the later. I re-read the article. nothing much specific there. I don't subscribe to the theory but to defy such an economist when I am a mere mortal is a big call.
I think really it's to hard to see where this will all go. the forces are so huge and so unpredictable that anything could happen. the size of this resources mega-boom is so huge that it could see a wage and price explosion in this country. the dollar could go nuts. manufacturing could be killed which will see resources freed up for more productive areas. Alternatively, if the banks keep refusing to play banks then the money multiplier and the velocity of money will remain at a trickle. what if there is a new terrorist attack and there is a flight back to safety? what of the US ability to continue to pay its way? peak oil, when will this become news again?
Many opposing forces!
AP whilst one can get overwhelmed by the possibilities my position is don’t sweat the small stuff and plan for the events you can control. Firstly economics is not really that huge and unpredictable. In fact most of the time markets behaves exactly as it should and is therefore predicable. Many analysts make a living from this norm, I am one of them.
Whilst I concede the possibilities are infinite, within normal market conditions most of the events you mention would occur slowly and therefore the market would adjust. I also concede that the black swans you mention are possible although unlikely. I can’t plan for them but I can and do plan for normal economic operating conditions. Therefore my post on interest rates stands and in fact I did some more work on this today on the plane.
The last time interest rates were increasing we saw significant decreases in property prices across the board when rates got to 7.25%. Due to the lag factor in reporting it is likely that the pivot point was closer to 7%. The reserve is very aware of this and will be wary about the economy at these levels, the last thing the RBA wants is to decrease housing prices and put the banks at risk.
Whilst I do not expect this position to differ I have adjusted my numbers somewhat for inflation. As I mentioned in the previous post I expect the cash rate and the mortgage rate to be very loose until the government either expands or retracts the guarantee. Therefore the new position is, irrelevant of the cash rate, when mortgage rates reach the aforementioned 7.25% we will see some pressure on prices. That said the market can and will absorb some pressure albeit slowly. In detail my numbers show that we may well have a rapid run up to the 7.25% level however following this, the market can and will only absorb an increase of 0.75% in the next 2 years. Anything more can’t be absorbed and decreases in prices will occur.
Mike