Posted by Greg Atkinson on Jan 28th, 2009

Well it seems the inflation genie is back in the bottle and that the bottle is back in the cupboard. Therefore our wise leaders in Canberra have in less than 12 months gone from fighting inflation, to trying to stimulate growth and save the Australian economy from recession. Of course none of the economic problems Australia faces today have anything to do with government blunders, it is all China’s fault.

In 2008 as you might recall, the “nasty” Howard years had left the Rudd Government with a “terrible” legacy…economic growth. As a result, all the incoming government needed to do was to deal with a huge government budget surplus, rising growth and some inflation numbers that were outside the comfort zone of the Reserve Bank. If you took into account that high oil and commodities prices had pushed inflation just past 4%, then inflation was only just above the RBA’s long term target of between 2-3%. (and hardly out of control in historical terms anyway)

But the new government decided that good political points were to be gained by blaming “high inflation” on the previous Howard Government and so we had Wayne Swan back in February 2008 saying on ABC TV’s Lateline progam “The inflation we are experiencing now has been on the march. On the march for at least two years. The inflation genie is out of the bottle”. Well the inflation genie is well and truly bottled now, long live the deflation goblin.

The deflation goblin is a lot nastier than the inflation genie. The deflation goblin comes out of his cave when he hears that the poor inflation genie has been wrongly accused or harshly treated. He then runs around the economy devaluing assets with just a mere glance…real estate values fall, infrastructure assets no longer seem like cash cows and the good old family home ceases to be a source of equity that allows the average punter to get that new car or boat. Suddenly people realise that a home equity loan is debt pure and simple, and that there is no such thing as a free lunch.

The major problem with the deflation goblin is that he is a nasty piece of work. When the inflation genie is out of the bottle we often find people are quite happy, growth is often chugging along nicely, jobs are being created and all that people have to complain about is high banana prices etc. The goblin however has few positive qualities and is a hard fellow to chase back into the cave. When the deflation goblin is around jobs are lost, wealth destroyed, more businesses fail but bananas are cheaper if you still have some spare dollars to spend. Of course the inflation genie can get out of control sometimes as well, but she never reached that stage in 2008 although she was ruthlessly targeted by the Government and Reserve Bank. (hence the reason the goblin is pretty angry)

The reports I have from the gnomes in the hills is that the deflation goblin has been stirred, but at this early stage he may yet be enticed back to his cave. This means the Government and RBA have one last opportunity to support the Australian economy before things get much, much worse. Hopefully the RBA (after their summer break) will cut rates by a full 1% in February and the Government will focus on supporting businesses and stimulating the economy. However if they mess up again, then I am afraid we will not see any signs of recovery in the Australia domestic economy in 2009.

Sadly the Government is playing games with the Australian public and have shifted to Plan B. Plan A was to blame everything on the Howard Government, Plan B seems to be to blame everything on China. It appears every time a Government Minister discusses problems the Australian economy faces they throw in “China” a few times as a substitute for the expression “it isn’t our fault”. It’s a bit like using Homer Simpson’s rule about always blaming the other guy, or perhaps they are following Sol’s lead over at Telstra and applying a few tactics from the management consultant’s handbook? (see: Sol’s Magical Mystery Tour) I wonder ever happened to Rudd’s concept of government accountability?

Finally a quote from the inflation genie slayer himself – Wayne “it isn’t my fault blame China” Swan.

“Further rises in the terms of trade, and ongoing high global energy and food prices, will continue to add to price pressures in a capacity constrained economy. That’s why we must continue to act to tackle the inflation challenge.” (Taken from: March 2008 Media Release: March 2008 Consumer Price Index )

Ooops…better luck with the forecasting job next time Wayne. I am sure the inflation genie will forgive you.

This article was originally posted on shareswatch.com.au