Hello everybody, and welcome again to another riveting episode of "The HSC with AB." Today, I'll be breaking the pattern of my last two posts, in that instead of a specific dot point, I'll be synthesising (ooh, I know my English key words) a couple of different points into one big overarching post: how Australia survived the GFC.
For those who don't do Economics, feel free to skip this one, but I will say that I think Economics is one of the topics that is a good thing to know at least a little about. I mean, no matter what you do, you will be getting money. The economy will affect you. Knowing the Haber process: probably not. But I digress. In this post, I'll be first going through the two arms of macroeconomics in monetary and fiscal policy, and then onto microeconomics, and finally onto our links to Asia. If none of that made any sense to you, don't worry: it will.
To those who do do Economics, I will point out that a) I'm not using too much terminology, as it can get rather confusing at times (though rest assured I do know it) and b) I very well may have missed some things - in fact I probably have: there's no real dot point I'm working from. In which case, feel free to comment.
Macroeconomics is the part of economics concerned with overall demand. It has two arms: monetary and fiscal policy (more on the latter later). Monetary policy is, more or less, the setting of interest rates by the RBA to alter inflation by changing demand (broadly, increasing demand causes prices to increase, also known as inflation). From 1996 to 2002, interest rates tended to go down, which boosted the economy. At around about 2002, however, the RBA decided to start increasing interest rates - slowly, at about a quarter percent per time, but they started to go up, in an attempt to slow the economy down. The reason is that if the economy starts expanding (as it was doing before the GFC), eventually the bubble can burst and there is a crash. For that reason, the RBA had interest rates at 7.25% when the GFC hit.
In August 2008, the cash rate was at 7.25%. Eight months later, in April, it was at 3%. By comparison, in the eight months before August '08, the cash rate had only gone up 1%. While 3% may seem low, other countries had their cash rates much lower to try and stimulate their economy. In April 2009, the US had their cash rate at 0.25%, the UK was at 0.5%, the EU had 1.25% and 1.5% (it is the EU, after all), and Japan's was at 0.1%. Our interest rate was somewhat high compared to Western economies (I've intentionally not mentioned China: more on that later), and that was a result of some of our other policies. While monetary policy played a large role, it wasn't alone.
Fiscal policy played a large role as well. From 1998 to mid-2008, the government ran a surplus, just because of how strong the economy was (as a rule of thumb, the better the economy is, the more the government receives in tax and the less it needs to spend). And it used that surplus to pay back some of the money it had borrowed over the years - so much so, that the government debt to GDP was about 8%. In comparison to 45% for the UK, 60% for the US, 65% for the EU and 190% for Japan (that was not a typo). So when the GFC rolled around, the government had enough money to actually go out and do something.
Which it did. The government started pumping money into the economy in an attempt to increase demand. It ran a huge deficit in an attempt to reverse the effects of the GFC. You may remember the $42 billion stimulus package in 2009, which was intended to increase spending which would increase aggregate demand, helping the economy. You will note that our economy didn't actually go into recession. This was at least partly due to fiscal policy.
Next we move onto microeconomics, which is the part of economics that deals with supply. What this mostly involves are things like infrastructure and training programs. When the GFC hit, the Rudd government put a lot of money into microeconomic reform, as it's called (a more detailed list here), including $2 billion in infrastructure such as road and rails, and almost $1.7 billion in training programs and higher education. The upshot was that improvement of infrastructure helped business make more and be more efficient (thus allowing them to hire more) and training programs allowed unemployed people gain more skills and re-enter the workforce.
This microeconomic reform meant that unemployment growth was slowed, and it reversed much quicker. Unemployment hit a maximum of 5.8% in Australia, while in the US and EU, it reached over 10%. And, on top of all that, employment helps with an increase in demand (the more people hired, the more people spending), which, as I've said, improves the economy.
Lastly, I'll mention our links to Asia, and specifically, China. China survived the GFC better than Australia did (yes, their growth rate did drop - to 6%, which was more than ours was before the GFC), and that was great news for our export sector. Australia mostly exports commodities, like coal and iron, and China imports a lot of commodities. Hence, when the GFC hit, we survived more or less intact, since China just kept buying our coal and iron and Australia just kept selling it to them. If we had mostly been selling to Europe and the US as we had done before we realigned our interests to Asia, we probably wouldn't have done nearly as well.
Well, in the words of Forrest Gump, 'That's all I have to say about that.' Before I go though, I will link you to some marvelous videos I found which Ebony would approve of, as they are by the vlogbrothers, which I've heard she likes just a little bit. The two videos I found were explanations for the Greek debt crisis and the American debt crisis, and they were very informative. Next post I'm thinking I might do an English post (the horror!). But we'll see.
Have a nice weekend,
AB
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