Treasurer's Phone Rings an Alarm Bell

Friday, January 11, 2008
It is far from an everyday occurrence for the Treasurer of Australia to have a chat on the phone with his United States counterpart. When they do contact each other you can be sure it is not just a social call. One of them is telling the other something of importance and US Treasury Secretary Henry Paulson yesterday morning would hardly have been asking Wayne Swan for advice on how to handle the American banking crisis. This call from Secretary Paulson to Minister Swan was surely part of an international effort to have governments ensure that the people in the world's major economies do not panic and cause a major disruption to the financial system.
It is a phone call that should make sensible people more than a little apprehensive about what lies ahead. When Mr Swan thought he should reveal that Mr Paulson did not think the US was about to enter in to recession I heard alarm bells, I began to understand why the markets now put the probability of a US recession above 55%. Politicians are hard to trust at the best of times and difficult indeed to trust when we are approaching bad times.
In Australia the popular wisdom of the economic pundits, most of whom are nothing more than the paid public relations hacks of the banks which pay them to peddle views that are in the best interests of the bank, is that our country can escape relatively unscathed from a US recession. The wonder economies of China and India, it is argued, will protect us.
Yet the news from China suggests that the wonder economy is not without a few problems of its own in coping with the rapid growth that is to be Australia's saviour. The People's Daily online today carries the following story:
Measures aim to stabilize prices
08:22, January 10, 2008
The government will introduce a range of temporary price-intervention measures in a bid to stabilize the cost of daily necessities, a State Council executive meeting said yesterday.
According to the meeting, large-scale producers of such products must seek government approval before imposing any price increases.
Similarly, large-scale wholesalers and retailers that want to raise prices will first have to notify the government.
The State Council has not yet specified what the products are, or when the measures will be introduced.
The country's Price Law stipulates that the State Council can temporarily freeze prices or centralize the price-setting power on part of or the whole market if the prices undergo strong fluctuations.
The prices of the country's major foods, including grain, pork and cooking oil, surged last year, lifting the consumer price index to an 11-year high of 6.9 percent in November, well above the government's target of 3 percent.
Despite a secure supply, China still faces the prospect of further price hikes as the global prices of crude oil and food surge, the State Council said.
It also ordered a halt to any price rises in crude oil, natural gas, electricity, water, heating, public transportation, education and healthcare.
Pledging to crack down on market manipulation or hoarding, the central government will also arrange special campaigns to oversee local authorities in stabilizing prices ahead of the festive season.
According to the State Council, attempts are also being made to revise a regulation to curb illegal price fixing, which will impose heavier punishments on industry associations found guilty of manipulation.
Cheng Guoqiang, deputy director of the Market Economy Institute with the Development and Research Center of the State Council said: "The measures aim to regulate market order, stabilize price expectations and ensure a healthy and normal market."
"Due to its wide coverage, price rises in the daily necessities market, especially the grain sector, might magnify and spread to other sectors," he said.
"Therefore stable prices in these sectors are key for the stability of the market as a whole."
Cheng said the measures are systematic, taken after key government meetings held last year set the tone of "preventing economic growth from evolving from rapid to overheating and preventing price hike shifts from going from structural to inflationary".