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This is my first blog entry for 2015. I hope all readers have had a great holiday period.

A lot has happened in Australia since my last entry. Much of what has happened has followed a course largely following what I predicted, but the explosive volatility of the situation means that a lot is going to happen that is impossible to precisely predict.

Firstly, as the mining boom wanes and unemployment climbs, the interest rate has been cut by the Reserve Bank of Australia. At the same time, the Australian dollar is tanking. When currencies are overvalued, as the AUD was on reaching parity with the USD, this is often followed by a swing in the opposite direction leading it to be undervalued.

A rate cut will accelerate the decline of the value of the AUD, as it becomes less attractive to overseas investors as a high yield currency. The US Federal reserve may well soon raise interest rates, whereupon the AUD may collapse in value. I would not be surprised to see the AUD drop consistently to around the 65-69 cent to the US dollar mark, or even transiently to around the 55-59 cents to the US dollar during periods of volatility, before eventually climbing back to historical averages.

This type of wild swing in currency value leading to gross undervaluation has historically often lead to a banking crisis. If the economy worsens and there are increasing numbers of distressed sellers and mortgage defaults, this would exacerbate any banking crisis. A deflation spiral from deleveraging will also cause stress on banks. The values of bank shares will likely plummet to historical lows.

It will not be long before the interest rates here will reach close to zero and we will soon see the Reserve Bank of Australia undertaking quantitative easing. In fact, they might as well start now, if they had any foresight. The government may have to bail out some banks soon to the tune of billions.

While the media circus portrays dissatisfaction with Tony Abbott as a personality game, it more likely reflects growing economic stress amongst the general population. Nor will replacing one personality with another do anything towards improving the state of the economy.

As long as the Liberal Party pursues austerity, personality games matters little. Unless there is a fundamental change in economic strategy, all media circus personality games will do is provide fodder for Murdoch tabloids peddling salacious stories while the economy goes down like the Titanic. The government should really be thinking about an aggressive round of stimulus right now before the ground collapses underneath them and they end up a one term government.

The Australian Liberal Party need to take a leaf out of the page of the Japanese Liberal Party. That, however, is exceedingly unlikely, as the Australian Liberals would rather die an agonising political death than to wake up to find that they are “all Keynesians now”. This represents a fair dinkum Aussie variety of harakiri.

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