First Flit

Having lived through the 70s in America, I know the signs of inflation.
When I first wandered into Australia about 8 years ago, coffeehouse conversation often turned to how the country had changed. I was the newcomer, and from America. It seemed like everyone wanted to be the first to tell me how Australia was becoming like America.Image by Getty Images via Day
I would look closely, and listen, to try to tell if the person thought that was a good thing or a bad thing.
In time, I came to realize that Australians had an easy way to assign blame for anything that went wrong: they just blamed America and Americans. It saved a lot of thinking and worrying about the things they could change.
America was to blame, so .. Why worry? Be Happy.

The changes aussies blamed on America were kind of obvious to me:

• high and rising prices;
• rabid consumer credit;
• smaller portions and lower quality goods were more expensive;
• service cutbacks because of personnel reductions;
• and fees on everything.

They were the consumer signals of inflation and hyperinflation. I recognized them in an instant.
When I said this stuff to aussies, the response was universal. A grim shrug, then some sort of comment blaming America.
A lot of times the comment wasn't even about prices or the economy. Aussies simply took my conversational comments as an attack on Australia, and turned to an attack on America.
The thinking seemed to be there was no sense in being negative (about Australia), there was always the US to blame.

When it came time to decide to stay, I got interested in the Australian economy.
It didn't take a whole long time to figure out where the inflation was coming from. The new Liberal administration had been elected because of the aging aussie homily: "Liberals create surpluses and Labour spends the country into poverty." The new Liberal administration was fueling inflation to pay off the national debts.
Mr Howard simply started paying something to everyone. Within a year, the direct payments into the economy tripled as a portion of the GNP - from 1% to over 3%. You had to make 6 figures in Australia not to be eligible for some sort of payout.
In America, that'd be catastrophic. But Australia is a small country with a small economy. In perspective, the recent Wall Street bailout is larger than the total GNP of Australia by $100billion USD.
Converted at the current exchange rate, that's be about $163billion AUD.
And that's after all the bloating inflation in Australia for 8 years or so.

The same consumer inflation signals continued for 8 years, only getting worse and worse. The inflation rate was underreported to the population. It was supposedly 4%. The real figure was closer to 10 or 12%.
Denial is not something unique to Australia. Just look at the idiocy of the sub prime mortgages in the US.
Consumers only really became concerned, as in the US in the 70s, when the cost of petrol went through the roof. The speculators that are blamed were only reacting to real market forces. There was room for the increase and they saw it.

I got the stories. A house had cost only $60,000 in the neighborhood only two years ago. Now it was $85,000. And that was nothing compared to prices across the whole metro area, where the average house was (then) $220,000. It was much worse in Sydney.
My comments were: This is still a suburb. It's a long ways into the city. But it looks like that's changing with the plans for new freeway. This would be a good time to buy that $85,000 house. -- It's obviously going to go up a lot.
The responses from the local Australians registered their incredulity: "These houses were old. They can't get much more expensive. It'd be better to tear them down and build new houses. Houses out here will never be over $100,000."
Within 4 years, just a year or so after I heard that comment last, the same house sold for $180,000. Two years later, it was on the market for $240,000.

The market value of that old, unrenovated 1970s military housing house had tripled in 6 years. And the freeway went into service just after it was sold.

Now Rudd government has to support the inflation. So they have gone even farther than the Howard government ever dared. All bank deposits are guaranteed. More than that, all loans between banks are guaranteed. And there will be a $10.4billion payout to spark Christmas spending on December 8th.
Weirder than fiction, the Assistant Prime Minister thinks this will not be inflationary.
And just two months ago, the RBA raised interest rates to combat inflation. This month, the RBA dropped interest rates from 7.0% to 6.0%, and more cuts are expected.
Nothing inflationary in all that. Nahhhhh....

Oh, the average house in the metro area is now $385,000. In Sydney, it's over $400,000.