Counting the cost of stimulus
27 July 2009
Yesterday I spent time with one of my car dealer friends. Not only did his football team lose but his jaw was down for another reason. After a wonderful June, orders for his cars in July have slumped and all his mates are experiencing the same fall.
It is clear that the government’s bonus tax depreciation on cars created a demand that simply did not continue. Demand was simply brought forward.
My car dealer friend is hoping to get another sales spurt in December when the 50 per cent bonus depreciation for small enterprises comes to an end. After that it may be all down hill.
While I sympathised with him, I suddenly realised that what he was the saying was the same as the message coming from Kevin Rudd – fasten your safety belts for the negatives that will follow the stimulus era.
And Rudd’s warning does not just apply to Australia, but is equally true for the US.
The unprecedented global economic stimulus comes at a price and that price is about to be paid.
You will remember that back around September/October last year when Lehman Brothers collapsed, the world’s leaders were looking at 50 per cent unemployment across the globe if the world banking system collapsed, as seemed likely.
They reasoned, therefore, that saving the world from that fate should over-ride all other priorities. Whatever problems came later as a result of the stimulus measures would be much less serious than 50 per cent unemployment.
Right now in Australia and in the US we are enjoying some of the fruits of that stimulus. And because our banking system was in much better shape than most developed countries and the China stimulus spending boosted the demand for our resources, the whole exercise has had a greater upward impact on Australia than on the US.
But most of the US and Australian stimulus was executed via large government deficits and heavy borrowing. Those deficits must be reined in during 2010 and 2011 and given the high interest bills they created this task will be doubly difficult.
Moreover, there are huge amounts of extra debt to be raised by the US and Australian governments. This will lift the cost of borrowing for everyone in the private sector, particularly as the big overseas sources of debt finance – Asia and the Middle East – have their own spending priorities.
So interest rates will rise and that will affect wide areas of the economy. I doubt whether the share market understands the implications of what Kevin Rudd is saying, but my car dealer friend certainly does.
Right now Kevin Rudd has Malcolm Turnbull on the ropes and so would love any excuse to got to the polls. Turnbull does not want to give Rudd an excuse, but is trapped in an environmental wedge. This is the story that is set to dominate commentary for the remainder of 2009.
Full article here