More economic jitters ahead by any guess

There is so much going on that if you make enough prognostications then there's a good chance of at least a couple coming true.

After a year that started with some promise, veered towards economic disaster and ended up walking a precipice, the odds of 2012 being relatively mundane are longer than me getting called up to play back pocket for Collingwood.

The issues of last year are well documented. Like Madonna or Gaga, many need only go by one word.

PIIGS (Portugal, Italy, Ireland, Greece, Spain) deficits, gridlock, disaster, corruption, austerity, Occupy - it was a long and growing list.

The two-word issues included the Tea Party, the European Union, hung parliament, sovereign debt and the resources boom.

One of the most interesting issues, and one which is not well enough understood in the general public, is bond yields.

These are effectively the interest investors are willing to be paid in return for stumping up for some government debt.

What drove Greece and Ireland and Portugal (and very nearly Italy) to the wall over the past 12 months was that the interest rates on their sovereign debt soared.

Investors simply were not willing to buy the bonds of these countries without getting well compensated for the risk.

The yield on a 10-year Greek Treasury started the year a little over 5 per cent. It ended at more than 34 per cent (and in reality the market has closed to Greek bonds).

In Australia, however, the reverse occurred.

In January last year, the yield on a 10-year Treasury bond was about 5.5 per cent.

It finishes at 3.66 per cent, a new 50-year low.

Think about this. Investors with spare cash are so enamoured by Australia's economic prospects they are prepared to invest at a rate of return of just 3.66 per cent.

You are better off going down to the local bank and opening a term deposit for a year or two with an interest rate of almost 6 per cent.

(Of course, the teller behind the desk might be worried taking your $1 million bank cheque.)

Much of the focus of the media is on the strong Australian dollar which, apart from a hiccup here and there, remained above parity with its American counterpart through the year.

Not since the days when the Government controlled the currency has the Aussie dollar been so strong for so long.

But the movement in bond rates also signals that investors from across the globe reckon Australia is a good economic thing, especially in the face of what is going on everywhere else.

And unlike the dollar, which causes trouble for local firms while being a godsend to shoppers and those keen to head overseas, bond yields do good things for governments.

Treasurer Christian Porter last week mentioned how the fall in yields on his debt had been a positive to the State Budget bottom line.

For Federal Treasurer Wayne Swan, the lower yields transpired into a $1 billion interest bill saving in the mid-year Budget update.

It also means the minerals resource rent tax will kick in at a lower profit rate for miners, offsetting to some extent the fall in commodity prices.

If anything, what happens to bond yields here and overseas will be a key insight into the health or otherwise of the global economy.

Then there a host of other issues for the coming year.
Will Greece leave the euro? Will French and German banks survive if Greece leaves the building?

Are the evident green shoots in the American economy likely to take off and grow strongly? If those green shoots show strength, when will the US Federal Reserve move on interest rates, given the problems it created the last time it kept the cost of money too low?

Will the Reserve Bank cut rates in February, but have to start lifting them by year's end?

Will domestic retailers realise the world is changing, that shoppers have got smarter, and that it is time to rethink their approach to bricks-and-mortar selling?

Is there a chance Mr Swan will surprise on the upside with a better than expected forecast Budget surplus in the 2012-13 financial year?

Is there a prospect Tony Abbott will realise he can't afford all the promises he has made?

Can iron ore and coal prices stay so high for another year, and what happens to the country if it is hit by another burst of natural disasters?

And then there is the biggest question of all. Will the Chinese Communist Party continue its long run of king hits and maintain strong growth for China, Australia's most important economic partner.

The Bank for International Settlements, effectively the central bank to the world's central banks, is fearful the seeds to the next financial disaster are being sown.

The problem is that we haven't overcome the problems to the last disaster.

As I have previously mentioned, financial disasters are much more difficult to recover from than your ordinary, run-of-the-mill economic downturn.

This year will mark the fourth anniversary of the collapse of Lehman Brothers and the world has yet to come to terms with the repercussions of that single event.

Given the precariousness of the global economy, another financial disaster will have us all heading to the backyard with our supplies of bottled water and canned beans.

We got a couple of glimpses of that possibility this year. The continuing inability of the EU to get its house in order.

The effort by Tea Party Republicans to have the US default on its debt.

Imagine what might happen if Chinese authorities discover their local government sector's huge debts cannot be paid off, or the housing boom collapses?

Still, despite the gloom there is always hope.

Hope that policymakers won't stuff up or succumb to banal populism. Hope that the US economy gets its mojo back.
Locally, the billions in mining investment won't stop - and that is a good thing.

But we could hope that business stops whingeing and actually comes up with some policy alternatives that look at the national economic interest rather than a narrow self-interest.

We could also hope governments and oppositions stop their policy charades, mostly along the line of coming up with a "simple" solution to issues that are complex, and instead deliver intelligent debate to voters.

Sadly, that has not much chance of coming true.

Anyway, have a good, and an economically benign, 2012.