Australia being trapped in a bigger bubble: RBA director

Australia is being trapped in a global bubble that could hit the nation much harder than the global financial crisis and expose the weaknesses of Labor government's economic settings, a board member of Australian central bank warned.


Reserve Bank of Australia board member Warwick McKibbin told The Australian Monday that the bubble in global commodity prices and property markets in Asia threatened to dwarf the U.S. housing market bubble that led to the global financial crisis in 2008.


He warned that the inevitable bursting of the bubble would reverse the surge in Australia's record high terms of trade, push down the dollar and leave the Reserve Bank struggling to fight off rising global inflation pressures.


"This is shaping to be much bigger than 2004 to 2007," he said, comparing the current excessive global liquidity with the global financial bubble that led to the worst global financial crisis since the 1930s.


"This cycle is even bigger," he said.


McKibbin suggested the surge in global liquidity was fueled by U.S. monetary expansion in a manner reminiscent of the early 1970s surge in food, mining and energy prices that led to global " stagflation", or the combination of high inflation and high unemployment.


According to his analysis, much of the surge in mining, energy and food prices is being driven by the near zero official interest rates and so-called quantitative easing of credit conditions in the U.S. and Europe in the wake of the financial crisis. "That is why inflation is taking off all over the world," he said.


The Reserve Bank meets Tuesday and is expected to keep official interest rates on hold.


McKibbin said the bursting of the new global bubble would severely test the Gillard government's budget settings and its regulation of the job market.
(Source:http://news.xinhuanet.com)