Monetary policy is
not the main game at present, nor do I believe it will be greatly influenced by
the Federal budget. This month in my
advice for the
board of the Reserve Bank

I have deliberately focussed on the main game which is the state of the global
economy. Continuing strong growth and the legacy of easy money is sure
eventually to produce what I call “goods and services inflation”, having already
produced dangerous levels of asset inflation.

It would have been
better if Australia had tightened its monetary
policy sooner and by more, as I have argued consistently during this massive
asset boom. (And we could also have argued in relevant economic fora – and
perhaps we did – for tighter global monetary policy.) “Better late than never”
remains my view about local monetary policy, but there are many tactical issues
for the RBA to consider, not least the May budget, not wanting to rock the boat
ahead of the appointment of the next RBA governor and the usual uncertainties
about the actual economic trajectory. The high and probably also rising price
of oil will weigh in this debate.

I see a rate hike
this month finely balanced on tactical grounds, although there are so many
stories from “well connected” journalists and financial sector economists that I
am tempted to say “the fix is on”.

These sorts
of predictions are best left to those with more vivid imaginations than Henry,
or a far greater ability to listen at drainpipes or to learn in cosy boardroom
chats. Instead this month I focus on geopolitical risks – the war on terror –
plus that I might call “geo-economic” risks – the deteriorating environment and
the growing disparity of wealth and incomes both within countries and between
nations – this development feeding the geopolitical tensions in obvious ways.
There are also the obvious economic “imbalances” so beloved of serious analysts,
the US (and Australian) current account deficits, China’s burgeoning current
account surpluses, over-stimulated asset markets and surging commodity

Taken together,
these big issues have a high chance of bringing the current global boom to a
juddering halt.

That is the big
economic issue we face, and to maximise our chances of coping we
need to become far more competitive than we are at present. The current IR
reforms are, I believe, biting far harder than currently discussed and this will
be helpful. The start of serious tax reform argued for in this column last

would also be very helpful. IR and tax reform are the two big reforms that
could help Australia to maintain its “miracle
economy” status through the virtually inevitable global economic

Henry Thornton.