Monday, January 18, 2010

Here come the hard yards

Enormous amounts of spending by central Governments around the world and unconditional support for parts of the global financial system, seems to have helped the world narrowly avoid a very severe recession.

But it is not as simple as that? Prior to Christmas sentiment seemed to be turning positive very rapidly. Equity markets, commodities, house prices and spending all rose while global unemployment seemed to stabilise. Banks were repaying their debts, and returning to healthy profits, to ensure their executives again took home healthy bonuses.

But as the world economy looked set for its next major boom, Governments moved with stealth to tap the breaks by implementing austerity measures to pay for the excesses of the past 15-20 years.

Already local interest rates have risen 0.5% from their lows, with more to come. Last week China announced a tightening in monetary policies.

In economies that were harder hit, the measures are harsher and more direct. A good example is the lift in Britain’s top tax rate to 50%. In the US, Obama is talking about a tax on banks which the consumer will end up paying. And this is only the start of it. Increasingly over the next two years as Governments feel economies are strengthening, they will look to extract their pound of flesh. This will curb rates of growth as economies recover from the Global Financial Crisis (GFC).

Not only will we pay in higher taxes and slower growth, the GFC will be used by sympathetic Governments to reject outright capitalism and to place some form of socialism back on the agenda. The past year has heard talk of rebuilding the social fabric of modern society and re-investing in neglected or much needed public infrastructure. Just look at Obama’s health care reforms and Rudd’s national broadband network, rebuilding schools and the looming debate on transport infrastructure for example (so much for being a fiscal conservative).

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