“The total value of commodity exports in the year ending June 30, 2010 is now forecast at $162.56 billion, up 2.7 per cent from a September estimate but down 18 per cent on actual exports of a revised record of $197.44bn last fiscal year, the Australian Bureau of Agricultural & Resource Economics, or Abare, said in its quarterly commodities outlook publication”

As you probably know I was ranting on about how our exports earnings would fall as the AUD went up almost a year ago, but back then and even recently commentators like Michael Pascoe (0ver at the SMH) reckoned we were in the midst of another commodities boom!

So even with massive amounts of economic stimulus being used to stimulate economies in the U.S, China, Japan, Germany etc. our commodities exports have fallen 18%…and there will be worse to come. The full impact in the cut in contracts prices is yet to flow though!

For my money, a drop of this amount in exports earnings spells recession.

As for the banks, the relationship between Big 4 and the Government is comical. The Government provides them a deposit guarantee which helps them crush the little guys and chalk up big profits and then Swanny comes in complains when banks do what they are designed to do, make money for their shareholders.

If the Government wanted to create more competition in the banking sector they should not have propped up the big guys! Honestly, does Swanny, Rudd and Co. actually know anything about free and fair open markets?

Yes, it’s hard to see the bank guarrantees being unwound anytime soon. The government and banks like to say that our banks didn’t have to be bailed out. But the guarrantees of bank borrowing are just a bailout by another name. I believe the guarrantees are in place until late 2011. With stuff like Dubai and Greece lately, there’s probably all sort of skeletons waiting to jump out of the closet that could bring back the wobbles. So I reckon they’ll rationalise some way to keep the bank guarrantee going for a little while longer. And even if by some surprise the guarrantee is removed, it’ll be there implicitly forever. Monumental moral hazard.

Overall though, it’s very difficult to guage what’s coming up. We’ve got the government stimulating and guarranteeing like crazy to blow the rain clouds away and put the sun back in their place. But it’s done such a great job that the RBA is now raising rates.

I reckon the RBA can only call things as they see it based on the official figures. That’s why I think we’re getting rate rises when we know that it’s still brittle underneath. I mean, they probably know that stimulus and first home buyers grants are all that’s keeping the economy going right now and that it could all blow over in the breeze if it changes direction. But if they didn’t raise rates with runaway official figures, it would make the official numbers look like a fraud. Official figures like CPI and GDP probably are fudged but if the RBA worked with their own intel and ignored the official figures, then we’d soon figure out that it’s all a farce and confidence would take a hit. Can’t have that.

At some stage I guess the Government has to say the finanical crisis is over and the bank guarantee needs to go, but the big banks won’t like that will they? I am guessing the banks have already given the Government the hint that if the guarantee goes then interest rates will be raised above what the RBA does, and so I don’t reckon anything will happen before the election.

What do you think?

I still think that we’ll see some interesting events unfold as the stimulus continues to wind down. It all still looks very fragile for me, with a lot hanging on confidence. But it won’t take much of an external shock for that confidence to fall to the floor again.

And as you’ve said many times, Australia has wasted the opportunity to do a bit of economic reform and diversification. We’re just lucky that our core industries – real estate and resources – are largely untouched. The government has bailed out the banks (and hence kept house prices bubbling along) and China has kept buying our rocks. As you say, what happens when China slows down? And I’m sure the government is hoping like mad that people don’t suddenly start thinking that houses are too expensive and stop buying. No plan B that I can see.

I also wonder about the bank guarrantee. I can imagine that being extended indefinitely. Why not just nationalise the banks? I mean at the moment, the government is on the hook for all of their borrowing but doesn’t seem to have any real influence over them. Banks are dependent on the government’s guarrantee yet squeal loudly at the first mention of having to tighten liquidity or raise capital ratios. The banks ask for support and the government says “sure and feel free to do whatever you like because there’s much more where that came from”. The government seems almost afraid to say anything beyond mildly critical of the banks, yet the government is holding the whip hand. That’s not much of a relationship, is it?

What miffs me is that if the US is China’s largest importer and is going through dire straights, then where are out commodity exports going after China reprocesses them?

Also if the Chinese and Indians are on a world buying spree (even buying Aussie homes) doesn’t that show they’re scared witless and trying to protect their savings from a coming Armageddon.

Anecdotally, a drill mining engineer friend (basically drilling for new mines) tells me the shit has hit the fan big time in the industry.