Reserve may stay its hand amid glimmers of hope

With no strong European government and a relatively new untested European central bank, one wonders how forced marriages and bailouts of European banks will be arranged.

Further, jobs are still being lost everywhere, and people who lose their jobs usually lose confidence and are forced to tighten their belts, causing the downward spiral of activity diagnosed so lucidly by John Maynard Keynes a little over 70 years ago.

There is not much the Reserve Bank or the Australian Government, can do about the global recession. Neither can either body contribute significantly to the global recovery.

The good news for Australia is that, with the application to the banks of the Government's triple-A credit rating, there is no real cause to doubt the solvency of these banks.

Despite Australia's "miracle economy" status, jobs are now being lost at an alarming rate. Clearly, globalisation means that many decisions are made in the global centres of power, rather than in Australia's boardrooms.

The alarming corollary is that economic policy decisions here may not much influence the state of the Australian economy. The best monetary and fiscal policies - somehow defined - may not help much at a time of general global panic and lack of confidence.

The caveat to this cheerless conclusion is that bad decisions can make matters worse. Australia has a very large net external debt, at last count approaching $700 billion, or about 70 per cent as a ratio to GDP.

With budget surpluses and zero net domestic debt, there was little chance of international investors transferring capital out or the run on the Australian dollar that would create. Now, however, there is a budget looming that will show a very substantial deficit, perhaps of the order of $50 billion, or even higher, according to some pundits.

The swing from last year's $20 billion surplus is dramatic, and is sure to catch the attention of those screen junkies who put thumbs up or thumbs down as each nation releases important economic information.

Reserve Bank governor Glenn Stevens has been careful to avoid any suggestion of disagreement with the Government.

I refuse to believe he really believes handouts to all and sundry (including Mrs Thornton), paying for pink batts in people's ceilings or painting schoolrooms, makes a lot of economic sense.

But Stevens is duty bound to go along with whatever the Government does, so long as he does not believe its actions represent a clear and present danger to economic stability.