Friday, August 5, 2011

Two Sides of a Coin


How to evaluate what happened this week? The answer, I guess, lies somewhere between these two extremes:

  1. We (especially we Aussies) are going bananas for no good reason (see here).
  2. We (that is, all of us, regardless of place of residence) are potentially in deep shit, through a possible renewed credit crunch (see here).

The first view (which one could call "Aussie-centric") sustains that in Australia, unlike the US and Europe, an essentially benign internal situation could deteriorate because of undue pessimism, due to outside events.

Although Mr. Ross Gittins (the first piece's author) does not mention it explicitly, in a nutshell his idea is that Australia has decoupled from the American and European real economies. That is, the US and Europe are largely irrelevant for Australia's economic performance.

The mining boom ensures Australia that Aussie exports, largely destined to Asia (China and India), prop up our GDP [=C+I+G+(X-M)], through increased exports (X).

Apart from this international trade item, Mr. Gittins focuses his analysis entirely on Australia; he does not stop to consider the US and the Eurozone (perhaps because he considers them largely irrelevant for the purposes of his piece); maybe less understandably, Mr. Gittins does not seem to consider Asia in any apparent detail.

The second view, by Mr. Paul Mason (which one could call "Euro-centric") coincides with Mr. Gittins' views, in that the US, the Eurozone and Asia need be considered separately, but focuses on the US and the Eurozone, leaving Asia to a large extent outside of consideration.

Unlike Mr. Gittins, Mr. Mason considers international trade, but emphasizes on international finance potential linkages, which is where Mr. Mason appears to consider the global risk lies.

I can find rather apparent weaknesses in both views. For one, are there internal political constraints on national governments? Or, I haven't heard much about China lately; have the readers any precise information about it? (Mr. Mason says that Asia is important, but does not offer too many details about it: perhaps his Eurocentric perspective justifies his overlooking this point; however, in Mr. Gittins' view this should be a highly sensitive matter, although it goes unmentioned in his analysis).

In any case, I do not intend to argue for or against any of these views and I certainly don't want to influence the readers: you are free to make your own mind.


As I finish this I've read that Standard & Poors cut the US credit rating.

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