Tag Archives: Europe

Conversations Around The Traps

Who Suffers From Zero Interest Rate Policy?

Zero interest Rate Policy or ZIRP as it is known in some circles has been going on for two decades in Japan. It has also been going on for 7 years in the USA and Europe. The reasons have ostensibly been from keeping asset prices to stopping banks from toppling over due to lack of liquidity, through to keeping people employed. The extremely accommodating policy has been running parallel with the Quantitative Easing program in the US and Europe which have somehow helped to prop up asset prices in bubble condition around the globe, but also not spurred growth as promised.

The way the traditional/classical economy was supposed to work was that lower interests would fund capital investment for the next phase of economic growth. Instead the low interest rates have allowed speculators to place bets at lower cost, while the piled up debt has eaten into future growth in a big way. The point of all this is to say, the things the easy money has gone towards have not been exactly productive or helpful, while there are people who are genuinely suffering because interest rates have been kept so low for so long.

For instance retirees in America and Europe with some amount of money saved up during their working lives would be finding that they won’t be living off the interest of the money they saved, but be forced to eat into their savings just to survive. This sort of thing can be seen as a breaking of the social contract. There would be a whole generation of kids growing up without learning about the virtues of saving because  they’ve never seen interest payments on their bank accounts. I don’t think this is a good thing because we’re raising people who haven’t seen the benefits of saving and compound interest.

Worse still, with something like QE going on at the same time, Zero Interest rate translates into a situation where you cannot sit on cash because inflation is eating away at that value; and you can’t stay in bonds because whole countries have been threatening to default for the last 3 years. That leaves equities or foreign currency trades, and they’re no guarantee of a return.

In fact, it’s worth asking at this point in time why people who save should suffer at the hands of the Central Bank while it essentially rewards people who go into debt to buy into positions. Why is it that people should not sit on their earnings as savings? If deflation is such a threat, then why is it so bad if the man on the street is able to get more for less?

Frankly I think the world is getting ripped off.

Politicians Lie, But Must They Be Brazen About It?

I was in a conversation earlier tonight with walk-off HBP, and the issue came up about how the Murdoch press essentially insist on telling non-truths and heavily-spun tag lines, all of which amount to nothing but lies. It’s like an Orwellian thing where untruths are shouted out loud until everybody accepts it as the dominant discourse and acquiesces.

But then Tony Abbott gets up and celebrates the repealing of the Carbon Price, characterising it s this bug bear in the economy that was raising people’s costs of living while not doing anything at all for the environment, and that his government is a “conservationist” government. All of these things are wrong. The Carbon Price was hardly a blip in the rising retail power prices, it was contributing to the reduction of our emissions, and there is no way you can call a government that insists on dismantling the Carbon Price system a conservationist government in any dialect or accent of English.

It’s an astounding thing that we have a Prime Minister that stands there and spouts untruths as if they were truth, pronouncing white is black and black is white. I can accept that politicians will work the facts of the matter in their favour through spin, and that they sometimes get it wrong, making them liars after the fact. I just can’t recall a single Prime Minister of this land lying knowingly with a straight face and expecting the people to buy it. This isn’t “no child will live in poverty” things where a politician simply gets the scope of the problem wrong. These things happen and I don’t judge too harshly. Going right back to Malcolm Fraser and looking through all the NSW premiers, I don’t think I’ve seen a single head of government lie with a straight face as Tony Abbott does.

This is a person who knows the science but chooses to ignore it; understands the facts and chooses to deny them; and then acts on the worst possible advice for ideological reasons and then says he is something that that he has never ever been; and that the ignoring and denying of science and facts and going against them for ideological reasons represents something that is positive for this country when it clearly is not. For Abbott to characterise his government as ‘conservationist’, he may as well as be saying his is a ballerina government, or an artistic government, or a caring compassionate government, or a forward-looking government. These things are equally Un-true of his government as the expedient, idle, lunatic, conceited claim that his is a conservationist government, especially having repealed the Carbon Price legislation, and telling us this at the press conference to announce the repeal.

I’ve just never seen anything like it. And my mind boggles, my brain explodes… It’s like a never ending torture of our minds.

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News That’s Fit To Punt – 01/Feb/2012

Citizen Rinehart

The richest woman in Australia, Gina Rinehart has set her mind on buying into Fairfax, the company that owns the Sydney Morning Herald, and the Age, amongst other mastheads. The response coming out of the Fairfax stables has been interesting.

Here’s Michael West:

The Murdoch press is already favourably disposed to the Minerals Council view of the world while Rinehart’s politics are said to be strenuously ideological in the fashion of her late father Lang Hancock. Rinehart control of the Fairfax mastheads could have a dramatic influence on politics in this country.
Any tussle, then, for the venerable Fairfax mastheads would entail not just economic considerations, but community and political issues too. These issues would play into the hands of the institutional shareholders who would no doubt demand recompense for parting with the major mastheads and the effect this could have on the attendant Fairfax transactional businesses, which feed off the enormous online traffic.

Apart from matters of price, then, there would be much focus on the likely direction of Fairfax editorial. And some ideas from Lang Hancock in his book, Wake Up Australia, provide some hints, such as how “we can change the situation so as to limit the power of government”.

“It could be broken by obtaining control of the media and then educating the public,” he wrote.

There were several ideas on how to gain control of the press. One was for Australian retailers to refuse “to give advertisements to any paper which did not support a change in the constitution to reduce government to an absolute minimum”.

“Control of the press could also be obtained by several of the big mining groups banding together with a view to taking over one or more of the present giant newspaper chains which control the TV and radio channels, and converting them to the path of ‘free enterprise’,” he said.

That’s pretty sobering. the SMH might be transformed into a broadsheet with even sillier, shallower, more fascist tendencies than a Murdoch rag. I think it would be the end of public discourse in Sydney.

Here’s a link to what politicians think:

Political reaction to the news of mining billionaire Gina Rinehart’s increased stake in Fairfax Media has been mixed with Opposition treasury spokesman Joe Hockey saying he is “comfortable” with the move.

But the Australian Greens have described the trend towards a handful of individuals owning swathes of the media as “dangerous”.

Communications spokesman Scott Ludlam says concentrated media ownership by individuals means Australia is unhealthy for democracy.

Senator Ludlam says the national laws against concentration of ownership in the media are now far too weak after being “gutted by the Howard government”.

The Greens Senator claimed Ms Rinehart has “indicated a desire to have more influence over national affairs” and that she had “campaigned against Labor’s mining tax to protect her own commercial interests.”

Interesting how Joe Hockey is merely comfortable. You’d think he’d jump up and down with joy at the thought that a right wing nutjob is trying to seize editorial control of the SMH.

For the record, this is Gina Rinehart’s view on several subjects:

Mining tax:
“[The Minerals Resource Rent tax] damages investor confidence and renders formally attractive and value-adding projects less viable”.
“One of the issues that needs to be tackled is the cost, risk and time lost on approvals, permits and licences before revenue can be earned, [which] has very greatly increased in Australia, making it almost impossible for small companies to carry and comply with such burdens,” Mrs Rinehart said.
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“If our costs get out of kilter through excessive taxation or excessive regulation on top of our other high costs we already have, this is just making it more difficult.”
Carbon tax:
“We must drop these taxes or we risk the bureaucracy becoming the only growth industry in Australia.”
“After this unnecessary shock to investment and exploration the carbon tax (and MRRT) is causing, we should also demand from our politicians that they introduce legislation that requires a majority by referendum before they can introduce any new taxes or tax increases.”

God help us all from this woman’s political views.

Anyway, I note all this because it was interesting how the SMH kept spitting out bits and pieces about Rinehart today as the story unfolded. It ain’t over ’til the fat lady sings and at the moment she’s busy buying up shares.

Between An Angry Devil And A Poison Deep Blue Sea

It just gets worse and worse over in Greece and by extension, Europe.

All leaders of the euro zone are insisting that forcing private creditors to take a hit on Greek bonds constitutes a “unique” event, for fear of causing contagion. But spreads on Portuguese bonds are rising to alarming levels, and the outlook for Italy and Spain is still wobbly.

“An inability to tackle a problem the size of Greece inspires little confidence in the ability of the EU to tackle Italy and Spain,” says Sony Kapoor, head of Re-Define, a financial think-tank in Brussels.

Germany parried demands, from Mr Monti and others, to enlarge the firewall by merging the existing temporary European Financial Stability Facility (EFSF) and the permanent new European Stability Mechanism (ESM). This would enlarge the fund from €500 billion ($659 billion) to €750 billion. Mrs Merkel said the matter should be discussed in March, as decided in last December’s summit.

March, says Angela Merkel. The Economist suggests the investors should take more losses.

What is the best way out of this mess? Step one is to force private bondholders to take more losses. They have been treated with kid gloves so far because European governments insist the debt deal must be voluntary, thanks in part to a misplaced fear of triggering credit-default swaps. That must change. Discard the veneer of voluntarism and Greece can be tougher on its creditors. It should pass a law that retroactively introduces collective-action clauses into all domestic-debt contracts (making it easier to impose debt deals on recalcitrant bondholders). If it does this now there is still, just, enough time to organise a big, coercive, but orderly, restructuring of Greek bonds by March 20th.

So mark that date down as the date hell will break loose on the markets again. 20th March.

While I’m at it I think it’s worth linking to this little thing from Boris Johnson.

Now in the old days, before the euro, there was a simple solution that allowed the Italians to keep producing cars of the same quality and to keep unit costs down. It was devaluation, and if you look at the postwar career of the lira (and just about every European currency) against the Deutschmark, you can see how it worked. As the mark appreciated, it was more expensive for Italians to buy a German car; and as the Italian currency fell, Italian cars remained a good buy in Germany. The tragedy now is that this option is closed off for the euro-zone members – and look at the Italian car industry.

Manufacturers can no longer use the lira to compete on price, and they are being utterly stuffed. Italian car sales fell 15.3 per cent in December, while sales of German cars grew 8.8 per cent. The Italians now produce fewer cars than the British do, and their markets are being relentlessly gobbled by Audis and Beemers and other beautifully engineered machines from Germany.

It is worth pointing out again that the Germans get a great deal out of the Euro for being the Euro in that it lowers the prices of their exports significantly; which is exactly why Angela Merkel is running around trying to save the Euro because the Germans stand to lose a lot if and when the Euro breaks up and they have to reissue the Deutsche Mark, and it appreciates like the Yen and suddenly nobody on the planet can afford German products except “the 1%”. It might be cheaper to buy all of Greece than to keep haggling over its debt.

Property Bubble Babble

I know this blog has gone in weird directions at time in pursuit of interesting tidbits to do with the GFC, and I have to say one of the weirder aspects of the GFC has been the sustained property bubble in Australia. It’s so weird, people are used to this bubble but as I pointed out yesterday, there’s no real reason for Australia’s real estate to be so much more pricier than other parts of the world. yes, it’s really nice here in parts, but so are Greek Island Villas that come in cheaper than some flats in long-established suburbs in Sydney.

Anyway, I got this link from Skarp today which points out 4 reasons why there is a bubble going on, tangential to what the other fellow Professor Steve Keene says. Embedded in it is this link here, which is sort of prequel to the other link. The take away message is that it wasn’t the non-recourse lending in America that led to the subprime problem, it was the extreme lending. Housing prices don’t always go up, and in the long view of history, any tie that it does is an anomaly. There is no housing shortage as claimed by the peak bodies, and Australian banks have not lent conservatively as claimed, which feeds back into the recourse lending argument.

I do want  to point to this bit:

Rational discussion about the state of the property market is fraught. Many outspoken bubble deniers are conflicted by their interests in industry and government. Many – not all – are employed by, consult for, manage, and/or own organisations with a direct interest in maintaining the status quo of an overvalued property (land) market. These institutions are primarily commercial lenders, investment banks, real estate intelligence firms, insurance, real estate agents, Treasury, the RBA, vote-seeking politicians, and the mass media.

Skilled and intelligent specialists, trained in neoclassical economics in leading US institutions, did not see their enormous housing bubble until it burst in front of them with horrendous consequences. What makes Australia’s “experts” any more competent?

As investor Jeremy Grantham has noted: “Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.”

All this is to say it’s worth looking at the Australian housing market with a good deal of scepticism. Even if prices don’t collapse, it’s hard to make a case that it’s going to keep going up. If I were an investor, I’d be looking at another asset class.

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Dreaming Of Greek Island Villas

Different Spin

Just a weird, weird thought for today. Would you move to Greece?

I don’t know if you’ve ever looked, but today Mrs. Pleiades showed me a bunch of photos of Real Estate available in Greek Islands. Hey, I’m no millionaire or anything, but you can dream. What caught my eye was the price tags on some of these gorgeous places. Take this one here in Ithaca, home of Odysseus. Or this seaside villa for 850k Euros. How about this 270k Euro cottage in Corfu? They’re absolutely beautiful places. I know Greece is in a lot of turmoil but consider this for a moment. If you had a bit of money and you could own one of these sorts of places, and wouldn’t starve and had all the amenities of a good life available, would it really matter to you that the Greek government is insolvent?

Apparently wealthy Germans flock to the Greek Islands.  guess it’s their equivalent of the Gold Coast. You can see why. So it is hard not to imagine that the Germans get something out of Greece being a member of the European Union and by extension, a member of the Euro.

I’ve been pondering this tangle of facts all afternoon. People are busting a gut buying a 2 bedroom flat in Sydney. For the same money, you could theoretically buy an amazing piece on some Greek Island and just stare at the beauty all day and all night. Okay, I know you’d need some cashflow but the point is how good is a 2 bedroom flat in Chatswood or Pyrmont, let’s say, compared to a villa on a Greek Island? If you need evidence that the Greeks really are in trouble, this has to be it; and in turn if there’s any evidence that Australian property is way, way overpriced, then this must be it.

But it cuts in all sorts of different ways. Imagine being a poor Greek person. If all this was around you and you couldn’t buy in because foreigners came all the time to buy it out, why the hell would you stay? No wonder they like the European union where they can get to work anywhere. If they got kicked out of the Euro zone, they would still have their real estate bought up by foreigners, but they would lose that freedom to go work anywhere in the Eurozone. No wonder the polls in Greece say they don’t want to quit the Eurozone.

It would be a shame if the Euro were to implode as a result of all the debt woes and bad faith negotiations. The fall out from that is going to be awful. But maybe all those Island properties would become even more affordable – then what are you going to do? 🙂

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UK As Defiant Problem Child

Hello Dave Cameron, Eurosceptic

I have to say movies are a lot less interesting than what’s been going on in the world since the GFC first reared its head in August 2007, a full year before the credit crunch that brought about things like TARP and stimulus packages. Since then the chaos has moved on from banks to sovereign states that paid money to buy out these bad debts, with the PIIGS nations getting a hammering the bond trading markets.

This week saw some extraordinary developments whereby some of the EU nations moved for greater union as the UK chose to sat it out. It’s a tricky thing, but basically David Cameron might have been the right man at the wrong place or the wrong man at the right place. Given the choice of wanting more of an input or less into the affairs of Europe, he chose to opt for less.

For Britain the benefit of the bargain in Brussels is far from clear. It took a good half-hour after the end of Mr Sarkozy’s appearance for Mr Cameron to emerge and explain his action. The prime minister claimed he had taken a “tough decision but the right one” for British interests—particularly for its financial-services industry. In return for his agreement to change the EU treaties, Mr Cameron had wanted a number of safeguards for Britain. When he did not get them, he used his veto.

After much studied vagueness on his part about Britain’s objectives, Mr Cameron’s demand came down to a protocol that would ensure Britain would be given a veto on financial-services regulation (see PDF copy here). The British government has become convinced that the European Commission, usually a bastion of liberalism in Europe, has been issuing regulations hostile to the City of London under the influence of its French single-market commissioner, Michel Barnier. And yet strangely, given the accusation that Brussels was taking aim at the heart of the British economy, almost all of the new rules issued so far have been passed with British approval (albeit after much bitter backroom fighting). Tactically, too, it seemed odd to make a stand in defence of the financiers that politicians, both in Britain and across the rest of European, prefer to denounce.

Mr Cameron said he is “relaxed” about the separation. The EU has always been about multiple speeds; he was glad Britain had stayed out of the euro and out of the passport-free Schengen area. He said that life in the EU, particularly the single market, will continue as normal. “We wish them well as we want the euro zone to sort out its problems, to achieve stability and growth that all of Europe needs.” The drawn faces of senior officials seemed to say otherwise.

That section is quite telling. Even prior to these meetings, it wasn’t entirely clear what possible input the UK might have had given its history of not joining the monetary union. While that choice looks like a great choice in hindsight, it’s also looking like the UK never really joined Europe in the way it was supposed to, so it now stands quite isolated.

As an Australian, the irony is rich, for the UK essentially had to abandon its preferred trade with Commonwealth nations in order to have access to the European markets and joining the EC, way back in the 1970s. That was one of the major changes that essentially push Australia towards embracing its Asian trade partners because it simply had no choice. In a sense the UK had to give up the baby to join the special club, only to find it didn’t want to be a member of that club because it was more a cult, but now it has no baby.

As it turns out, giving up the portion of sovereignty that controls money is probably the least possible thing to do for the UK when you think about it. France, and Germany have lost their kings, and other royal families of Europe have long ceased to have any political or even significant economic power. This is in stark contrast to the United Kingdom that successfully (I wish I had a better word for it than successfully, but… you know what I mean) preserved its positively medieval monarchy with significant reserve powers. no Conservative government in the UK is going to hand over the controls to the treasury to a bunch of Republican Frogs and Gerries. And God save the Queen and all that.

So given these kinds of historic reasons, is it any surprise that Cameron chose to stay out of the room where important decisions will be made?

“He’s thrown some meat to the eurosceptics who like to see the British PM wielding the veto. (But) it is going to make it harder to defend British interests,” said Simon Tilford of the Centre for European Reform, a think tank in London.

“Cameron has played a bad hand poorly. He’s been stung by the mounting rebellion here.”
In Brussels, Germany failed in its campaign to persuade all 27 EU countries to write the tougher rules into the bloc’s treaty, with just Britain and Hungary refusing to go along.

“Worried that Britain is starting to drift away from Europe in a serious way. To where? In a strong alliance with Hungary,” Swedish Foreign Minister Carl Bildt said in a tweet on Friday. By lunchtime, even Hungary had changed its mind.

British Foreign Secretary William Hague played down London’s isolation and tried to put a positive spin on the treaty clash, noting that different groups of EU nations had long worked together on various issues like defence and border controls.

“Decisions about the European single market, the thing that matters most to us for jobs and businesses in the UK, still have to be made by the 27 countries together,” he told Sky News from Brussels. “We will be very vigilant about any threat to that.”

Sort of amusing, that. Not surprisingly the moment been likened to Neville Chamberlain’s moment in history waving a piece of paper saying “peace in our time”. Europe’s suddenly been over run by the threat of sovereign collapses with ‘Merkozy’ emerging as a kind of force for further unification. I have a hunch that says even if I don’t like Cameron’s side of politics, he may have made the right call for the UK. He would have come to rue the day if he had laid down the burning spears of desire and given over to ‘Merkozy’. I mean, what would Winston Churchill have done? Blood Sweat and Tears, right? So while Cameron is likely to cop a walloping for his defiance, I suspect history will prove to be kinder to him.

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What The Hell Are They Thinking In Athens?

More Drama Than Drachma

I’m trying to get my head around the logic of why (oh why) the Prime Minister of Greece George Papendreou would propose a referendum on the rescue package.

First Mr Papandreou had to confront a hostile cabinet (although it has since endorsed the idea of a referendum). Then he faced the threat of a rebellion by his Panhellenic Socialist Movement (Pasok). And on November 2nd he will miss the opening session of a three-day confidence debate in parliament: Angela Merkel, Germany’s chancellor, and Nicolas Sarkozy, France’s president, have summoned Mr Papandreou to emergency talks in Cannes. They will try to dissuade him from what one western European observer called “political suicide and financial ruin for Greece”.

Pasok lawmakers erupted in fury at the idea of a referendum, which may be held as early as December, but could not happen at all if the Greek government loses the vote of confidence. Two socialist backbenchers said they would henceforth sit as independents, reducing the party’s parliamentary majority to a bare minimum of 151 seats in the 300-member chamber. A third socialist deputy, former development minister Vasso Papandreou (no relation), said she had asked Greek’s president Carolos Papoulias to call a meeting to organise a government of national unity. It would push through fiscal and structural reforms, then take the country to elections. “Greece faces imminent bankruptcy,” Ms Papandreou warned. Separately, six veteran Pasok members urged the prime minister to resign, saying he was “taking Greece back to the 1950s”—a grim period in the country’s history, which was marked by widespread poverty and mass emigration.

Politicians from both sides of the aisle have joined the call for a snap election. Antonis Samaras, leader of New Democracy, the conservative opposition party, said that elections are “a national imperative”. A referendum “would put the country and the future of Europe at risk”. Alexis Tsipras, leader of the leftwing Syriza faction, also called for elections, saying Mr Papandreou “is finally being dragged to the polls under asphyxiating popular pressure, but it will be an election, not a referendum.”

It’s a real head-scratcher as to what he thinks such a referendum would achieve, but off he goes, mouthing off this referendum. Naturally stocks took a nose dive everywhere, which is neither here nor there; although I really do want to point out that even if it doesn’t look like altruism, the European Union is going a considerable way towards trying to bail out a reckless Greek government that went and squandered what it borrowed. It might not look like it but Sarkozy and Merkel went to great lengths to hammer out an agreement to ave Greece from itself. Now Papendeou has taken that fragile agreement and tossed it to the dogs, so to speak. And by dogs I mean those people baying for a change in Greece just so it doesn’t have to go through with the austerity measures. It’s a bit like he’s gone and metaphorically spat in people’s faces, now that he’s secured agreements from them to save his metaphorical house on fire.

And I’m asking myself, what rational reason could he give for throwing all of that out the window? What the hell is he thinking? Is he seriously thinking it’s a realistic choice to let the people decide and if the people decide to default, then history would somehow absolve him? Because if that’s the idea, he’s not only out of his depth, he’s out of his tree.

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China In The Spotlight

More Than Reading Tea Leaves

Okay, non-movie related entry today. Sorry guys, but this stuff keeps being so interesting, so bear with me.

Time Magazine had this article today, pondering the likelihood of China being able to help out Europe as the global financial crisis part 2 unfolds.

China certainly has the cash on hand ($3 trillion in foreign exchange reserves) to make a difference. It also seemingly has a strong interest in keeping global markets afloat. But that wasn’t the take I got at a lunch this week in Hong Kong with a regional banker, an economist, and a Hong Kong politician.

For one thing, frugal Chinese citizens aren’t keen on spending their country’s savings to bail out profligate Europeans, they said. Beijing is already under enough pressure to spend more of its export cash on its own people. The government and China’s sovereign wealth funds also aren’t sold on the idea. That’s partly because China doesn’t feel as vulnerable to Europe’s debt crisis as we might think.

That sounds oddly familiar. For one thing, the Germans don’t want to spend the money to bail out the profligate Greeks but in their instance it can be argued that they should seeing that the Euro actually keeps Germany sheltered from a much more fluctuating and volatile currency. Some have done the sums and think that a re-issued Deutschmark would appreciate 30% above where the Germans are trading, putting a massive dent in their exports.  So an argument can be made that the lazy Greeks are in part keeping the Germans in business, even if they owe too much money.

Furthermore, there’s this interesting article here.

The concerns about Europe’s banks have been simmering in the background for some time. Economists have warned that at the core of the euro zone crisis is an unstable support system: Poorly capitalized banks were holding up poorly financed governments, which in turn were expected to back the poorly capitalized banks. As the sovereign debt crisis has escalated, sucking in giant Italy, those fears have only inched closer to becoming reality. Many influential voices have proclaimed that Europe’s banks just don’t’ have the level of capital necessary to withstand a one-two punch of slowing growth and widening debt crisis. They could end up taking a massive smack from losses on their holdings of European sovereign debt.

Right. And when the European banks start really failing, what is that going to do to Europe which is China’s great export market? Hot on the heels of that article is this article here in Yahoo7.

“Everyone is getting more concerned about risks accumulating domestically (in China)” said Ju Wang, a fixed income strategist at Barclays Capital in Singapore.

The implications for Australia are huge. Although BHP Billiton and Rio Tinto have both issued bullish statements about demand from China for our natural resources booming for at least another decade, experts say that producers such as our miners are often the last to know when demand from customers falls off a cliff.

If China’s property market continues to fall, building will stop abruptly and demand for Australian iron ore will plummet because most of our goods go towards building China’s infrastructure.

“This is certainly a big issue and one we cannot afford to be complacent about” said Shane Oliver, chief economist at AMP Capital.

“The biggest concern are the loans from outside the banking sector that fuelled the property boom. But there are risks across the economy and it could have a big impact on our exports. China needs to look at loosening monetary policy sooner rather than later to help stop so many investors borrowing from unregulated lenders.”

In other words, China actually needs Europe to sort out this Greek sovereign debt mess because if it doesn’t, it has as much to lose in the ensuing global recession. One can’t say with any confidence that wise heads will prevail in the Euro debate or the US policy debate, let alone who-know-what that passes for policy setting in Beijing. So strap yourselves in for the double-dip recession and hope like hell it doesn’t devolve in to wars and destroy the world.

The Dark Crystal Ball Says…

This one is from Pleiades, and everybody who is vaguely interested in where things are likely to go should have a read of it.

Unless Germany moves quickly to reverse its current account surplus – which is very unlikely – the European crisis will force a sharp balance-of-trade adjustment onto Germany, which will cause its economy to slow sharply and even to contract. By 2015-16 German economic performance will be much worse than that of France and the UK.
If Germany does not take radical steps to push its current account surplus into deficit, the brunt of the European adjustment will fall on the deficit countries with a sharp decrease in domestic demand. This is what the world means when it insists that these countries “tighten their belts”.

If the deficit countries of Europe do not intervene in trade, they will bear the full employment impact of that drop in demand – i.e. unemployment will continue to rise. If they do intervene, they will force the brunt of the adjustment onto Germany and Germany will suffer the employment consequences.

For one or two years the deficit countries will try to bear the full brunt of the adjustment while Germany scolds and cajoles from the side. Eventually they will be unable politically to accept the necessary high unemployment and they will intervene in trade – almost certainly by abandoning the euro and devaluing. In that case they automatically push the brunt of the adjustment onto the surplus countries, i.e. Germany, and German unemployment will rise. I don’t know how soon this will happen, but remember that in global demand contractions it is the surplus countries who always suffer the most. I don’t see why this time will be any different.

About a week after I set down these “predictions”, and two days after I finished this point, I saw in the Financial Times that German growth has already hit a wall. Expect to see a lot more articles like this over the next few years.

The rest of the article makes for fascinating reading.

I was thinking the other day that there is far more debt than there is money in the economies all combined. So at some point somebody is going to be stuck with the un-payable debt, and that will lead to all kinds of conflict. There’s really nowhere to run in the markets or even outside of it. The money you hold might evaporate in policy-led inflation; the assets you hold might devalue severely. The governments you vote in might have to tax you harder than you thought. And none of this would add up to what would be enough.

Ultimately we’re going to end up like Argentina in the late 1990s. You wouldn’t be able to insure anything because insurance companies will die back. All those Woody Allen jokes about insurance salesmen will sound quaint on that day. It’s all in the cards. We live in interesting times, that’s for sure.

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