The Australian Government - Article Example

Introduction: The purpose of this paper is to try and ascertain the truth behind the statement “The greatest challenge to governments in this century will be maintaining living standards in the face of high energy cost and uncertainty in energy supply”. Our case will be based on the Australian Government. However, our strategy for tackling this statement would be two pronged: first we would look at the general issues that are related to our topic at hand. Then, we would look at the specific case of Australia but from a monetary policy point of view i.e. we will try to extrapolate the problems that will be created by this said problem. For a more streamlined view of our paper, we have assumed that these hindrances in infrastructure as well as the perpetrated high cost are all signified in a jump in the level of inflation which has to be managed by the economy. Based on our analysis, we will then try to create a final hypothesis on the statement at hand. Situation in the current set-up: Present era is the era where energy is the basic resource which is essential for living. The present age can easily be termed as Fossil Fuel Age (Hogan,1993) because 93% of the total world’s energy comprised of oil, coal and natural gas, this is surprising because only a century and a half ago the figures were reverse. Fossil fuel provides only 5% of energy while the animals and humans supplied 94% of it (Grubb et al, 2006). Energy resources are strong determinants of economic development (Hatfield-Dodds, 2007). In other words, they play an important role in the growth and development of a country. The various resources that generate energy in brief are coal, oil, gas, hydropower, nuclear, solar and wind generated energies which have been changing with the passage of time. The energy resources play important role in the socio-economic development of a country while the importance of these resources for developing countries is more important. Technologically, undeveloped societies are those lacking the organization and technology for industrial mass production. In real terms, though, it means hundreds of millions of destitute, illiterate, starving people subsisting on the equivalent of a few hundreds dollars a year (Hunt, 1979). It means modern conveniences and luxury goods for a small elite, bare subsistence for the masses. It means minimal health care, and epidemics sweeping through weakened population. Until recently, such non-industrial societies fit one of two categories. The second World included all communist countries, even those not industrialized, like Vietnam. The third world encompassed noncommunist, non-industrialized societies, largely in southern Asia, South America, and Africa. The third world category unfortunately lumped together countries with vastly different governments and living standards, ranging from the economic dynamos of Singapore and Taiwan to the troubled regimes in sub-Saharan Africa. And since the abrupt disintegration of the Second World at the end of the 1980s, this three-fold classification has become even less useful. (Martin et al, 1997) If the world glanced at, it is known that all the developed countries are basically industrial. In other words, the dominant proportion is the income from industry. The power resources have played the key role in the development of these countries. For generating machines, melting metals and keeping the means of transport in motion power resources are required (Shaikh, 1978). Japan is the glaring example in this connection, which is deficient in mineral resources but its electricity production capacity is eight times more than any developing country due to which Japan is monopolizing in the motor vehicle industry. All the developing countries of the world are economically backward because either they are not having the power resources or have not properly and completely used them. With the advancement of technology, demand of energy is also growing faster. It has been discovered that United States of America, whose population is just 6% of the total population consumes almost one third of world’s total energy resources (Reddy et al, 1989). Macroeconomic implications: Now, let us move onto the second and perhaps more critical part of our paper. Here, we will try to look at the macroeconomic activities that need to be ascertained in order to handle increased costs to the consumers due to electricity. Some of the changes that the government can make in the macroeconomic policy are given here. We have used these changes and then subsequently tried to analyze the overall effects of these changes on the economy, hence, showing what the increased costs of infrastructural incompetence’s have on the country. Changes in Bank Rate Policy or Rediscount Rate: Bank rate or re-discount rate basically is the rate at which the commercial banks operating in a country and able to get a loan from the Central Bank in the country. For instance, the State Bank of Pakistan charges 10% bank rate from the commercial banks operating in Pakistan for a loan. By altering this interest rate, the central bank is able to control and manage the supply of money in the country. In the instance of inflation, the central bank can increase the rate of interest to counter the effects of inflation. This change will see the commercial banks also increase the interest rate that they offer on the loans that they give to the general public, as their own cost of loans have increase. This will see a decrease in loan activity on the part of the consumers, which will subsequently lead to lesser degrees of investment, overall country product output and most importantly the prices. This process will enable the bank to control inflation. On the flip side, if the country is facing a period of inflation, the central bank will decrease the interest rate. This will see commercial banks decreasing their interest rates as well, all in turn leading to increased investments, production and decreasing levels of unemployment; all the while decreasing the prices in the country. Hence, deflation can be controlled by using monetary policy instruments in this method. (Aherne et al, 2005) Now, according to macroeconomic theory, the relation between exchange rates and interest rates is based on the no arbitrage policy. This policy basically states that any asset that is available in the global must be available at the same price in the world regardless of the currency of exchange. Therefore, an apple which is available in Japan must be the same value in Japanese yen as it world in the U.S. in dollars. This same rationale is applicable to the securities market as well as the services market. Therefore, one could say that if i1 is the interest rate in country 1 and i2 is the interest rate in country two with the exchange rate between the countries being Ex1; then, the following identity must hold. (Calza et al, 2007) (1 + i1) = (1 + Ex1)* (1 + i2) Therefore, an increase in the interest rates in Australia will see the Australian currency depreciate against the dollar. This basically means that there would be more Australian dollars now available per Japanese Yen. Hence we can gauge from this knowledge that the prices of Australian products in Yen would decrease as a product worth $99 would cost 9.9 yen if the exchange rate is $10/yen. However, if the Australian currency devalues and come to $11/yen, this same product would now cost 9 yen. Therefore, Australian net exports would increase as Japanese would prefer to buy items from Australia as they would be able to get them at a cheaper rate as compared to before the increase in the interest rates by the Australian Government. (Benito et al, 2006) Open Market Functions The other most oft-used mechanism for monetary policy alterations by the government are open market functions. Under this method, the central bank takes part is the sale and/or purchase of governmental assets. Once again, if we assume that the country is going through a period of economic inflation, then the central bank would look to sell the governmental assets that they own, to the commercial banks; who would be interested in buying these assets in order to procure the rate of return that is offered by the central bank on these governmental securities. By this mechanism, the central bank would be able to decrease the number of loan able assets that commercial banks have to offer to their consumers; as these assets would be used in the procurement of the governmental assets. Subsequently, the central bank would control the activities of the commercial banks, hence, putting a check on the investing activities of the public, all the while managing the level of inflation in the country. In the other case of deflation, the central bank would purchase the governmental securities from the banks which would enable the banks to have an increased base of assets whereby they can offer a larger number of investment opportunities to their consumers, increasing levels of investment, average levels of income, overall country output and hence, decrease the level of deflation in the country. Now, we can clearly see the implications of heightened cost of capital on the consumers due to greater inflation as in the case where the central bank buys governmental assets from the commercial banks, the commercial banks enjoy a large monetary base from where they can offer loans especially housing loans/ mortgages for the housing activities of their consumers: the opposite being the case in the instance whereby the central bank decides to sell the governmental assets that it owns to the commercial banks in the country. Therefore, the maintenance of living standards in times of high energy costs and public becomes a challenge far overbearing on the economy as the appropriate monetary base is not available to the consumers via the commercial banks which would render these consumers unable to maintain the same standard of living from the same endowment of income that has been appropriated to them. Changes in Reserve Requirements: According to the banking laws that are set by the government and the central bank, a certain proportion of the deposits that are possessed by a commercial bank have to be kept in the form of reserves in a secure location, which is usually the central bank. This is done in order to maintain a safety level in order to meet the requirements of the people or institutions who have deposited their assets in the commercial banks. This mechanism too has direct implications on the consumption and spending activities of the people in Australia, as the central bank can lax the reserve directives in the instance where they feel commercial banks are not offering enough loan able assets to their consumers, which will see an increase in the consumption loan agreements between banks and consumers, subsequently increasing the activities in the housing market. The opposite is the case when commercial banks are offering excessive loans, which will see constrictive policies being applied to the commercial banks in the country vis-à-vis reserve requirements, hence, dissuading banks from offering loans to their consumers, which will decrease their consumption spending. Therefore, one can see that if the cost of energy increases then the government would not want the population to increase their consumptions based on loan agreements which they might not be able to fulfil in the long run and, hence, try to dissuade consumption by increasing the reserve requirement, even though this might come at the cost of losing critical accounts in the business etup as well as crucial foreign direct investment, which would certainly hamper the growth of the company. Conclusion: We have appropriately seen the implications of the increases cost of energy on the consumption patterns in Australia and the subsequent macroeconomic decisions that have to be undertaken in order to overcome the effects of this increased cost. In addition, we have also seen the loss of other more critical benefits due to macroeconomic policies which have to be made in order to reduce the effect of these increased costs; all of which has enabled us to succinctly conclude that "The greatest challenge to governments in this century will be maintaining living standards in the face of high energy coast and uncertainty in energy supply" is indeed a correct proposition, at least for the government of Australia. Bibliography: 1. Ahearne, Alan G. Ammer, John Doyle, Brian M. Kole, Linda S. and Martin, Robert F. (2005) ‘House Prices and Monetary Policy: A Cross-Country Study’ International Finance Discussion Papers Number 841, Board of Governors of the Federal Reserve System 2. Benito, A., J. Thompson, M. Waldron, and R. Wood (2006). "House Prices and Consumer Spending (420 KB PDF),” Bank of England Quarterly Bulletin, vol. 46 (Summer), 142-54. 3. Calza, A., T. Monacelli, and L. Stracca (2007). "Mortgage Markets, Collateral Constraints, and Monetary Policy: Do Institutional Factors Matter?" CFS Working Paper Series No. 2007/10 (Frankfurt: Center for Financial Studies). 4. Grubb, M, C Carraro and J Schellnhuber (2006) Technological change for atmospheric stabilisation: Introductory overview to the Innovation Modeling Comparison project’, Special Issue: Endogenous Technological Change and the Economics of Atmospheric Stabilisation Energy Journal pp 1–16. 5. Hatfield-Dodds, S., 2007, ‘The Economics of Climate Change and Climate Policy: Contributions and Distractions’ in J. Boston (ed), 2007, Towards a New Global Climate Treaty: Looking Beyond 2012, Institute of Policy Studies, Wellington, New Zealand 6. Hogan, J. P. (1982), Voyage from Yesteryear, Baen Books; Reprint edition 1999. 7. Hunt, E. K. (1979), The categories of productive and unproductive labor in marxist economic theory, Science and Society, Vol. 43(3). 8. Martin, H. P. and Schumann, H. (1997) The Global Trap: Globalization and the Assault on Prosperity and Democracy, Zed Books. 9. Shaikh, A. (1978) An introduction to the history of crisis theories. In U.S. Capitalism in Crisis. New York: Union for Radical Political Economics. 10. Reddy, A.K.N., Goldemberg, J., Johansson, T.B. (1989) Energy for a Sustainable World, John Wiley & Sons Read More