Thursday, December 08, 2005

The new economic reality -advice for fund managers and housewifes

Those old enough to have been able to comprehend a newspaper in 1981(or thereabouts) will remember the term stagflation - the curious combination of inflation and unemployment that was experienced due to the oil crisis of 1979. As a result, Hawke and Keating had to float the dollar because of the resulting current account crisis. The difference between then and now is that oil is not going to come down beause of the resolution of a hostage crisis or the war in Iraq(fat chance) - instead oil prices will continue to steadily increase as a consequence of peak oil.

This is already leading to supermarket inflation which is exacerbated by the lack of a competitive market for products. A duopoly of Coles and Woolworths is an agreement to fix prices not competition. Many annual fees will experience a 5 - 20% hike this year due to fuel costs being passed on.

Unemployment hasn't started to rise yet but it surely will in the New Year. There may be a lag as the backlog of construction and investment gets worked through. The current rates of employment disguise a lot of part time work and dual income families struggling to pay the bills. These people will be sorely affected by an economic dowturn. This will be in turn exacerbated by the changes to the Single Parent Pension and the dissocation of the dole from C.P.I. increases. People on the dole and single mothers with children older than six will not be gauranteed rises in their income along with the C.P.I. as are other pensioners. In times of high inflation this will not produce good outcomes.

A critical factor is how the worlds and Australia's economy adjusts. In the 1980's, floating exchange rates and trade liberalisation helped the economy to absorb the income shock. This time round the income shock is much more severe and long term and barriers are increasing as nations go onto a war footing. From an economic point of view a war footing makes sense, military Keynesianism is acceptable to the most died in the wool free marketeers. Wars create artificial demand through destruction.

In the 1980's stagflation was regarded as a new and unusual phenomenon because everybody accepted that the only cause of inflation could be unsustainable demand in the form of wage rises. Demand driven inflation. Stagflation is supply driven inflation.

Let's cut to the chase, what to do...

Well in my country town the local fruit and vegetable grower who uses a bore and a shade cloth and a green house, with integrated pest control, provides vegetables year round and is doing very well thank you. The duopoly that is driving up retail prices is only sustainable because of the economies of scale that depend upon cheap fuel.

Buy a flock of sheep or goats, there's never been a better time.The price of cotton and plastic clothing is sure to rise sharply.

Buy a bicycle - sell your car.

Invest in industries that are unique or rich in information in your location.

Make your own bread, establish bulk sources of flour, rice, lentils, oils, etc.

Pray, and try and lend a helping hand.

As communities become more insulated the degree of sociality becomes important. Diversity, cooperation, civility, and mutual respect for differing points of view within a community are important measures of sociality.

Ultimately, it will come down to how we learn to live with the new economic reality of increasing scarcity and decreasing resources.

The advantage of communication is that we can share solutions as well as problems.
Return to Kiangardarup


Post a Comment

<< Home