Helped by a drop in the value of the floating Australian dollar, crisis was averted, or at least postponed, in what Henry regards as Australia's finest set of pre-emptive economic policy actions.
By 1989, however, the CAD was again blowing out, and this time pre-emptive action was not undertaken. Monetary tightening was too little, too late and when it came was greatly overdone. The benefit was that the CAD was cut to safe levels and inflation was killed.
Throughout the 1990s there were benefits of Labor's economic reforms keeping the lid on inflation. Global inflation hit a post-World War II low. The CAD remained in deficit and international debt rose inexorably.
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The CAD reached 6 per cent of GDP three times, in each case to pull back before a crisis erupted. Australians have come to regard the CAD as a friend and debt as sensible "gearing up" of relatively ungeared balance sheets.
Does the graph ring warning bells, gentle readers? The CAD was around 7 per cent in the December quarter of 2007.
Henry asserts that the peak to the long boom of the 1990s and 2000s was then. We are in the midst of an economic slowdown. Crisis and a severe recession can be prevented if Keating's banana republic policies are repeated on a bigger scale. Are the relevant decision-makers and advisers as focused as they were when Bob Hawke was prime minister?
The budget must be tightened substantially, wage increases must lag behind inflation and interest rates must rise until there are clear signs of overall restraint.
Henry expects the Reserve Bank to stay its hand today.
But further rate hikes will occur if fiscal policy fails to deliver, if inflation again surprises on the upside or if wages begin to blow.
First published in The Australian on April 1, 2008.
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