What steps did the Rudd government take to lessen the impact of the global financial crisis? Why do you believe they took these steps?
The global financial crisis has had a profound impact on nations around the world. I applaud Rudd in his efforts to abate and diminish the influence of an interconnected society on Australia. On method utilized in which to diminish the impact on the Australia was to instill confidence in the financial system overall. Rudd first guaranteed deposits of all major financial institutions in Australia. This prevented bank runs as consumers, fearful for their money, rush to withdraw much needed funding from banks. Instead, by guaranteeing deposits, the government was helping financial institutions avoid solvency risk. With no deposits, banks would be unable to lend or conducts other financial services oriented activities. This in turn would lower the likelihood of an Australian recovery which would be a detriment to entire global economy (Brooks, 2004).
Furthermore, this action helped quell investors concerns regarding the merit behind Australian issued debt. Without the guarantee from the government, investors would require a much higher risk premium in order to purchase Australian issued debt. A 100 basis point increase in interest rate would have a very profound impact on Australia as, at the time, 50% of GDP was financed through debt. As such, the government would be forced to pay more to investors over the course of the loan. In addition, as is typical in a period of extreme pessimism, government spending would be required simply to help keep an economy afloat (IMF 2006). This occurs as tax revenues are typically at their lowers levels. As such, governments must finance the difference by issuing debt in their native currency. If the required risk premium increases, the cost of issuing said debt could rise dramatically. By guaranteeing deposits, Rudd helped reduce this rise in costs.
In addition, Rudd attempted to incorporate a stimulus package into the economy designed to help foster growth within the region. However, much to the government's detriment, the consumer simply saved the stimulus as oppose to spending it. This reflects, I believe, a fundamental change in how the consumer approaches both consumption and savings. Australia, much like America, is transitioning (Switzer, 2005). Consumers are now paying down their debt while also saving their discretionary income. Fearful for their financial future, many consumers are elected to instead save this money. This is the polar opposite of what the governments of developed nations want to occur. Spending particularly in America, Australia, and other developed nations is a catalyst for American growth. Therefore in order to ensure a recovery, consumers must therefore spend. Consumers are not doing so because they are unsure of the financial future (IMF 2006). In Australia alone, the savings rate jumped to 8.5% through the financial crisis as indicated by exhibit 10.
Discuss the effects of the economic situation on Australia's current account.
The economic effects on Australia's current account are profound if left unchecked. As mentioned in detail earlier, the account deficit is a direct result of the economic situation prevailing in the market. Due primarily to this situation, certain cost initiatives on the part of government were required. One such initiative was stimulus, particularly in the commodities and consumer services industries. These industries are the engines of growth for their respective businesses and the economy alike. However, because of the financial issues facing the global economy, the businesses are not performing up to their normalized standards. In fact, some industries are experiencing contraction. This event therefore reduces tax revenue in the form of corporate and individual income tax, thus contributing to an account deficit. This however, is only one half of the equation.
Government expenditures are also increasing at a rapid level. In order to compensate for lower wages, higher unemployment, and in many instances higher debt burdens, the government must engage in stimulus. This stimulus is often very costly for government. Stimulus packages can cost governments trillions of dollars each with the intent to help foster growth. With the heightened level of expenditures combined with the lower income from corporations and individuals, large account deficits will undoubtedly occur.
How is the current account deficit being financed? What worries might the Rudd government have over the sustainability of this financing?
The account deficit is being financed through debt, much like America. The Rudd government, as mentioned above, will have particular problems with high risk premiums required to finance the government debt. As the debt burden increases, investors will constantly assess the Australian government's ability to repay should high burdens. Combined with the low income figures due to lack of demand and low earnings, investors may require a higher risk premium to hold Australian debt (Hawk, 1994). This will become particularly burdensome if the required risk premium approaches unsustainable levels. The whisper number is approximately 7%. At this number many governments have required international bailouts from other countries. In particular Greece and Spain have both been given bailouts once their 10-year notes approached the 7% threshold. If Australia approaches this mark, they too could potentially require a bailout ( The Economist, 2008). As such, the required risk premium will be the main worry for the Rudd Government.
The case discusses Australia's political shifts beginning with the change from the Whitlam administration (1972-1975) to the Fraser administration. What ideological factors might have been at work in the history since 1970 of Australia's politics? How were these ideologies linked to economic developments?
The most pertinent ideological factors at work were those of capitalism. During this period Australia was beginning to manifest itself as a national power. Its exports to China, particular commodity-based products, increased the prosperity of China in a profound manner. Exhibit 11b showcases the dramatic increase of exports to China over a significant time period. Commodities such as Copper increased by nearly 400%, while lead and wool nearly doubled in regards to exports. This ideology was the catalyst of economic development as Australia began to foster growth and trade with other nations. Exhibit 12 indicates Australia's top 5 trading partners. Most of these trading partners are Asian, Pacific Islander in nature. China being the largest importer and exporter of goods to Australia has become a major trading partner. The ideology of globalization is also apparent within the overall economic structure of Australia. Exhibit 14b indicates Australia's emphasis on manufacturing. During the 1970's Australia was manufacturing goods to export at a level comparable to that of the United States and Canada. In fact, in subsequent decades in produced more than many other developed nations. These ideologies ultimately helped generate wealth and prosperity with the nation.
Discuss Australia's relationship with China. Identify any contradictions you see between Australia's economic situation and the fears it may have over China's growing power.
One Australian fear, which is legitimate, is that China is too large a trading partner. Exhibit 12 indicates Chinas importance to the overall economy of Australia. China accounts for 15.6% of all imports to Australia while also accounting for 14.6% of all exports from Australia. The second best trading partner is Japan with 9% and 22% respectively. As such, Australian worry that the fate of their economy hinges primarily on the fate of other Asian countries. Such is the nature of a global economy (McDonald, 2008). Another fear is that of China's growing power to influence Australia's economy in regards to its commodities. China, due to its inordinate amount of demand for commodities is attempting to invest directly in other countries. Exhibit 11a showcases China's growing portion of worldwide commodities. China, due in part to its very large economy is utilizing a vast amount of the world's resources in regards to commodities. Exhibit 11a shows China has control over 39% of the worlds wool, 47.4% of the worlds…