Readers from two weeks ago have suggested our headline 'Can capitalism survive ...' was somewhat alarmist.

We were of course discussing the enormous fiscal deficits in the 'developed nations', including crucially the mighty USA.

Our star provocateur was the historian Niall Ferguson, who has been visiting Australia.  Extremely odd that he has not received more attention in the mainstream press.

Henry travelled to Sydney to attend Ferguson's Bonython lecture, run by the Centre for Independent Studies, on the basis of being on the top of the waiting list. Sadly when it came to it there was no room at the feast, gentle readers, so I had to go searching in cyberspace. I found a modern classic - 'An Empire at Risk' - posted just before Christmas 2009.

Ferguson in that fine contribution presented forward estimates of USA deficits and debt, which were alarming enough. The numbers have in fact deteriorated since late 2009.

History strongly supports the proposition that major financial crises are followed by major fiscal crises says Niall Ferguson.  Financial crises create debt explosions, usually producing either a debt default (when the debt is in a foreign currency), or a bout of high inflation. The history of all the great European empires is replete with such episodes. Indeed, concludes Ferguson, serial default and high inflation have tended to be the surest symptoms of imperial decline.  We suggest that the great inflation of the Age of Aquarius (the 60s and 70s) was the harbinger of such decline.

The U.S. is unlikely to default on its debt, which is in its own dollars, meaning the choice it is facing is serious fiscal consolidation or the Fed printing money—buying newly minted Treasury bonds in exchange for even more newly minted greenbacks—followed by the familiar story of rising prices and declining real-debt burdens. It's a scenario many investors around the world fear. That is why they have been selling dollars and buying gold. This is Henry's prediction also, but not Ferguson's, who is by any standard a far better historian.

The inflation solution must be questioned with U.S. unemployment close to 10 percent, weak labor unions, huge quantities of unused capacity in global manufacturing and people’s expectations of inflation very stable, so far as can be judged from poll data and the difference between the yields on regular and inflation-protected bonds.

Another possibility is a rise in the real interest rate, which is the actual interest rate minus inflation. This can happen in one of three ways: the nominal interest rate rises and inflation stays the same; the nominal rate stays the same and inflation falls; or—the worst case—the nominal interest rate rises and inflation falls.

There are a number of past cases (e.g., France in the 1930s, Japan recently) when nominal rates have risen even at a time of deflation. Foreign investors might ask for a higher nominal return on U.S. Treasuries to compensate them for the weakening dollar. And inflation might keep falling, to the surprise of most forecasters.

Whether rising real interest rates is worse than a burst of inflation depends on the precise circumstances  For a heavily indebted government and an even more heavily indebted public, rising real interest rates mean an increasingly heavy debt-service burden. The relatively short duration (maturity) of most of current US debts means that a large share has to be rolled over each year. That means any rise in real interest rates would quickly hurt government, business and household budgets.

Even without rising real interest rates, large deficits mean rising debt service payments. There is also immense pressure for spending on health. Like debt service payments this is virtually certain to keep rising in the USA, short of some Thatcherite revolution. To avoid default, it is typically spending on defence that has to be cut, as already assumed in the USA's forward budget estimates.

‘This is how empires decline’ says Ferguson. It begins with a debt explosion. It ends with an inexorable reduction in the resources available for the armed forces. US voters realise this and the US leaders have soon to produce a credible plan to restore the federal budget to balance over the next five to 10 years.  If it does not there is a real danger that a debt crisis could lead to a major weakening of American power.

There are many precedents. Habsburg Spain defaulted on all or part of its debt 14 times between 1557 and 1696 and also succumbed to inflation due to a surfeit of New World treasure. Prerevolutionary France was spending 62 percent of royal revenue on debt service by 1788. The Ottoman Empire saw interest payments and amortization rose from 15 percent of the budget in 1860 to 50 percent in 1875. By the interwar years, interest payments were consuming 44 percent of the British budget, making it intensely difficult to rearm in the face of a new German threat.

'Call it the fatal arithmetic of imperial decline' Ferguson concludes. 'Without radical fiscal reform, it could apply to America next'.

One assumes the USA would remain a capitalist nation despite its decline as a great power.  But with severely reduced defence spending, continued crippling debt burdens and perhaps also inflation, it would be far less able to fend off attacks from countries or ideologies opposed to capitalism, or at least opposed to the democratic variety.

Furthermore, in the postulated situation, the USA would be forced to revert to its natural isolationist stance.  This would leave small capitalist nations at great risk of being attacked, or indeed invaded by a flood of refugees from geopolitical or physical upheaval.  (See 'Australia - alone and friendless' for our take on this vital matter and our attempts to spell out the challenges facing the capitalist world and our small part of it.)

There are many issues to think about in the extraordinary world we now inhabit.  Niall Ferguson deserves a wider audience, and we sincerely hope he has met with Julia Gillard and Tony Abbott.

Posted today on The Australian's website.

You can apparently watch Ferguson's Bonython lecture here, if you have the right software.

Australia's goods and services (CPI) inflation was 0.6% in the June quarter 2010, compared with 0.9% in the March quarter 2010. See the full ABS report here.
 
The measure was 3.1% through the year to June quarter 2010, compared with a rise of 2.9% through the year to March quarter 2010.

These measures were below the rate expected by Australia's economists.  Henry was grateful to Mr Swan for informing us on the 5 PM Sky news that 'underlying' goods and services inflation was 0.5 % for the quarter and 2.7 % for the year., This confirmed Henry's 12 noon guess that this measure too might be below the expected level. This is unambiguous good news for Julia Gillard, Australia's battlers and the Reserve Bank in that order. Not all bad news for Tony Abbott either, now that is looks as if he has a chance of becoming the next Prime minister.

The most significant price rises this quarter were for tobacco (+15.4%), hospital and medical services (+3.8%), automotive fuel (+2.1%), rents (+1.1%) and house purchase (+0.6%).

The most significant offsetting price falls were in domestic holiday travel and accommodation (-6.0%), fruit (-4.8%), audio, visual and computing equipment (-6.3%), vegetables (-3.0%) and overseas holiday travel and accommodation (-1.9%).

Some clever journos have found in these figures evidence of the two speed economy, like physicists pouring over the results of collisions in one of those costly particle smashers. The two-speed economy theorists need to remember RBA deputy-chief's view - there are two speeds, fast and very fast.

Politics

Tony Abbott is looking Prime Ministerial and Julia Gillard is lookin g a lot less relaxed than in this well-lit, well made up Women's Weekly pics. 'It's gotta be Rudd who's leaking said Henry's best mate in the Labor Party. 'Can't stop 'em' says Treasurer.

Mark Latham is spending 30 minutes on Sky News at 9.30 PM tonight and some more colorful insight is sure to be provided.

And Belinda Neal - remember her - is deciding today if she will run as an independant.  Ambassador to Antarctica perhaps, but Julia will have to move fast.

Game on, indeed.

Was it Labor's fiscal stimulus or the dramatic fall in the Aussie dollar and interest rates that saved us from deep recession?

Did you see Nobel Prize winning economist George Stiglitz on the 7.30 report last night?

He has no doubts - it was Labor's stimulus spending.

'There was a lot of waste and mismanagement' said Red Kerry O'Brian, echoing Henry's criticism, though he gave Henry no support at the time.

'There would have been even more waste if the government had done nothing' said Mr Stiglitz. 'Unemployment involves great waste also'.

Sadly, O'Brian did not pursue the point. What if the benchmark was not nothing, but useful spending that helped make Australia a more productive economy?

Spending more on Research & Development (R&D) or suspending payroll tax for small enterprises?

I am prepared to bet that Mr Stiglitz would have said spending to raise productivity would have been far better than handouts to consumers, dangerous insulation batts and rorted amounts on school buildings.

Meanwhile, local economist Tony Makin has a different line of attack.  During the global financial crisis the Aussie dollar fell by 30 % and cash interest rates roughly halved thanks to fast action by the independent Reserve Bank.

Makin claims these two changes in key prices within a market system boosted the Australian economy far more that Labor's botched stimulus program with virtually no connection to the market system.

Now we also learn, though it is denied by the gummint, that Labor's spending was biassed toward marginal seats and away from safe coalition seats.

What a surprise.  Was it Ros Kelly and her whiteboard brought back from Labor's attic?  At least the Addams family are upfront and honest about their gruesome activities.

Henry is in Sydney waiting to see if he gets a seat at the CIS Bonython lecture by historian Niall Ferguson tonight, having failed to book in time.

It is cold and wet and the traffic is gridlocked.

Just a normal winter's day in the Labor-run premier city of the South Pacific.

 Henry ... one of the most damaging cultural ideas of the contemporary world is the idea that we in the West (including Australia) should not/cannot resist our own extermination and exit from history. This is a widespread basic idea among the Left media commentariat, university intellectuals, public servants, unthinking elected officials, Ph.D students and very many ordinary folk who pay a greater or lesser degree of attention to our public life. Of course this idea is not put as bluntly as I am putting it here. However, it is firmly established in our national psyche via the unchallenged notion :'Australia is an aging nation'.
 
This sentence is uttered regularly in 'debates' on population and is accepted as casually true as is the statement 'the Melbourne Cup will be run in November.'
 
The median age in Australia is, as I have seen, around 35 years and rising. This means half the country is 35 and below and the other half is older than 35. We need to properly debate this issue and arrive at a desired median age. When we pick this age, all the other questions to do with population/immigration will solve themselves. All issues/decisions surrounding population would be compared to how such a decision helps (or doesn't help and is thus rejected) meet the stated desired median age.
 
The desired median age for Australia should be 25 years. There should be 7 persons (over 15 years) in full time work/study for every one person in fulltime retirement. We need our parliament to arrive at these figures. When that crucial decision is made we can then use basic mathematics to tell us how we go about reaching these desired levels from where we are now. These three vital figures (25 ..7 ..1) will help guarantee our national safety and historical continuity for the 'Australian tribe' which has formed itself into a nation state and currently stands in possession of 7.7 million square kilometres of this continent and the attendant resources.
 
Henry, to age is to die. This is obvious. To avoid death one needs to 'youth-ify'. As individuals we cannot do this but as a tribe in competition with 195 other national 'tribes' around the world we can do it. Making the decision to do so is a cultural decision, not an economic one. Unfortunately we have 'leaders' who seem to think that what we have now by way of a reasonable standard of living and quality of life is ours by right and is not the result of great and prolonged high quality work and social discipline over 200 years. We were always able to find the high quality workers (First World people) needed to run an economy which has given us what we have today. We will need to keep doing this or our standards and quality of life will crash.
 
To keep what we have we need to keep our economy/society young and agile. We are blessed with a capitalist economy but this system functions best when it is easy to enter into the  business end of the system and the entrepreneurs (tiny and gigantic) can always find young, agile and flexible workers 'to have a go'.
 
We are told by the enemies of Australia's future (most of whom work here in Australia) that NOTHING can be done to lower the median age of the nation; nothing can be done to avert our fate and place on the historical scrap heap ... along with the Etruscans, Sarmations, Canaanites and Neanderthal Man.  All sorts of statistical models are paraded out as proof. All these 'proofs' are based on the assumed continuation of the current 'Me' culture which has got us into the problem in the first place.
 
The adoption of a sensible world view which places Australia sustainably and confidently in the top ten of nations in the world in the list of standard of living and quality of life will require a return by us to a complete sense of our nationhood. It will also require a cultural and political understanding of ourselves as a special people who have a vast good resource fortune (unearned) in this world and thus must use this fortune well and properly, for others as well as ourselves. Such 'particularist' ideas revolt the Australian Left. Such ideas are repulsive to them as they ruthlessly push the still poisonous cultural/economic/social remnants of the shattered and murderous 'Socialist Project 1917-1991'. They use their institutional positions to see that such ideas cannot be published easily in Australia today. Henry, the 'freedom of speech' Left are super keen and enthusiastic censors of these and similar ideas. We all know this but no one mentions it.
 
Any Australian public elected official who started talking about these issues would be supported in a stampede by the ordinary Australians. These ordinary Australians today have a collective sense that all is not well with our 'emerald city on the hill' ... the Paradise of OZ. They are right (as they usually are in matters to do with the nation) and still nobody says anything. This election campaign grinds forward like some sort of appalling and dreadful home movie which we are required to watch. No issue of worth or importance is mentioned sensibly or with any intelligent idea attached.

More here including links to a number of important articles on the population issue.

Wall Street liked the fact that only seven Eurozone banks failed the stress tests, and US shares had a good Friday last week..

This was despite the fact that none of the tests included a sovereign debt default.

The bigger news is that the International Monetary Fund (IMF) has told central banks to 'prick asset bubbles'.

The 'Executive summary' begins: 'The crisis brought the financial system to the verge of systemic collapse and raised the prospect of depression and deflation. Central banks helped defuse these threats, including through exceptional measures. Considerable efforts are now under way to draw policy lessons from the crisis. For central banks, the crisis seems to provide three important lessons for policy frameworks—mainly concerning systemic financial stability'.

Financial stability should be addressed mainly using 'macroprudential policies'. They can 'mitigate the procyclicality of systemic risk and the build-up of structural vulnerabilities' - head the problems off before they become too great.

'Macroprudential tools' include capital requirements and buffers, forward-looking loss provisioning, liquidity ratios, and prudent collateral valuation'.

This is all good sense, but the key assumption is that asset booms should be prevented, or at least should be opposed - 'don't just stand there, do something'.

The IMF also maintains its position that central banks ought to retain goods and services price stability as the 'primary objective of monetary policy'.

There is also the question of 'moral hazard' and the need for 'more flexible operating procedures' - the bail out issue.

I have been re-reading Kindleberger's classic book on Manias, Panics and Crashes. 

This discusses the financial crises of  several centuries.  There is always a tendency in periods of optimism for credit to expand to meet the demands of trade.  In times of euphoria, credit can become very flexible indeed, even including the invention of new forms of credit such a bills of exchange in the nineteenth century, borrowing from the central bank to fund share purchases in the 1920s or 'subprime loans' in the early 2000s.

I suspect the truth of the matter is that no amount of diligent and flexible leaning into the wind of euphoria can totally head off an asset bubble, though central banks and 'prudential regulators' like Australia's APRA have in current times to do their best and be seen to be doing their best.

Organisations, like individuals who wish to keep their jobs, must be seen to be doing their best, even if what is to be done varies over the decades.

In his analysis of the great asset bubble of the 1920s, JK Galbraith makes the point that the US Fed did not want to be blamed for stopping the boom.

‘Action to break up a boom must always be weighed against the chance that it will cause unemployment at a politically inopportune moment’.  And ‘the immediate death not only has the disadvantage of being immediate but of identifying the executioner’. (Quoted in the conclusion to the linked article about the crash of 1929.)

Clearly we are in a period of renewed policy activism.  Banks will be more cautious for a decade or two, and regulators more diligent.

But there will be future periods of asset boom fuelled by euphoric animal spirits.

The trick is to educate one's children and grandchildren so they can take advantage of the next asset boom by investing early and cashing up before the bubble bursts.

Terms of trade rocket.

'PRICES paid for Australian exports jumped sharply in the second quarter, increasing the heat on the RBA to raise interest rates further.

'The big rise in export prices highlights the impact that booming commodity receipts will have in turbo-charging the economy through comings years.

'Merchandise exports surged 16.1 per cent in the second quarter, easily outstripping a 1.9 per cent rise in imports, the Australian Bureau of Statistics said today.

'The data produced a net 13.9 per cent increase in the country's terms of trade, representing a huge income stream for the commodity-rich economy and helping to ensure it will continue to be among the fastest-growing developed nations.

'Australia's terms of trade are quickly closing in on the 50-year highs last seen just before the global financial meltdown in 2008'.

More grist for the 'rate hike soon' school.

Henry's editor fails to gain commendation for painting of Cradle Mountain

Oil on canvas
60 cm x 90 cm
signed bottom right Jonson '10

Exhibited in the Savage Club art show (amateur division) in 2010, where it failed to receive even a commendation, possibly because the artist failed to buy sufficient drinks for his fellow members.

When someone criticised the birds, the artist replied: 'My boids are just a good as Boyd's boids'.

More paintings here.

A rural Twenty-first party

Another family member has been drinking too much but not whilst driving, thank goodness.

Here is his report.

Cartoon of the week

Better than expected corporate earnings results and good economic data gave Wall Street a kick overnight.

Those companies exceeding expectations included Caterpillar, 3M and United Parcel.

More generally, Dow Jones Newswires reports: 'The gains followed encouraging economic data from the euro zone -- its composite purchasing managers index and industrial orders both unexpectedly rose -- as well as a smaller-than-expected drop in US existing-home sales.

'In addition, investors found the latest round of data particularly encouraging because a number of bellwether companies posted revenue that topped analysts' estimates and climbed from the prior year, reversing a trend seen in recent days of companies missing revenue expectations even as their earnings beat estimates.
 
'Investors' worries for the economic outlook were soothed somewhat by a smaller pace of decline than economists had forecast in reports on US existing home sales and leading indicators.

'Reports showed that the euro zone's private sector expanded at a faster pace in July, boosted by an unexpected pick-up in the manufacturing and services sectors, while retail sales in Britain also beat market expectations'.

No silver lining lacks its cloud, however. The Wall Street Journal points out that the slowdown in China's headlong economic growth, while moderate so far, is reverberating through global commodity markets.

'Since China's government started cracking down on its overheating property market in mid-April, global prices for aluminium are down 18 per cent; for copper, 13 per cent; for lead, 19 per cent; and for nickel, 27 per cent, though prices for all of those metals have stabilised somewhat in recent weeks.

'Steel prices in China are down about 15 per cent over the period. Analysts say there could be further declines, as growth in China's huge construction sector continues to ease.

'The construction boom in China has played a crucial role in global demand for raw materials, to the enormous benefit of resource exporters such as Australia, Brazil, Canada and much of Africa'.

Interest rates

Whoever wins the election will inherit an economy growing at well above its sustainable rate, says Peter Martin, making further interest rate rises inevitable, according to the latest Westpac-Melbourne Institute leading economic index.

On the other hand, Glenda Korporral says that Ben Bernanke's latest speech gives RBA Chief glenn Stevens 'breathing room' on rates unless (of course) the CPI data is rather worse than currently expected.

One admits to hearing heavy breathing from the gnomery at the top of Martin Place. It would be a sad thing to have to give Ms 'Moving Forward' Gillard one in the eye, especially as it looks as if she might just win the bloody election.

You've done it again, Barnaby.  Delivered a half-baked idea - low tax or no tax for Aboriginal Australians living in 'remote indigenous communities'.

Half-baked is arguably better than 'buried and cremated', because at least it might be possible to put a half-baked meal back in the oven for some gentle further cooking.

Like the controversial welfare refoms for Aboriginal Australians living in the Northern Territory, the idea becomes more palatable when applied to all Australians regardless of skin color or ethnicity.

A more fully-baked version of Barnaby's idea would be lower tax rates for all Australians living and working in remote parts of Australia, or doing jobs such as fruit picking that struggle to find workers. (Here is a report from young David Jonson on the joys of fruit picking.)

How about a 10 point cut in the rate of income tax for income earned in remote, unpleasent or dangerous jobs including for Australian men and women on the front line in Afghanastan or needed to man submarines.

Given all the money sloshing about in Australian government coffers now and prospectively, no doubt such a scheme could be paid for without putting additional upward pressure on interest rates.

And it would give a significant boost to regional Australia and to the defence of the realm.

Reserve Bank undercuts Abbott

'RESERVE Bank Governor Glenn Stevens has undermined one of the key Coalition election policy planks', say Peter Martin and Clancey Yeates, declaring Australia has "virtually no net public debt".

'As Tony Abbott was in Melbourne pledging [a further] $1.2 billion in spending cuts and a "complete focus on getting debt and deficit under control", the Reserve chief was in Sydney preparing to deliver a speech that countered some of the debt arguments point by point.

'But in an unwelcome sign for Prime Minister Julia Gillard, Mr Stevens indicated the Reserve would raise interest rates at its meeting on August 3 - less than three weeks before the election - if circumstances required it.

'Mr Stevens said the board would "consider all the issues for the economy and do its job. What else do people expect?"  (The speech itself is linked here.)

The key to whether there will be a rate rise during the campaign, say Martin and Yeates, will be next Wednesday's inflation figures. 'Yesterday the RBA took the unprecedented step of nominating the underlying inflation figure that spells danger for Labor: 3 per cent'.

This is fair comment, but we suggest readers review the state of play as it was in November 2007.

Then the Reserve was playing catch-up and arguably had no choice at all.

Now after six interest rate hikes to a normal level for Australia, and continued uncertainty elsewhere, to hike or not to hike may be less obvious than it was in late 2007.

Henry's authoritative analysis will be here on the morning on August 3, as it was on Melbourne Cup day 2007.

'Not without widespread debt default or general, damaging inflation' seems to be the answer.

Historian Niall Ferguson, visiting Australia soon to present the Bonython lecture at the Centre for Independent Studies, concludes an article for The Financial Times/Business Spectator as follows: 'The evidence is very clear from surveys on both sides of the Atlantic. People are nervous of world war-sized deficits when there isn’t a war to justify them. According to a recent poll published in the Financial Times, 45 per cent of Americans “think it likely that their government will be unable to meet its financial commitments within 10 years”. Surveys of business and consumer confidence paint a similar picture of mounting anxiety'.

Ferguson believes that confidence will be killed with budget deficits that are a record for peacetime economies.

The key is effects on confidence.  'In 1981 the US economist Thomas Sargent wrote a seminal paper on “The Ends of Four Big Inflations”. It was in many ways the epitaph for the Keynesian era. Western governments (not least the British) had discovered the hard way that deficits could not save them.

'The remedy for such fears must be the kind of policy regime-change Sargent identified 30 years ago, and which the Thatcher and Reagan governments successfully implemented. Then, as today, the choice was not between stimulus and austerity. It was between policies that boost private-sector confidence and those that kill it'.

'With double-digit inflation and rising unemployment, drastic remedies were called for. Looking back to central Europe in the 1920s – another era of war-induced debt explosions – Sargent demonstrated that only a quite decisive policy “regime-change” would bring stabilisation, because only that would suffice to alter inflationary expectations'.

While Ms Gillard and Mr Abbott trade insults, and increasingly obscene advertisements - themselves doing nothing for the confidence of voters - other western nations are seeking economic salvation in record peacetime deficits. 

It is the legacy of the Howard government that the Labor government has not piled up unmanageable debts, despite its reckless and poorly administered stimulus programs. However, poised as we are between inflationary developing nations and western nations facing debt default or inflation, we too are suffering inflation that could yet severely damage our 'miracle economy'.

John Mauldin this week has addressed America's 'debt supercycle'.

The following graph shows total US debt since 1870, close to the start of the so-called 'Long Depression', usually dated at 1873.

The upward twitch in the 1870s is clearly visible, as is the far larger increase - a surge, not a glitch - in the Great Depression of the 1930s.

The scary thing is the far larger and more entrenched surge that began in the 1950s and accelerated substantially from the start of the 1980s.

(An equivalent graph for Australia is discussed here.)

The size of the task facing the USA is shown by the next graph, which has the heading 'This cannot be.'

John Mauldin says, like Niall Ferguson, the choice for American voters, and indeed voters in all the other highly indebeted and recessed western nations, is between prolonged fiscal austerity and a major surge of inflation.

'It's all well and good to say that you want fiscal rectitude. It's another thing when it is hitting budgets near and dear to you. And to get back to a remotely sustainable deficit is going to take pain in every corner. It is going to hit near you, gentle reader. Some will get hit harder than others.

'And this is the case in every country running large and out-of-control deficits. It is not just a US problem. The Irish are in what can only be called a depression, along with the Baltic states and Hungary. Greece will soon be there, once they have to meet market rates for their debt, or force their labor markets to endure a very serious deflation to make themselves more competitive.

'So, can we know how The End Game will turn out? The short answer is no. Each country will have to make its own political choices. Could we see hyperinflation in the US on Britain or Japan? It is possible, with bad policy decisions. I doubt it that it gets to that. But could we see inflation? The answer is yes.

'That has been the traditional method of default for many countries over the years. Instead of outright default, they simply inflate away debt. And the logic is compelling'.

I agree that 'the logic is compelling' for inflation if the alternative is a decade of fiscal austerity, partial dismantling of the welfare state and slow growth of spending on health, education and defence. (See my February 2010 column on this matter.)

Of course, individual countries may find a 'regime change', as the UK did with Mrs Thatcher at the helm and the US with President Reagan.

But for most, including possibly the mighty USA, inflation may be easier path.

Inflation, if allowed to become too serious, is itself a regime-changer.

But what would the prevailing regime look like if inflation is preferred to great fiscal austerity?

Edited version posted next day on The Australian website.

The federal election campaign is underway as the major parties launched new advertisements yesterday.

The Liberal Party’s first major ad is entitled ‘real action’ and commits them to cutting government waste, ending budget deficits and halting illegal immigration.

Similarly, Labor’s ad ‘let’s move Australia forward’ echoed Julia Gillard's reformist speech from last week.

Links to both advertisements can be found in the new Federal Election 2010 section.

Although there are some clear differences between the parties – such as the federalization of healthcare – both Tony Abbott and Julia Gillard are now trying to court to moderate swing voters.

Both the Libs and ALP agree on the need to return the budget to surplus, stop illegal immigration and promote sustainable population growth.

Abbott says the Libs will return the budget to surplus faster than Labor, but the ALP has announced it will end the deficit by 2013.

But neither party has explained exactly how they will cut government spending and pay off the debt.

The Libs say they will cut spending, yet they have promised new spending on mental illness and paid parental leave. Tony Abbott has ruled out introducing any new taxes, which begs the question – how does he expect to pay for new social spending while returning the budget surplus?

The Labor Party has locked itself into the same position. The government says the budget deficit will end by 2012-13 (this forecast comes from the Treasury and, given its track record, should not be relied on), but its’ promise to federalize healthcare will cost billions of extra dollars every year.

And how can anyone seriously believe Gillard’s austerity pledge after her role in Rudd’s disastrous stimulus spending that bribed the electorate with $1000 cheques, killed several insulation installers and gave private schools much needed new indoor swimming pools?

Both parties have therefore moved towards the centre on economic policy. Abbott realizes the economy is the Liberal Party’s strongest card, but he has not promised any significant tax cuts. Likewise, Gillard changed the mining tax to help pay off the deficit because voters had woken up to Kevin Rudd’s smoke-and-mirrors politicking.

The gap between the ALP and Libs on immigration and population has lessened considerably since Julia Gillard became Prime Minister.

She abandoned Kevin Rudd’s ‘big Australia’ policy and moved Labor towards the centre ground position of ‘sustainable population’. The Liberals also support a sustainable population that is the view held by most Australians.

Lastly, the parties have converged on illegal immigration. Kevin Rudd was seen to be too weak on asylum seekers and this was a key contributor to his downfall. Labor and the Liberals are now talking tough on illegal immigration, with Tony Abbott promising to turn boats away if they enter Australian waters.

Expect this centrist trend to continue over the coming month.