2006-09-20

More evidence of a slowdown

Producer prices in the US have increased by only 0.1% in the last month. These numbers would not have taken into account the drop in oil price we have been seeing in the last 2 weeks. Given the inflationary effects of the oil price, either a) We have entered a miracle-stage of economic performance which has gotten rid of inflation altogether, or b) Prices are dropping because there is a drop in demand, because there is an economic slowdown. Obviously I am sticking with b).

Ross Gittins eviscerates the Liberal party's reliance upon the housing bubble in today's SMH. Just as persistent unemployment and fiscal looseness undid the Labor party back in 1996, the doom spreading in the property market at the moment will probably undo the Libs at some point and hopefully give a more realistic picture of their fiscal competence. The current situation is a result of a popped asset-price bubble that has been exacerbated by two federal government policies - the first homeowner's grant and negative gearing. These two policies essentially stimulated the housing market beyond what was acceptable.

The whole idea of being fiscally responsible and being concerned with economic neoliberalism means that the government should really butt out of certain industries. The coalition have not done this with the housing market - they interfered with it by throwing money in its direction and caused a bubble to form. While the bubble expanded, the beneficiaries voted for the coalition. Now that it has popped, the reputation of the coalition as good economic managers will be severely questioned.

In the bad old days, the ALP used to gain votes by throwing money at certain industries so that blue collar people think their elected officials actually cared (which of course they didn't). The same can be said about the Howard government's policy of boosting the housing market.

My solution? Demarchy.

4 comments:

Ian Deans said...

"Prices are dropping because there is a drop in demand, because there is an economic slowdown."

Ah - no. Prices are dropping because the Yanks found more oil off their coast which could boost their reserves by 50% - speculative supply rose while demand remained constant. You missed the supply part of supply and demand.

One Salient Oversight said...

Not really. The fact that America discovered oil hasn't actually added to the supply just yet - it'll take them a few years to fully exploit this.

Oil prices are dropping at the moment because of two reasons:

1) A drop in the "risk" premium (no more invasion of Lebanon + no impending hurricane to destroy gulf of mexico oil infrastructure)

2) A drop in usage - there is an economic slowdown underway.

And as I stated in the first paragraph, "These numbers would not have taken into account the drop in oil price we have been seeing in the last 2 weeks."

Theteak said...

Ah, no. You're both very wrong. The price of oil has dropped because it no longer costs as much.This is mainly due to two factors:
1. It doesn't require as much mulah to buy it.
2. It costs less to buy.
3. It is now possible to fill er up and buy a couple o' tasty snacks - just like the ol' days...ah the memories...snickers really satisfies...as does premium ulp.

One Salient Oversight said...

Dang, I knew there was a flaw in my argument somewhere...