To the Doomsayers of the Australian Economy,

Do we have to ignore all the stimulus packages so early and spark a massive selloff with such pessimism, equating the 2008 situation with the Great Depression of the 1930?  The depression which we refer to was also affected by central banks operating in a market which was not fully exposed to the free market forces of supply and demand. 

In the 1930s, people took their money out of circulation, including bank accounts and put it into gold as the gold was held at a standard price.  This not only took money out of circulation, creating liquidity problems, but also maintained its value as set by gold.  As the governments tried to inject funds into a highly regulated as opposed to a market driven, financial system to combat this, they not only stimulated the economy briefly, but also fuelled inflation and price volatility.

Since the late 1980s the Australian economy has been operating in the ‘open market’, meaning it is now subject to the forces of supply and demand, from the float of the currency to a myriad of investment vehicles.  The central bank raises and lowers official interest rates with a mission to ‘maintain price stability’ via intervening in the rate of flow of funds in the system.  For the last decade, we have managed to stimulate an economy from a recession in the 1990s to one of lowest unemployment levels in history coupled with the lowest interest rates in history which lasted a relatively lengthy period of time.

What stimulated our economy in 2001?  Let’s pay attention to the AUD in the free market.  The RBA may have supported the AUD when it dipped to it well below US$0.50, but let’s not ignore the stimulatory effect this level of the AUD has on our exports.  Our exports become very cheap to developing countries at this level.  Not only are they cheap, however, our resources companies get paid in USD.  So for every USD they sell of their product offshore, they receive more in AUD for the privilege.  So just when we thought resources were slowing down, the recent falls in our currency have probably been a blessing in disguise.  It’s really only a problem for those lucky consumers who still have the cash to be able to afford an overseas holiday at this point in time.  In addition to the bonus for the Australian resources industry, the lower AUD will also re-stimulate our tourism industry as offshore consumers see Australia once again as a place to visit which won’t cost them an arm and a leg to stay here.

So where there are clouds, ladies and gentlemen, there are silver linings.  These beautiful silver linings are in addition to the red carpet, already laid by the RBA and the government, in the form of a 1% drop in interest rates and $7.4bn fiscal stimulous plan.  How can we be so negative as to say to the RBA and the federal government, “well that’s it, then, let’s just go into depression” after we bend over to the media sensationalism, calling such a state of affairs and not even trying to see the good things that Australia has to offer at the moment.

It would be surprising if the RBA changed interest rates prior to seeing the effects of the fiscal stimulous, as to do so may inject more volatility (interest rates, and consequently prices) into the market – volatility is the enemy of the RBA and the very monster which it aims to tame.

So don’t fall into the trap of the media over-sensationalization and rush out to sell everything you have.  A market is driven by the masses. 

Let’s keep our heads high and “Advance Australia Fair”!!