Happy birthday, Prime Minister. Times are looking tougher, but we know you are a tough dog for a hard road. We remain (reasonably) confident you will see us through current worries into a more relaxed and comfortable future.

What are the problems?

Long term it is the “GWOT” – the Global War on Terror. Also climate change, geopolitical tension (always with us but how to deal with Iraq, Iran, North Korea and China, the emerging superstate).

While the global outlook is for strong, non-inflationary growth, China’s economy is overheating (goods and services inflation 4.4%), the US economy is struggling with the fallout from indiscreet (“sub-prime”) lending with the ripples spreading to Australia thanks to the losses of highly praised hedge funds.

Short term we have Labor’s big lead in the opinion polls, the challenges of the “two speed economy” – the battlers struggling and returning to Labor, the wealthy ungrateful for government policies that make them rich (eg. negative gearing) – the resources boom, Dr. Haneef and, surprise, surprise, the re-emergence of goods and services inflation.

Australia’s economists have apparently switched direction like a shoal of sardines spotting a predator. The smart money has been on “no rate hike til 2008” but now there is supposedly an 80% chance of a rate hike in early August. Henry is confident RBA Governor is far more stable that the shoal of “25 leading economists” tipping a rate hike on 8 August.

Henry, of course, has been saying global monetary policy has been too easy throughout this century so far. Australia’s monetary policy has been tighter than the average but still too easy and soon the piper of inflation will need to be paid.

Iran

The Economist has an excellent supplement on the riddle that is Iran. Its leader discusses the cases for and against direct action to try to destroy Iran’s nuclear industry:

This story could have at least three unhappy endings. In one, Iran ends up with nuclear weapons, bringing new instability and a hair-trigger face-off with nuclear Israel into one of the world’s least-safe neighbourhoods. In another, America or Israel take pre-emptive military action and manage to stop it, even though such an attack would almost certainly have very dangerous consequences of its own. In the third ending, Iran is attacked, and enraged, and retaliates – and still ends up with a bomb anyway.

Read more at Henry Thornton

Peter Fray

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