The next crisis

Australian consumers are still finance change skeptics who believe that the demands of those wanting to claw back the stimulus packages are self-serving attempts to crash the recovery and collapse consumer confidence in time for next year’s early elections.

Households are taking up offers from the major credit card providers to convert their credit cards into debit cards while still increasing their reliance on credit ratings based on assumptions that their home value will continue to rise as a result of immigration and natural population increases.

Workers are well aware that their employers are asking them to cut back their hours, take early holidays and increase their productivity without expecting an increase in their pay packets.

Pensioners are expecting that the Government will be forced to pay them more than the consumer price index and subsidise their rents as the rental market comes under pressure from investors moving from the equity market to the property market.

The Futurist suggests that the consumer is the best indicator of the emerging trends and the underlying realities that smart companies will face when we get round to the anniversary of the situation in October. Consumer confidence has followed the rise in the value of the Australian dollar which is now 44% higher than the October low a year ago and around 40% better than the 60 cent mark at the start of this year, as imports become cheaper and exports become more difficult.

So watch out for the impact of the G20 Leader’s Summit in Pitsburgh on 24-25 September, which is the forum for Kevin Rudd’s desperate effort to cut a deal on the clawback of unspent stiumulus package funds to the household sector and a massive refocus on longer term infrastructure and trade deals that prop up the export trade.

Good progress has been reported on the policy development needed to implement the package of reforms and introduction of regulatory curbs on risk generating executive salary package for bankers and unregulated credit reference agencies.

The Basel capital framework has been beefed up, accounting standards and practices strengthened, standards for bank risk management and lending to small and medium enterprises with real export opportunities replace financial options based on arbitrary algorithms, bank disclosures of on- and off- balance sheet exposures are now under severe scrutiny and stress tests and principles for sound compensation practices integrated into the supervisory frameworks are being considered in Pitsburgh.

When the Financial Stability Board (FSB) met in Paris on 15th September it reviewed this emerging reconstruction of the world’s financial markets. It stated: “Despite welcome signs of movement towards normalisation of markets in recent months, fragilities remain and the supply of credit remains weak. Although many financial institutions have returned to profitability in recent quarters, this owes much to the extraordinary official measures to stabilise the system. It is important that firms retain these profits in order to prepare to meet future higher capital requirements. To these ends, banks need to take a combination of capital conservation measures, including actions to limit excessive dividend payments, share buybacks and compensation”.

Under these conditions, smart companies will convert their business and marketing plans into formal applications for credit and finance agreements with their banks to gain a measure of security for their growth plans for recovery without adding higher costs of capital to their risks for the coming year.

Do it now because the Rudd recovery requires a return to surplus budgets, cut backs in expenditure “we need to have” and a return to the concerns about the re-emergence of inflation. If the world market continues to push the Australian dollar to parity with the US dollar because of continued guarantees to the major banks without a concomitant increase in lending to small and medium enterprise, there is a real danger for companies in the coming financial storm by the end of this year. We could even see a rush into gold and away from oil as the speculative play for those who can see the end of the taxpayer funded recovery.

There is a real prospect that the revival of concerns by central governments with the return of inflationary pressures will lead to further collapses of the banks and financial institutions that are still hiding the realities of their derivatives disasters without taxpayer willingness to accept the “too big to fail” proposition and consequent rises in turbulence in asset markets.

Watch out for more regulatory pressures, demands for greater truth, trust and transparency from financial advisors and an expectation that banks maintain an appropriate balance of pace and regulatory reform related to movements in global currency markets and strategic investments.

Dr Colin Benjamin
Entrepreneurship and Strategic Thinking Consultant
Marshall Place Associates offers a range of strategic thinking tools that open up a universe of new possibilities for individuals and organisations committed to applying the processes of innovation, creativity and entrepreneurship.

Email dr.colinbenjamin@marshallplace.com.au
Contact: CEO Dr Jane Shelton, Phone +61 3 96400099

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