November 2010

Andrew Pegler – 12 November 2010

James Wolfensohn – not the 1950s Chicago blues legend – reckons Australia is missing the Asian boat and that the US will be stuffed for years.

James Wolfensohn is an Australian-born investment banker who became president of the World Bank in 1995. He reckons Australia hasn’t really woken up to the global shift east yet. The “Wolf” reads a lot. He gets out heaps. And he’s just written his autobiography called A Global Life. According to the Wolf our failing is to do with education. “The interest of young Australians to study in Asia is less than it should be given the huge economic dependence of Australia on Asia as a buyer of natural resources. We should be putting a tremendous effort into making sure that our young people understand those cultures better.” He has a point. So go east young men and women!

He’s also pretty downbeat on the US economy. “For the next two or three years growth will be two or three per cent, which won’t get them out of this problem”. That problem, according to the Wolf, is 10% unemployment and a further 7% have either fallen off the radar or can only get a few hours’ work a week. That makes near 17% unemployment. The Wolf also estimates that by 2050 over 60% of global GDP will be in Asia and points out this last happened in 1815. FYI in 2000 80% of the world’s GDP came from the US, Europe and Japan.

For what it’s worth here’s an idea for Barack. In an effort to kick start your ailing economy, shift that stubborn 10% unemployment, offset your crippling national debt and postpone the looming national identity crisis that will come as global power moves inexorably from west to east, the US should consider obtaining an Avon distributorship. I’m sure Hilary will be busting to hit the road and sell high-quality cosmetics and perfumes, particularly the bath and body care ranges. Vice President Joe Biden could run the online shop and Ben Bernanke could manage the customer relationships with China and India.

I will be in my caravan.

And in other news… the aforementioned US economy grew 2% over the last quarter up from 1.7% in the quarter before that. The biggest driver of demand there, consumer spending, i.e. people buying stuff, rose a tad but continues its sluggish form compared to past deep recessions.

Should Glen Stevens and the RBA board be stamping our interest rates “Made in China”? Me thinks so.

China just overtook Japan as the world’s second-largest economy and this export-driven inexorable rise of the dragon continues to laden this lucky country with a largesse of fortune cookies. Dirt? We got heaps of the stuff! Coking coal, iron ore. Natural gas? More than you poke a Bunsen burner at! And then there’s our meat, wheat and the odd treat. China’s demand-driven growth will continue to underpin demand for all this stuff and barring a global catastrophe (rogue asteroid, volcanic explosion bringing on a new ice age or Lady Ga Ga coming out as an alien) the outlook for the little economy that could is pretty damn good. And then there’s India coming online – no need to curry that favour. But if there’s a dark side to this moon it’s that rates could stay up for ages.

Why? Economists are a nervous bunch, especially when the economy grows too fast. When this happens demand for goods and services grows faster than supply. FYI goods are those results of economic activity you can drop on your foot, services are things you can’t. When goods and services grows faster than supply there is a scarcity – the laws of supply and demand kick in and prices go up, which is what inflation is.

So how do you control inflation? That’s right folks, good old interest rates. Higher rates mean less people want to borrow and that means less economic activity and therefore less inflation. Capice?

In this post-GFC resources boom mark II the world is throwing money at us for our dirt and other goodies. This in turn is boosting our incomes, and also encouraging the big mining companies to make massive, long term infrastructure investments. And all this action means spending is likely to grow faster than production, which could very easily unleash the inflation genie.

Just how high rates will need to go to put a cork on all this fun remains to be seen. At least one ex RBA bigwig reckons there’ll be four increases between now and the end of next year.

Mmm � perhaps we should get our trade figures made in China too. I hear 8 is highly sought after.

In other news … sex sells! SEX.COM could be worth up to $13m when it goes under the hammer. It last sold in 2006 for a steamy $14m, but resurfaced in July after its owner went belly up. FYI Insure.com went for $16m in 2009.The question “what’s in a name?” never seemed so relevant eh?