For the past thirty years, Australia has led a charmed life. The only economic shocks it has to endure were exogenous.
At the turn of the Millennium, Australia managed through the Asian Financial Crisis and Dot.com recessions without much pain.
In 2008, the Global Financial Crisis wrecked our market monetary system but the economy survived despite a per-capita recession.
Leading up to 2015, we went through the first of the China imbalance shocks as it sought to shift away from commodity-intensive growth. This was the worst of the lot by far, with living standards cratering for a decade, but our evil pollies successfully hid it under a pile of foreign bodies.
In 2020, it was the global pandemic that upended the economy.
What each of these episodes shares are that they are exogenous shocks. Something happened outside the economy to punch it to its knees. That is not to undersell the role of overheating domestic conditions, especially in 2008. But, for the most part, in each case, the economy could have sailed on were it not for the external shock.
Today, we face something we have not seen in 30 years, an endogenous shock. An inflation outbreak so strong that the central bank is going to jeopardise the household debt pile.
It is certainly the case that most of that inflation has come from offshore via supply-side problems. We are far less of an economic island than we were in the last endogenous shock of 1990.
But, by the same token, the breadth of inflation now bespeaks the opportunism of lifted price expectations. Our own pandemic stimulus played a key role in this, largely via housing costs, but also via a whipping fiscal fire hose, mass immigration, and the failure to address energy policy.
Thus, the current interest rate spike is as endogenously generated as we have seen in the globalised era.
Does it matter?
In macro terms, yes. It means that the two levers of policy, monetary and fiscal, are now going to extinguish the economy rather than save it. as they do in exogenous shocks. That means the economic fallout will be worse.
In political terms, yes. It means there is a lot more blame to go around which clearly opens the possibility of volatility.
