may begin to have a significant impact on growth: specifically, a further 10 percentage point increase reduces trend growth by more than one tenth of 1 percentage point. For corporate debt, the threshold is slightly lower, closer to 90%, and the impact is roughly half as big. Meanwhile for household debt, our best guess is that there is a threshold at something like 85% of GDP, but the estimate of the impact is extremely imprecise.

There are no easy policy solutions out there, as reflected by the Swiss National Bank recently announcing moves to stem the flow of money into Swiss Francs in order to protect its exports.

For heavily indebted nations, there is likely to be painful reform, and this is why public dissent is increasing in many Western nations as governments struggle for answers.

Just recently, and following on from the Tea Party movement which aims to shrink the size of government and cut federal spending (with 60 of 435 US representatives now identifying themselves as party members), protests spread from Wall Street, New York to many cities around the world. In the US alone, signs, slogans and discussion focused on opposition to bank foreclosures, corporate influence in politics, the wars in Iraq and Afghanistan, insufficient job prospects, currency devaluation, affordable housing and universal health care, and fixing inner-city schools.

Dissent is hardly likely to go away. In the four years since the US recession began, the US civilian working-age population has grown by about 3 per cent yet the economy has 5 per cent fewer jobs (6.8 million jobs) with the real unemployment rate 15-20 per cent. With poverty levels rising recently to now affect 46.2 million Americans, the bottom fifth of households that made $20,000 or less in 2010 saw their incomes decline 3.8 per cent after inflation.

In countries like Greece, Ireland, Portugal and Spain, unemployment is already around 20 per cent (youth unemployment around 40-50 per cent) at a time when such economies have shrunk by 10-20 per cent.

Western societies are somehow expected to create employment and wealth at a time when domestic consumption already comprises 60-70 per cent of GDP.