“Opening a new IR assault, Peter Costello told The Australian Labor’s plan could lead to a wages explosion across the economy at a time when inflation was near to 3 per cent,”  reported The Australian today. Vote Labor and you will see a wage explosion and rising interest rates – well, rising more than under the coalition, anyway.

The Treasurer has been mixing with the great and the good in Washington – sure beats meeting the State Premiers in Oz. He has got the message Henry [Thornton, not Ken] has been delivering.

“Inflation is now a problem around the world, and we in Australia are not immune from the world,” Mr Costello said yesterday.

Weekend TV in Melbourne had “Auction results sparkling” and “prices rising again” stories, with a small inner suburban terrace going for close to a bar, $200 K above the reserve.

For one of the best short analyses of the western world’s massive asset boom
– which includes Australia’s massive housing boom – see Aussie stockbroker Marcus Padley in the Saturday Age.

“Until 1997 the chairman of the Federal Reserve was largely a functionary.
But in 1994 Greenspan did something visionary. He raised interest rates in a “pre-emptive” strike against inflation.

“It was a phenomenal move. But there were side effects, the main one being that Greenspan “de-risked” borrowing. When we knew interest rates weren’t going to jump from 7 per cent to 17 per cent we became more confident and we borrowed more. And more. And more.”

“Will he blow it?” Marc Moncrief and Josh Gordon provide a great take on the 2007 budget.

“In a private speech to colleagues delivered last month — but explosively leaked to the media last week — Treasury secretary Ken Henry forcefully argued that in times of full or near-full employment, a spending splurge would be very bad news for the economy and interest rates.

“In other words, when the economy is running flat out, it’s pretty hard to spend more money (unless it lifts productivity) without sucking away resources from another more productive area. Higher prices and higher interest rates would result.

In TV interviews from Washington, Treasurer Peter Costello said his budget priorities are the budget in surplus, essential spending programs and tax cuts. We’ll know soon, but this budget will be an important roll of the dice. Visit Henry’s budget watch here.

More reading at Henry Thornton.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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