Are we headed for another economic big bang?

In Australia our leading economic thinker, Steve Keen, continues to put prime importance upon reducing private debt and he continues to be ignored as he was during the "age of prosperity". We might suggest a kind of big bang theory. When Keen is being ignored a big bang is coming.

The Henry thesis would actually make matters worse. This is because a resources boom would lead to Australia becoming hooked on foreign debt to finance the extraction of minerals and energy for export. It is this that, counter-intuitively, leads to high current account deficits as Garnaut points out. The Henry-Rudd strategy will massively increase private debt.

In addition, we seem to be in the midst of two bubbles. One is global which actually includes commodity prices and the other is local, which also includes property prices. The commodity price bubble has been superbly documented by Nouriel Roubini and our bubble by Kenneth Davidson. These bubbles have been fuelled by public policy.

Moreover, in Australia we have a real estate market geared towards investors not home buyers. A lot of the Rudd Government's policies can be read as an attempt to sustain the property bubble, which was reinflated by the tax payer guaranteed financial spivs rebuying property in the affluent suburbs of Melbourne and Sydney. Remember when Mark Latham was attacked from all quarters for suggesting that we get rid of negative gearing? In his diary he called the property boom a "spivs paradise". Latham could have been a great Labor leader, but despite the bravado he never really had the courage of his convictions.

The new bubbles got started when all those stories started to appear in the world’s financial press about the return of “an appetite for risk”. Of course, the appetite should return following the bailout. That’s moral hazard.

If we put moral hazard, no simplification and thereby no significant deleveraging in the context of a renewed appetite for risk, together with a purposely inflated series of bubbles (perhaps including in China) then we might have a case for global financial crisis 3.0.

We should note that we could have a ticking time bomb because a good part of all those toxic assets remain hidden in the balance sheets of US and especially European banks. The system can still crash.

Since the 2007 election, and probably a bit before it, Brand Rudd has dominated Australian political life. This domination has been based on stratospheric poll numbers. In fact, those poll numbers were always the only thing going for him. His leadership of the Labor Party is based on nothing else.

The problem for Rudd is that his very high poll numbers are not real. I submit that they represent a bubble for they are based on spin control and a pathetic opposition. If Rudd is Labor's chief asset then the Prime Minister is really an asset price bubble. We all know now what happens when an asset price bubble bursts. Labor's lead in the polls can fall rapidly because Rudd is a flaky.

For Labor the Rudd bubble coexists with a bubble in the economy. If the bubbles in the economy burst again then the Prime Minister is finished because the Rudd bubble is now indexed to the economic bubble.