It's a radical thought but the next official interest rate move in Australia could be down rather than up as most economists are predicting - and the next move for gold could be up, rather than down.
It's a radical thought but the next official interest rate move in Australia could be down rather than up as most economists are predicting - and the next move for gold could be up, rather than down.
Deflation rather than inflation is emerging as the world's major worry with last night's return to government economic stimulus in the U.S. a warning shot for other countries which have become too cocky about future growth.
Australia and Canada are leaders of the cocky brigade raising interest rates while the U.S. maintains a near-zero interest-rate policy.
The problem for the U.S. is a real fear of deflation, a time when prices fall, which might sound like good news but is actually a disaster because it can become a self-perpetuating process with consumers delaying purchase decisions, shops laying off staff, manufacturers slowing production, and business investment decisions postponed, and asset values (including property) falling.
Japan has been in the grip of a deflationary spiral for the best part of the past 20 years with a stagnant economy, rising debt levels, and rising unemployment.
The question for Australia is whether it is possible to import deflation and falling prices in the same way we have sometimes imported inflation and rising prices.
Right now the jury is out, but with Europe also hovering on the brink of deflation as its failed members, such as Greece and Ireland, drag that region down into a prolonged period of low-to-zero growth.
Saving Australia, for now, from the threat of deflation is commodity demand from Asia. It is possible that we will continue to disconnect economically from the U.S. and Europe and grow even closer to our major customers, China, Japan and Korea.
But, even those countries will find it hard to resist the force of a global slowdown if the U.S. slides into a feared double-dip recession.
Popular as it might be to dismiss the U.S. as a fading economic superpower it remains the place where economic trends are started, as we saw two years ago when the collapse of its domestic mortgage market sent the rest of the world into a recession.
That's why last night's decision by the Federal Reserve, America's central bank, to re-start a process of effectively printing money via what has been dubbed "quantitative easing light" was a very bad sign for the rest of the world.
What the Fed is doing is buying securities issued by the U.S. Treasury, effectively pumping money it was expected to take out of the economy from its original burst of quantitative easing back into circulation.
Some observers see this form of printing paper (dubbed QE2 - for quantitative easing mark 2) as a symbolic gesture. That might be correct, but could just as easily be the start of a trend which sees the U.S. (with Europe to follow) printing even more paper money to prop up stalling economic growth in the hope of avoiding a deflationary trap.
If that happens, then investors will lose further faith in the value of paper money, especially the U.S. dollar, turning instead to hard physical commodities of the sort being consumed by China, and the ultimate hard commodity and international currency, gold.
Australia's politicians might be congratulating themselves on how we avoided the full effects of the global financial crisis, and arguing over who played the lead role.
That self-indulgent game could be over very quickly if deflation really does become a global problem because the temptation will be to throw more freshly-printed paper money into stagnant economies in the hope of kick-starting growth - with only one winner from that process; gold.
