Turnbull must wait until Australia’s debt problems hit: Kohler

The Mysterious Case of Godwin Grech and the Faked Email has been a gripping page-turner, no question, and an entertaining diversion from all the dreary economic non-fiction we’ve had to plough through lately.

But one wonders how the plot would have turned out if Australian unemployment was at 9% and rising (as it is in the United States) and house prices were going down, not up.

What I mean is that Opposition leader Malcolm Turnbull is really under pressure because Kevin Rudd’s stimulus package has apparently worked. Australia is one of only two countries where that can be said (the other is China), and the Prime Minister and Treasurer are thus economic colossi, coated with green shoots of Teflon.

It has been, and still is, the economic debate of a lifetime – ‘necessary stimulus’ versus ‘too much debt’ – and Turnbull had been spinning his wheels making the latter case. When the March quarter GDP came in at plus 0.4% three weeks ago, he obviously decided a new path was needed. No traction on this one.

But the attempt to create a new winning debate about petty corruption was high risk for two basic reasons: firstly, Rudd and Swan were not already vulnerable on the economy and secondly, the mate who got special treatment didn’t get special treatment. And then, of course, there was Mr Grech.

In the US, meanwhile, President Barack Obama is beginning to come under pressure from the Republicans, with claims that his stimulus has saddled the US with debt and did not work, since unemployment is now 9.3% and, according to the OECD this week, rising to more than 10%. As a result, Obama needs to keep his nose clean – but even so, when he returns to Congress for more stimulus money, as he will soon, he will struggle.

And last night US Federal Reserve chairman Ben Bernanke was being uncomfortably grilled by the House Oversight Committee over his role in forcing Bank of America to take over Merrill Lynch. The head of the bank, Ken Lewis has been saying he was coerced; humiliatingly, Bernanke had to assert that he acted with the “highest integrity”.

And 9% unemployment doesn’t help. Far better if he and the President were able to say “and anyway, it worked” rather than simply “it prevented something worse” which can never be proved.

Meanwhile, Turnbull is correct: the big problem for the world now is government debt.

As ANZ’s economist Warren Hogan said in a note yesterday: “The most tangible risk to the global economic outlook is now the funding of large public sector deficits.”

America’s public debt to GDP ratio is projected by the IMF to be 70% next year and 95% in 2014. In Japan the forecasts are 115% and 140%, respectively; in Europe, 68% and 80%; in the UK, 67% and 96%.

On less optimistic economic assumptions than the IMF’s baseline forecasts, the debt outlook is truly nightmarish.

In this company, Australia looks pretty good – 9.2% in 2010 and 24% in 2014 – but Australia needs to run much lower government debt as a percentage of GDP because our access to global capital markets is more limited.

In any case we are part of the world, and the world is becoming bloated with public sector debt – much of it structural rather than cyclical. Removing it will be a long-term project requiring very difficult, possibly even suicidal, political decisions.

In the meantime, fiscal policy will be removed as an economic tool, bond yields will rise and put downward pressure on all asset values, and inflation will rise as governments take the easy way out and monetise their debt instead.

This will be the big debate of 2010 and governments everywhere will lose it because at that point unemployment will not be falling. That includes Australia.

Turnbull just had to be patient.

This article first appeared on Business Spectator.