Washington, D.C. and Sydney, the financial capital of Australia, are nearly 8,000 miles apart, but the global financial system is making the world a lot smaller than it used to be.
Australians elected a new government last weekend. The Liberal-National coalition leader Tony Abbott defeated Labor party leader Kevin Rudd. Contrary to the party name, Mr. Abbott was the conservative candidate in the race, and defeated a deeply divided opposition party. Mr. Abbott comes into office with a somewhat mixed bag of economic data. While the economy has generally held up well, the Australian dollar is at its highest since June (not good for an exporter). Interest rates are also still high, with the 10-year government bond just above 4%. Even unemployment was reported at an unexpectedly high 5.8% rate this week.
One of the key themes of the election focused on taxes on mining companies, with the debate centered on the impact to the natural resources that are such a large part of Australia’s exports. In particular, Australia is still heavily dependent on its monstrous customer to the northwest – China – which accounts for 27% of its exports. All year there has been chatter about the prospects for a China slowdown, which carries heavy implications for Australia. Earlier this week, China did post some better industrial production numbers, but that has to continue for Mr. Abbott to succeed. For China to continue growing, the U.S. and the rest of the developed world need to keep consuming imported Chinese goods.
This leads us to return to Washington, D.C. and the decisions that could be made next week in the U.S. Capitol, when the Fed meets to decide about tapering its asset purchases. The success of Australia’s Mr. Abbott is contingent on Fed Chairman Ben Bernanke, his colleagues, and his successor making the right choices now.
My View: The right choice is for the Fed to taper its asset purchases, beginning the process of normalizing monetary policy. Ultimately, this will result in a stronger U.S. economy, a stronger Chinese economy, and a stronger Australia for Tony Abbott.
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