Propping up the economy

Sub-prime loans, because of the risk involved, offered high returns. The results are now obvious. As David Alexander, the economics writer for The Canberra Times has put it, “suddenly the virus was hitting the citadel of capitalism.”

The story so far is that the US Government will spend up to $2 trillion saving this citadel - Wall St. Would it not have been better to spend that amount on public housing rather than merchant bankers?

Some argue that the situation is different in Australia. Certainly “no doc” or “low doc” loans make up a much smaller percentage of our loans, and foreclosures, although increasing, have not done so markedly. Unemployment remains low, and the resources boom continues. Housing prices - an indicator of individual wealth - have not yet fallen very much.

The question is, for how much longer will these good economic factors continue?

Apart from rapidly falling superannuation returns,(unfortunately I am about to access my superannuation), the immediate economic impacts of the Wall St crisis are yet to play out in Australia. However it is likely to include both increased bank lending rates (irrespective of what the RBA does) and much tighter lending restrictions (i.e. less loans). This is because if the banks won’t lend to each other, except at exorbitant rates, (rates which will flow through the economy,) why will they lend to us?

Over time this, coupled with a recession in the US, will see increased downward pressure on wages and higher unemployment. Rudd’s WorkChoices Lite, like Howard’s version before it, is specifically designed to force wages down during bad times.

There will be less tax, meaning the vaunted surplus will be threatened. The Rudd Government’s attacks on public services and public servants could then be swingeing.

The Wall Street bail-out is likely to increase inflation around the world. This will pressure the RBA to increase rates, not cut them.

China and the US are economically, inextricably linked. A recession in the US could, apart from the matters mentioned above, also flow through to Australia via a downturn in China, possibly in mid-2009.

However there is a further problem. If it is true that the general rate of profit is lower now than a decade ago, and the competitive drive means the hunt for higher returns compared to competitors is intrinsic to the system, then there could be more sub-prime loan crises - in other guises - not less.

It also means traditional methods of increasing profit rates - like lengthening the working day, increasing productivity and cutting wages - will come more and more into vogue.

War too destroys capital and renews the system.