Australian Economy in Weak Phase

And down the stretch they come...

What a week it's shaping up to be. First, the Reserve Bank meets on Melbourne Cup Day Tuesday. And then Wednesday morning Australian time, we'll all watch the results come in from the U.S. Presidential election. Will either result be surprising?

The RBA talked up inflation last week, hoping to tamp down expectations for a big rate cut. The bank's deputies were out in public proclaiming the health of Australian household finances. Which households were they talking about?

The Australian economy has entered, "a new phase of weakness," according to a survey released this weekend by the Australian Industry Group. The report said this year's epic financial panic has led to, "rapid deceleration of orders, investments and confidence."

All that sounds suspiciously like a country that's about to enter a recession, despite the government's assurance to the contrary. Layoffs, falling house prices...none of that could ever happen here, could it?

Before we forget, if you want to watch an on-line, abbreviated version of I.O.U.S.A, the movie adapted from Bill and Addison's Empire of Debt, you can find it over at YouTube. No word yet on a DVD release date for Australia.

As current as the movie is, the Federal deficit has gone up about $2.5 trillion since it was made. Seriously. The various bailout programs and loans to deal with the credit crisis are growing faster than documentary film makers can up with.

The point of movie, however, becomes that much more compelling. You can't borrow your way to affluence and power and expect to stay there. You eventually transfer control of your economic destiny to your creditors. That's what's happening in America. And in Britain too, actually.

And who are those creditors? The people that make stuff and sell oil. China, Japan, and the Gulf States own a large chunk of America's public debt. And if you want a preview of what the relationship between these countries and America might be in the coming years, just take a look at Gordon Brown going hat in hand to the Saudis this weekend.

"The Gulf states will have a vital role to play in agreeing the plans to get the world economy moving again," Brown said on his way to Saudi Arabia this weekend. He added that the Gulf States "are an increasingly important source of inward investment to the U.K. As long as they play by our rules and operate in a commercial manner, we welcome investment from sovereign wealth funds."

What do you make of that? It's pretty audacious stuff by a man who is asking for money. But then, desperation often breeds a certain kind of boldness. The Gulf States, Brown says, "are an increasingly important source of inward investment to the U.K." Translation: you have the money and we need it.

And what about, "As long as they play by our rules and operate in a commercial manner, we welcome investment?" Let's have a crack at translating that.

"Yes, we'll sell whatever you're interested in buying (because we haven't), as long as you allow us to preserve the facade that we still own it and are in control of it. And it would be nice if the benefits of owning assets-you know, income, dividends, earnings-could still accrue to British firms and citizens...even though we don't own them any longer. Would that be possible? Would you like some tea? A scone?"

One of the most interesting things to watch in 2009 will be whether the authors of the beleaguered global financial system-the U.S., Britain, and Europe-will actually be able to redesign a new system and force it on India, China, Japan, and the Gulf States. The Old Money powers are certainly acting like it's their prerogative to redesign the world in any form they'd like.

But the New Money Powers-the oil exporters and the Chinese and the Japanese-might not be so content with a Global New Deal that preserves the power and status to the West without recognising...well...fiscal reality. It just goes to show you how complex relationships can get between creditors and borrowers. Who really has the power?

And then, who really has the power? That is, the American military has provided the law and order behind globalisation since the post-war era. Europe, Japan, and Korea subcontracted their defence arrangements to the U.S. And in exchange for basically going along with U.S. foreign policy, they enjoyed nearly unfettered access to the American market.

It looks like all that is changing in 2008. Not all at once mind you. But it's just a reminder that the current passage of calm in financial markets may not last too far into next year.

Dan Denning
for The Daily Reckoning Australia

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