Kind cuts

Why is the RBA watching inflation and holding fire on rates while the reverse is the case in the US and Europe? Here’s why…

Is it any surprise that people are already asking Kevin Rudd and Wayne Swan to remember that interest rates tend to rise under new Labor administrations and that Peter Costello’s tsunami warning may be more than a false alarm? 

Lending between banks is seizing up, and bank lending officers are weeding out the small and medium enteprises that show any signs of substantial volatility in capacity to supply them with a regular cashflow, let alone access to venture capital for domestic production.

Major reconstruction of the major financial institutions management reflects the scale of the undeclared crises in currency and capital markets.

Next week will be the time to take a day (well at least a couple of hours out) to think about the new Government, central banks and the rest of your business life.

It will be the week when we get the long-term picture about the switch from industrial to experience-economies around the globe, and the gnomes will decide how to respond to Northern Rock and Hilary Clinton’s attempt to promote moral hazard with a moratorium on home ownership risks.

Every business that has any export potential needs to take time out with its advisory board to consider the changes that are going to emerge in their markets.

What proportion of their customers are disaggregating their value chain by purchasing on a just-in-time basis and lowest cost of production basis compared to those customers who are building long-term consistent quality supply relationships designed to enable them to expand into the new markets – a shift to transnational rather than international business relationships?

The pointy headed end of town will be taking note of the fact that the US market is no longer assured of the support of the Chinese Government, that only Bush and his Haliburton colleague (now shifting to Dubai) still believe that an attack on Iran will prop up their dwindling influence, and Russia’s Putin is establishing a Euro alliance that will further weaken the value of the US dollar.

The retail market and the technology market will face the same dilemma. The affluent quintile with loads of assets and a willingness to do deals are going to be making a flight to quality, but are prepared to delay their purchases until they have checked out the scene. The average consumer is downsizing their expectations and going for cheap imports rather than splurge on big ticket items.

At the same time, the productivity improvement and mid-level management staff for medium to large enterprises is hitting the limits on supply of competent staff with sufficient experience to meet the demand.

That’s why the Reserve Bank is watching domestic inflation while holding fire on raising rates here while the reverse is the case in the US and Europe.

The world is in a major transition away from respect for the leadership of the US economy and diversifying into the BRIC (Brazil, Russia, India and China) economies as the US and British central banks look to interest rate cuts and market interventions to prop up flagging short-term domestic productivity and home-based consumption.

At the same time new international financial centres are emerging – such as Dubai and, according to Wayne Swan, maybe Perth – that are based on the long-term commodity and infrastructure markets that hedge against micro-movements in currencies.

The kindest cuts will be those that ensure steady growth with low inflation and keep the price of oil below $US100 and the price of gold around $US800. So watch these prime numbers and spend a little more time and a little less cash over the Christmas season.

Otherwise it may be harder to have a profitable new year working on the old assumption that “she’ll be right mate”.

 To read more Colin Benjamin blogs, click here.