Tag Archives: Global Financial Crisis

View From The Couch – 06/Sep/2014

Lessons For A Saturated Economy

I found this commentary about the impact of the property bubble in the Sydney Morning Tabloid this week. it’s written from the perspective of the younger people who cannot get into the market. A lot of people seem to think it’ young people whining, but there are lessons in history from all this property bubble business (that all these banks are denying exists here). The experience in Japan in the late 1980s through to earl 1990s was pretty instructive. The Bubble and the aftermath of the Pop created economic havoc on the Japanese Gen-X who were coming into the workforce at the time. This resulted in high youth unemployment as well as low rates of marriage and birthrates – and effectively brought forward the peak population date of Japan. The resulting impact of that event was that all the projections the government had made about pension plans and how the labour force was going to support the retiring Baby Boomers went out the window. Much of the low growth and sluggish economy of Japan in the aftermath of The Bubble can be put down to a generation of working people essentially placed out of options and never finding the traction that earlier generations had.

I have friends who are basically economic refugees from Japan. They got out because there were no immediate options that were rewarding or befit their education. Many ended up without kids, others delayed having kids. The 90s and early 2000s saw a remarkable exodus of young, educated Japanese people, who are now not over there contributing to economic growth.

The process of writing off and paying down debts in Japan has been grueling, and worse still government intervention into what they called PKOs – price keeping operations for assets – has distorted the markets leaving what can only be called zombie companies.

The PKO money came out of the government to shore up the asset values of shares and property which is to say, they socialised the debts. The Japanese government under Ryutaro Hashimoto argued that this was necessary to stop a disorderly exit, which is to say, it allowed some investors to keep their bubble profits to pay off the bubble debts instead of getting wiped out. You wonder how those parties got to enjoy such favourable treatment, but then if you see how entwined Japanese heavy industry, banking and the old MITI was in its day, it was one of those things that people acknowledged tacitly without putting up a big fight. After all, what happens to Japan should Mistubishi or Sumitomo should fail? The option cost of bailing out those companies essentially ate the future of Japan.  And that’s just Japan. The GFC has exposed the same problem in advanced economies across Europe and North America as well as Australia and New Zealand.

The point of all this is to say, private sector debt has a way of becoming public sector debt, and “too big to fail” essentially eats the future. A few things are very clear from the property bubble in Australia is that the private sector debt is bigger than it has ever been, and should it get called in, it would wipe out our four major banks (BASEL II and III notwithstanding). Because those banks are still in the TBTF category, the government will socialise those losses by bailing them out, and then we’ll see our future spending go up in smoke to preserve the inflated prices everybody paid for their houses.

The finer point of all this is, if you don’t think there’s a housing bubble, then that’s one problem. If you do thing that there is a housing bubble but think it’s just a matter of the market correcting itself, then you’ll be in for a surprise.

Ross Garnaut Says There Is a Bubble – But So What? Cut Rates

This one‘s related but really interesting. Ross Garnaut thinks there is indeed a bubble going on in the housing market, and that the Reserve Bank of Australia is keeping a close eye on it. Basically, Garnaut is saying the rest of the economy outside of housing could do with the lowering of rates. The rates being as they are keeps the Australian Dollar too high, and makes Australia’s economy less  competitive. The only thing keeping the rates where they are, is this deep concern that there is a housing bubble going on, so the rates need to sit at as high a place a possible given the parameters. Instead Garnaut is saying if the RBA cuts rates, then the rest of economy would be able to compete and grow, and the housing bubble should be dealt with specific measures. He also says governments should stop favouring housing for the purposes of capital adequacy.

“It is ludicrous to be worried about lending risks in the housing sector on the one hand while at the same time requiring banks to put more capital aside when they are lending to BHP,” he said.

“And there are several reasons to do something about negative gearing. There are budget reasons, and reasons to do with keeping within reach the old Australian dream of widespread home ownership.

“It would also contribute to putting a lid on the housing bubble so we could reduce interest rates and the exchange rate as required by the rest of the Australian economy.

“But the problems can’t be solved by the Reserve Bank alone. It requires co-ordination of prudential regulation, monetary policy and fiscal policy.”

It’s an interesting idea that evokes the old definition of inflation. Inflation, is essentially too much money chasing too few assets. This explains exactly why housing bubbles happen. Given that housing is given a privileged position in measuring capital adequacy, banks are better off lending out mortgages than lending out business loans for capital expenditure. The money headed to mortgages become much easier money by dint of a definitions for capital adqaucy. This devalues businesses against property ownership, even though property ownership in of itself – especially home ownership – can’t contribute to the economy in the way that a productive business can. Things like negative gearing simply make it worse. So all the money goes into the property market but of course the overall supply side of the property market itself can only grow at a certain rate. As more money gushes into the property market, it can do nothing but create a condition where the prices of homes inflates. Too much money chasing too few assets.

Is China Finally Wobbling (Just A Little bit?)

It’s been like five and a half years since the market bottom following the Lehmann Shock which triggered the GFC. Since then the world has looked on… make that Australia… Australia has looked on to China to keep its economy afloat. China in turn obliged by doing massive stimulus spending, which resulted in it sustaining its 7%+ annual GDP growth rate. There are some who think China has been inflating its GDP figures for years to get more investment, and think there is a 30%discrepancy between what China’s real size as an economy is and what the stated size is. That would explain the vast lack of growth in consumer spending that China has so needed to move from an export-driven economy to a consumer driven economy.

China subsequently pushed all levels of government to take on debt and give stimulus to the market and that has resulted in a massive ballooning of debt in China to fund this 7+% growth. Since the GFC, year after year, economists, investors, traders ad analysts of all persuasions have pointed at China and said it is unsustainable. Somehow China never imploded or popped or collapsed. All those ghost cities built in the middle of nowhere with speculation money? No problem. All that re-hypothecated collateral minerals that went missing? No problem. All those companies that started going sour and failed to pay their bonds? Government intervention has saved the day. If you had bet on China to unravel in the last few years, you would have lost money on all those bets.  It would’ve been hard losses to take too, because rationally speaking, China had every reason to come unstuck. The proof was in the pudding, and the pudding’s been magic so far.

Now, there are signs the magic pudding isn’t going to hold up. I don’t know how China is going to kick the can down the road next time, but they may yet have a way of doing so. After all, one of the interesting aspects of the great recession has been the way things just keep going on in spite of the numbers. If China can’t kick the can down the road, this is going to be it for the 23 long years of economic growth in Australia. The cracks are already showing up in commodity prices. Iron ore – the biggest corollary to the health of Chinese industry has sunk to a five year low. This is going to hit our export figures. Falling commodity prices should bring the value of Australian Dollar down. Things are about to get very bumpy.

I can report to you that the money-go-around in Sydney has stopped to a snail’s pace. There are a lot of companies sitting on unpaid bills, the companies themselves waiting to receive payment to pay those bills. I have to say it hasn’t been this slow since August 2007, which was exactly the peak of the market before the GFC. I’d start selling shares this month if I had any to sell.

 

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News That’s Fit To Punt – 03/Sep/2014

Why? Because Fuck You

Everything this Federal Government does is tainted by a sort of grubby conflict of interest. Of course that’s not confined to the Federal Government, because the greater conflict of interest might actually be Clive Palmer who owns a dirty big mining company, gets to make deals where a tax like the mining tax can get repealed. It’s hard to imagine a more egregious and gratuitous case of helping yourself because you can.

The deal has meant that the government will halt the rise of superannuation. Naturally, with the sensibility of a cheesy movie villain, Tony Abbott tried to sell this as more cash in hand for employees which, frankly made me choke on my lunch. I’m sorry to tell you Mr. Prime Minister, but that’s money that’ll stay in the pockets of companies. Paul Keating has lambasted the government but honestly, if he wanted to still have a meaningful voice, he should’ve stayed on in parliament after 1996.

The repeal of the Mining Tax was of course one of the platforms of the Coalition so we ought not be surprised, but really, it is pretty disgusting how the Coalition are totally happy to sell out Australian citizens in favour of a gaggle of mining billionaires – Clive Palmer among them – and try to sell it as being good for the worker. Can it get any worse?

Yes it can. Here’s how.

An Inconvenient Ruse

The emissions for energy generation jumped the most in eight years, since the end of the carbon tax.

So much for Al Gore coming to lend a hand in fighting the good fight against global warming. Thanks to the repeal, polluters have gone back to a kind of burn-baby-burn mentality and now it’s out of control. Of course the plan by this government is also to smash the renewables industry, and directly pay these polluters to stop polluting.

It’s like government by stupidity. You’d never have guessed thing would get this bad. No sane mind would have guess it would get this bad. But this unrelenting awfulness – “Operation Ongoing Enormous Clusterfuck” according to FDOM – was their platform! Grin and bear it.

Pink Batts Coming Home To Roost

Pleiades swung this one at me today. The best bit of news might be how the Royal Commission into the Pink Batts has yielded interesting results. In as much as it was a blatant witch hunt, it looks like it delivered a result that was assumed by the proponents of the Commission. Here’s something from Crikey which is behind a pay wall:

 

First, Hanger found the training regime and regulations at the time of the first of four fatalities in October 2009 to have been seriously inadequate:
“With the exception of South Australia, which had a licensing regime for insulation installers, there was no insulation-industry specific regulation beyond the generally applicable occupational health and safety regulation.”
But here’s the thing: then-minister for the environment Peter Garrett and his staff had spent most of 2009 tightening regulations and procedures. Hanger listed more than 40 interventions to address safety deficiencies — all completed before October. So if the safety framework was still deficient by then, it must have been woefully, if not criminally, inadequate prior to 2008. Having presided over industry growth to the level of about 200,000 new and existing houses insulated annually, the previous Coalition government cannot escape culpability.

Secondly, Hanger opened wide the door to those wanting compensation for the program’s sudden termination:
“I find as follows:
“… the effect of the losses was to devastate many long-standing businesses … and to cause as well personal financial collapse and severe despair and emotional harm;
“that harm and such circumstances justifies pre-existing businesses being compensated.”
If compensation is won, it will be the Abbott government scrambling to find the funds.
This has a certain rough justice about it, of course. There is an argument that the scheme was not intrinsically dangerous and was not failing, rather that it suffered from extreme misreporting from the outset, by both Coalition MPs and a feral media.

Thirdly, the Commissioner was scathing about Abbott’s staff in the course of the inquiry:
“The Commonwealth did not suggest one witness that ought to be called. It did not generally volunteer documents that were not the subject of a summons to produce. It did not elicit any evidence of its own volition. All of this is despite the fact that it was the repository of the critical documents and the corporate knowledge of what had transpired.”

Not even Peter Garrett copped such a shellacking:
“Furthermore, the Commonwealth hampered the work of those assisting me by the way in which documents were produced … Other than in response to a specific request from the Commission, there seemed no logic in the order in which documents were produced. The Commission asked that documents be produced chronologically, however the Commonwealth did not oblige.”

Finally, the Commissioner made it clear that if the federal government initiated the program, then safety is definitely its problem. Never mind the long history of state responsibility.
“There was much debate about whether workplace health and safety issues were a matter that was of any concern to the Australian Government, or whether it was more properly the concern of the States and Territories. It was said, by a number of federal public servants, that the Australian Government had no regulatory power in the field of workplace health and safety, and therefore that it was not a risk that the Australian Government could control. In my view, this attitude was deplorable.”

That means occupational health and safety is now firmly a problem for the Federal Government. Every time somebody dies in an accident, he article suggests a ministerial head is going to roll. Worse still, the responsibility for the failure didn’t just get sheeted home to the Rudd Government, it also got sheeted home to the Howard Government, and last I checked Tony Abbott was the health minister in the government. This thing is going to boomerang right back at him.

The Housing Bubble That Isn’t But Of Which We Must Be Wary

For months – no make that years! -we’ve been hearing that Australia does not have a housing bubble problem. All the economists who have come and pointed out the great anomalies of housing prices in Australia have been laughed out of the public discourse while the anomalies only get bigger. As late as last month Glenn Stevens of the RBA was talking down any possibility that what we had on our hands was an actual bubble! No, he simply reiterated that sometimes the property market goes down. This month he’s taking a different tack and saying there might be nasty shocks. Included in that link is a bit covering China where he cites a downturn in China might manifest itself as a nasty shock. If that wasn’t enough, David Gonski of the ANZ Bank told the Australian British Chamber of Commerce that booming prices cannot possibly continue forever (now there‘s a brave call).

And lo an behold there’s news that China’s real estate market is going screwy. Some might even say it is crashing like it was a Global Financial Crisis. Speaking of crashing, the commodities market in China is crashing. I wonder if those things combined would form this so-called ‘Nasty Shock’ Glenn Stevens is talking about? Or will Sydney’s housing prices simply just shrug it off and keep climbing?

Stay tuned for more fun!

 

 

 

 

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News That’s Fit To Punt – 13/Jul/2014

Garbage In, Garbage Out Process

Leading economists are rejecting the basis on which the Abbott Government is proceeding with cuts. They don’t think there is a budget crisis. At all.

We knew this going into the election last year, we’ve known it since; people ave been saying it across different media for most of the time since; and the only people who think there is a crisis is the Coalition Government. I know we’ve been through this topic on several occasions, but basically our Federal government debt is miniscule compared to the debt carried by other OECD nations; most of the government debt we do carry is in the local councils; and the big debt problem is in the private sector, where low interest rates have ruled supreme since the Global Financial Crisis has allowed for bubbling asset speculation on borrowed money.

In short, the government could possibly wipe out the debt in a small number of years if it were bloody-minded enough to not to care what happened to he economy. But nobody asked for this, and it would rewrite the social consensus about what government does. While that is an enormous problem all of its own, I want to focus on something for a moment. This government came up with the worst-received budget of all time on the assumption that there is a budget crisis when there manifestly is no crisis at all whatsoever. it stands to reason that none of the solutions they’ve reached for have gained any traction in the electorate.

Never has a bigger load of garbage been shoved into the process of government in this country, and never has it given rise to so many garbage policies you wouldn’t wish upon anybody (okay, except maybe Iran).

Cue Jerry Harrison

The myth that grew up around Senator Ricky Muir arriving in Canberra was that he was a ‘Bogan’ – meaning exactly what, it’s hard to say because Bogan-ism isn’t a political credo, it’s a class-conscious insult – but here’s an article that reveals he might not fit the prejudices of the media. The way the media have portrayed him, he’s been anything from the second coming of Pauline Hanson to some rural Victorian village yokel idiot who got lucky in the exchanging of preferences (as if such things happen regularly).

The so-called ”rev-head senator” outlined personal passions that include organic food, which he grows and eats from his garden in rural Victoria, preventive healthcare, which he is interested in championing at a political level, and renewable energy, following his surprise intervention last week to protect the Australian Renewable Energy Agency from the government’s budget knife.

——

Senator Muir revealed a broad belief in the environment, renewable energy and organic food. ”Just because someone is a motoring enthusiast doesn’t mean they are an environmental vandal,” he said. ”I don’t think many people would argue that renewable energy is the way of the future.”

Asked whether he would use his balance of power influence to push for preventive health programs, he said: ”I will certainly look at it with a very open mind, that’s for sure.”

For the Coalition, that’s a Trojan Horse. The guy called himself a “motoring enthusiast” sounding like he’s pro-roads and pro-construction and he’s turned out to have a far more nuanced and sophisticated take on the environment and civilisation than anybody on the side of the Coalition. You could do a lot worse than that, and in looking at the sorry lot in the Coalition ranks, Australia has done a lot worse than Ricky Muir for a very long time, but Australia might have just got lucky right there with this Senator.

She said let’s ride, rev it up, rev it up little boy and ride!

Not A Bubble (Nudge Nudge Wink Wink)

As we’ve learnt over our lifetime, nobody ever sees the big financial disaster coming. It’s always “This time it’s different”. So in that spirit, I just want to say it’s very different this time with housing in Australia because there’s a ton of money being laundered out of China looking for landing spots and Australian Housing has turned out to be one of those asset classes.

Thus you have to take it with a grain of salt when economists say “yes it’s overpriced but no, it’s not a bubble”. If you believed that then maybe I can interest you in this nice little coat hanger-shaped bridge in Sydney Harbour that you might want to buy. The conventional wisdom now is that it’s never a bubble until it pops.

As with these things I’ve had a little while to reflect on it and it seems if there’s one thing that limits future growth in an economy it is rent-seeking and there are a lot of rent-seekers. This is understandable because housing construction forms such a large part of the economy in Australia, somebody has to be the lobby that twists the economy in some way. In that sense negative gearing appears to be just one of the economically irrational policies we have going. Naturally if you look through old articles in the SMH for negative gearing, it is is littered with articles defending the policy – which in turn reminds us of this blanket denial that there is no bubble going on. Sure. No bubble, and negative gearing is working a treat.

So as with most things to do with what pundits say, you can be assured of two things. They’re wrong, and we’ll be the ones to pay for it.

The World’s Worst Kept Secret Is ‘Out’

Ian Thorpe says he’s gay. I don’t know what to say except we knew about this from way back in the heady days of the 2000 Sydney Olympics and all those gay people saying they gave him a pearl necklace. The denials over the years were comical and the topic of much derision. In this day and age, it shouldn’t be such big ‘news’ but I guess wowserism is always going to make this news.

People, come on, he didn’t win because he was or wasn’t straight or gay.

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Where QE Has Taken Us

The Central Bank Conundrum

In the past week, Mario Draghi put through the policy of negative interest rates. He said the idea was to push savings out and into investment. This has had scribes scribbling around the world as to exactly what it means, but parsing through the writing it appears the most dreaded thing for central banks is asset deflation. It appears that we’ve hit a point in history where we just can’t let asset prices fall because too many things are tied into the prices as they stand, even if they are bubble prices. In other words, the whole Zero Interest – and now Negative Interest policy has been a desperate attempt to keep everything in their leveraged positions.

To this end, central banks around the world have been running what amounts to a price-keeping-operation, partly through printing money, partly through bluff, but also by buying equities. It turns out central banks have bought 29trillion in equities around the globe. ‘Abenomics’ in Japan has been running a gambit where pension funds have been buying equities at the behest of the government. 29 trillion is a lot of money when you consider the size of the US economy is 17trillion. No wonder investors around the world have looked at prices of shares and said a bust is due. Yet amazingly share prices of blue chips have kept soaring. Well,they would if Central Banks are buying them with printed money.

Now I’m not one of those people that bangs on about the failing of the fiat currency but any way you look at that situation and you have to ask, should equities be a one-way bet? But the Central Banks do this because they need share prices to stay high.

Zero Interest rates have been in place for many countries and the effect of that has been to amplify the carry trade where the US Dollar has surged out to ’emerging economies’ in search of yield as well as re-inflate the property bubble in places like California and London. Once again, asset prices are getting supported over just about any other consideration. So much so that a hypothetical interest rate rise of 0.5%would jeopardise US$13trillion worth of derivative products. Again, we’re not talking chump change here.

The problems of falling asset prices would be the banks being unable to cover all the positions. Take Deutsche Bank, which has  200trillion dollars worth of exposure to derivatives as an example. If asset prices deflate even a little, there will be massive movements in those derivatives and would easily wipe out Deutsche Bank. And if Deutsche Bank should fail, the fallout form that would be a whole bunch of banks going down with it.

And so we’re stuck with Central Banks busily trying to re-inflate asset prices whether they be shares or property or bonds. They’re printing money to do it, which means inflation is going on pretty hard out there somewhere. The proper analytical explanation of inflation is going to be too much money chasing around too few things. If you print enough money there are too few things by definition. If the printed money is then used to buy the share market, it seems the inflationary effect will be amplified. Similarly if money is  printed to buy the bad debt derivatives from the subprime loans crisis, there will be too much money chasing around too few proper investment vehicles. What happens i the things that are affected the most are not houses and fancy commodities but things like grain and foodstuff? Doesn’t that sort of destroy the purchasing power of people living in the third world? Won’t this bring massive social stability around the globe? And still the Central Bankers are trying to re-inflate the asset bubbles.

It’s not the speculation that is the problem; it’s the process of simultaneously destroying value while preserving prices.

When the GFC came about, there was much discussion about moral hazard and the US TARP bill which was an emergency loan to banks to shore up their bottom lines. We threw precaution to the wind and supported TARP because without it, our banking and our  superannuation accounts would have been shot. Since then banks have received the mos support from Central Banks in order to set their books straight. The bankers even drew up  Basel II and Basel III agreements so that banks could be held to a standard to lessen systemic risk – or so the argument went. And yet the net effect of all this has bee the destruction of the middle class in America (with the possibility looming for Australia yet), with the super-rich getting ever richer. The guy on Main Street got taught a lesson moral hazard at his own expense, after having his life savings taken hostage. The guy on Wall Street simply got a green light to continue doing the stupid things that got all of us into such a sticky strait.

So 6years-going-on-7, I think it’s a good time as any to ask just how well all of this is working out. The debt of the world combined sits at 720trillion dollars. The world economy combined is somewhere around 70trillion. We’re not easily going to pay off that mountain any time soon. That being the case you wonder how long the whole charade is going to go on. We might have kicked the can down the road nicely back in 2008, but we’re running out of road.

Discounting Inflation

One of the more pernicious things that has happened since sometime in the 1970s is that governments have changed the way they measure inflation. The net result of doing so has been to under-measure the real inflation out in the market place and claim inflation has been tamed. Again, this was particularly true in Clintonian America of the 1990s, where they invented some strange practices, which have since been adopted by the rest of the world as a ‘standard’. The basket of goods used to measure CPI has changed so much since the 1970s that it really bears no relationship to the figures that have come before. It’s been made to look more palatable by adding in luxury goods as well as items imported from overseas instead of items produced in the first world, which of course means we’re importing the deflationary pressure from the third world.

Obviously it works out much better for Central Banks and governments if they can turn around and point at lower inflation figures. The problem is that we are printing money in an awful hurry in many parts of the world, and at the same time China is running out of cheap labour which meas there won’t be a whole lot more deflationary force to be imported from China, the world’s second largest economy. In fact the Australian Financial Review had a headline in the last week saying just that; that the RBA has erred on the side of too low an official interest rate.

This is of course kind of ironic because on the one hand central banks the world over are fighting to have more inflation and no deflation on asset prices. If they simply went back to measuring the CPI the old way, they can probably see just how much inflation there exist sin the current system. Also, by under-measuring inflation, they’re setting themselves up for lower interest rates and thus looser monetary policy which of course does lead to more inflation. The longer the low interest rate regime runs, in a sense we’re making real a greater inflation without having the means to measure it. We’re already way too comfortable with the low interest rates. Even without the discussion on moral hazards, you’d think the central banks have got to figure they have one on their hands.

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Everybody Hates This Budget

Everybody Except Ballerinas

Who decided that out of all the arts practitioners that ballerinas in particular were the most hard done by and could not be cut any more? Who’s daughter or niece is studying to be a ballerina? Didn’t they think we’d notice that everybody in the sciences, arts and manufacturing gets funding cuts but the ballerinas are going to get a special scholarship fund for their boarding needs? Has there been a bigger joke and probable cause for investigating a conflict of interest than this item in this year’s budget?

But no, there won’t be a federal equivalent of an ICAC, so we may never know. I sure hope the findings in the NSW ICAC about this North Sydney Forum brings down Joe Hockey. Screw him and the tutu and shoes he came dancing into town with.

How Do The Nats Cope?
It struck me that the budget would hurt the rural base of the national Party as much, if not more than people in urban areas. Consider youth unemployment is higher in rural areas, so these cuts to the dole and changes in arrangements would affect more rural families than city ones. Making tertiary education more expensive adds a burden on to families that have to send their university student children to cities to board and study. If at the same time the Federal government is pulling 80billion from healthcare and education from the states, then clearly they’re more likely to feel the pinch when the State governments cut health and education in far flung rural areas before they cut in urban areas.

Which ever way you dice this, this budget is not good for the bush at all, and even if they built all these roads, it’s the sort of spending that is one-and-done with nothing to follow up. There’s really nothing in it that helps the bush at all, and so you wonder what exactly keeps the Nationals in the fold with the Liberals except for an extreme kind of social conservatism. Even then you wonder how much the bush can take of this before they say, “bugger the principles, we’re not going along with this crap”; It may already be happening because the amount of support given to a rogue national party member like Bob Katter teaming up with mining magnate Clive Palmer suggests the rural vote is already looking away from the Coalition in search of a better choice

I spoke to Pleiades today who tells me people on the backbench on the government side are hopping mad at Tony Abbott. Tony Abbott is putting it on the MPs to go and sell this to their electorates, but the MPs weren’t consulted about any of these radical changes. If it’s not a fiasco, it sure is a looming disaster.

OMG, A Medical Research Fund?

It’s pretty clear the current Libs have attitudes that date back to when Galileo started moving the earth and Darwin conjured humanity from monkeys. The thing that has Pleaides incensed is that this mob have come to power and shut down the environmental agencies, cutback the CSIRO, and research areas an starved science of funding in the name of budget surplus. They say it’s about the budget surplus, but actually they just don’t like science for embarrassing the church. Pretty soon they’ll be ramming (un)’Intelligent Design’ into the classroom and wanting to support the church through public funds – in fact they’re already paying for chaplains to be in schools.

These people don’t really believe in science. Think about that for a moment. They don’t even have a minister for science. Their vision for the future revolves around building roads and presumably keeping driving fossil fuel vehicles as if the world does not change. Not only are they in denial about Climate Change, they’re in denial that anything changes at all. so how much credibility is there when the very same people who have taken an axe to science turn around and say they are going to have a medical research fund?

It immediately begs the question qui bono  – who benefits? It’s no conspiracy. It has got to be the pharmaceutical companies who have been lobbying the government to keep their entitlements under the current medical entitlements even if the Australian people lose theirs. Oh that, and maybe Joe Hockey doesn’t want to die of an obscure cancer.

It will be too late to reach for your torches and pitchforks when they start giving out textbooks with humans and dinosaurs cavorting together. You heard it from me right here.

Captive To Idiocy

I know name-calling doesn’t help but it’s worth calling things by their proper name: The Liberal Party in Australia has transformed itself into the Conservative party and are decidedly Tory in their bearings. Just as with their overseas conservative counterparts, there’s nothing terribly liberal about this Liberal Party at all. It’s no coincidence that Tony Abbott wanted to bring back Knights and Dames. However when it comes to economic policy the only textbook they had to go on was the austerity practiced by the UK Conservatives and the sort of belt tightening imposed on Greece.

Of course, austrity has not worked at all, and Greece saw its economy shrink to such an extent that it ended up owning more money as against their GDP. The experience in the UK has been such that they couldn’t run austerity program enough to sustain infrastructure so they only half implemented it and mostly talked about doing it. The very notion that austerity would lead the economy back to health is built on the simple assumption that if government debt is reduced to zero and goes to surplus, the economy would once again be free to make capital investments.

It’s a lie. It’s stupid. And quite frankly it’s so wrong and stupid, it’s evil and a danger to society. And yet that’s our federal government

The problem with our economy and what has hindered our recovery is that people have not been able to deleverage their private debt from their peak in 2007. That’s it. Even if the Australian government went back to zero debt, as long as Australian households are in debt up to their eyeballs and Australian industry is in debt up to their eyeballs, there won’t be any more big capital expenditures in the wake of the mining boom subsiding. That’s really it in a nutshell.

But the desire of industry is always to privatise profits and socialise losses so to this end they lobby  governments for special treatment. In the current government we have a bunch of idiots who want to do exactly as the lobbyists ask, believing this is the remedy to a problem that does not actually exist, when in fact it utterly fails to address the problems that do exist. And if that’s not captive to idiocy it’s hard to imagine a better example.

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Moral Hazard Spectacular

Stop(ped) Making Sense

Pleiades wanted me to write a bit about this today. He’s sent me a couple of interesting links behind the AFR paywall. I can’t link to them a a result but I can offer my opinion on a few things.

You have to hand it to Central Banks. They’ll jawbone anything and everything to get the economy to roughly go in a direction. Usually, what the Central Banks want is for asset prices to be stable and go up, while an inflation of about 2-3% eats away at cash so people have to do something with their money apart from shove it under the mattress. You can put them in equities, bonds, commodities, property, but the 2-3% is there to eat away at your pile of cash if you keep it stationary.

Of course, that’s why interest rates move the way they do, which is to say whenever the equity markets sag, the Central Banks cut interest rates and every time they hit new highs, they take some points off. We’ve been watching this game for something like 30years since the RBA went independent of the Federal government, and since the days when Paul Volcker as the head of the US Fed set about taming inflation.

…but what if all this was a crock?

Share markets in the USA are at an all time high, but interest rates are close to zero, and Quantitative Easing is, while being tapered back, still pumping liquidity into the market in exchange of bad debts. You’d have to look at all this and say that the narrative we’ve been led to believe is broken. It’s also been 7years since the GFC broke, 6 since liquidity got pumped into he market, and QE is still continuing. The American markets are talking about a ‘Recovery’, but the mere fact that interest rates are at zero and QE is still going on should tell you we’re nowhere near any kind of recovery.

If there were a ‘Recovery’, how could there be stories like this?:

Driven by economic necessity — Rohr has been chronically unemployed and her husband lost his job last year — she moved her family back home with her 77-year-old mother.

At a time when the still sluggish economy has sent a flood of jobless young adults back home, older people are quietly moving in with their parents at twice the rate of their younger counterparts.

For seven years through 2012, the number of Californians aged 50 to 64 who live in their parents’ homes swelled 67.6% to about 194,000, according to the UCLA Center for Health Policy Research and the Insight Center for Community Economic Development.

The jump is almost exclusively the result of financial hardship caused by the recession rather than for other reasons, such as the need to care for aging parents, said Steven P. Wallace, a UCLA professor of public health who crunched the data.

“The numbers are pretty amazing,” Wallace said. “It’s an age group that you normally think of as pretty financially stable. They’re mid-career. They may be thinking ahead toward retirement. They’ve got a nest egg going. And then all of a sudden you see this huge push back into their parents’ homes.”

I’m sort of lost for words when I read that because that’s a surefire sign that the economy has not made any kind of credible recovery – but for some miraculous reason US equity prices have punched through the previous highs from prior to the GFC meltdown. What QE has accomplished is to reinflate all the asset bubbles, up to and including the housing bubble in America. If you think this is somehow not true then hey presto, subprime mortgages are back. Maybe these people in California living in their parents’ houses can score one of those loans that only need 3% upfront.

The point is, Ben Bernanke said the whole QE thing and TARP thing was to shore up banks so they would keep lending and that liquidity would not dry up and businesses would stay open. What’s happened instead is that the money got sent out of America on financial markets to places with high risk and high yields – affectionately known as emerging markets – and has subsequently inflated commodity prices and real estate prices around the globe. More to the point it didn’t exactly save jobs.

We’re Really Going To Fight For The Grey Zone On The Eastern Front?

This is nuts. The US is sending 600 troops for an exercise in eastern Europe. Airborne troops are allegedly going to Poland, Lithuania, Latvia and Estonia. All of it in response to the crisis in Crimea. There are a few things I am not convinced about America’s willingness to follow through and fight a war in Ukraine.

First of all is how willing the NATO allies are, in supporting America. Germany in particular makes me doubt NATO’s resolve. Are the Dutch and Spaniards and Belgians and Italians willing to send troops out to Ukraine and shed blood for Ukrainians, even though they’re not even a member of NATO or the Euro zone? It seems incredibly unlikely the commitment is there. Germany in particular might still be culturally traumatised by the World War II campaign in Ukraine and the political fall out ever since. Do they want to send troops there? I’d hazard a guess and say no.

Secondly, Europe still relies on Russian gas supplies from the pipeline that runs through Ukraine. They’re not in a position to bite the hand that feeds it. And contrary to opinions flying around that America’s shale gas boom is big enough to fill in the gap it has two giant hurdles to getting to Europe: the gas has to be liquefied and then shipped across the sea. It’s not economically viable to be doing so.

Which brings me to the third conceptual bump in seeing the West fight in the Ukraine against the dark forces of Mordor Putin’s Russia is that there’s no money in the coffers to sustain this war effort. A lot of the Eurozone and the USA are simply carrying too much debt to finance yet another war (after the squandered expenses of the Iraq misadventure and the mismanaged Afghan misadventure). The Central Banks are tapped out printing money to buy back the crappy subprime debt that needs to get written off. Who are the idiots who are going to line up and buy war bonds to fund this misadventure into the grey zone of history where mighty empires go to die as they dash themselves upon the borders of Russia?

Putin must know all this. So this has to be a bluff. Right? Of course one imagines this is exactly how people felt in the 1930s in the aftermath of the 1929 bust as the world marched to World War II. I can’t believe I’m even writing of this on an ANZAC Day weekend. You’d be worried if you’re the Baltic states and Poland.

 

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Quick Shots -19/Apr/2014

What I Lie Awake Thinking

I was thinking in my half-waking sleep dream mode this morning that the world’s free market could be understood very clearly as this giant chaotic mass of fear and greed. The bears and bulls are exactly that, animal spirits of fear for the market and greed for the market. It then occurred to me that Karl Marx could see the logical ramification of this capitalist system as a giant train wreck and that somehow human beings with our superior rational intellect would want to add rationality in to the mix.

Of course the communist experiment of the Twentieth Century ended up being mostly fear: fear of Stalin, fear of Mao; fear of counter-revolutionaries; fear of freedom and the corrupting influence of capitalism and so on. But you look at something like the post-Soviet economy of Russia and it is clear that the logical outcome of capitalism is the kind of oligarchic Kleptocracy and all that inequality that comes with such structures. China has similarly headed straight to the income inequality and disparity between the oligarchs and the ever-suffering peasants.

The most worrying aspect of free market capitalism isn’t even this disparity in income or the mis-valuing of labour or the reification of money or the degradation of government and public finnances or the emergence of these oligarchs. It’s that the more we commit to it, the more extreme our reliance becomes, upon a system that is essentially held up by our collective fear and greed. Think about the fact that we are 72hours away from starvation and riots. All that fear and greed has taken us to the ledge and here we are thinking this is the best deal going on how to distribute goods and services.

I’m not about to go become a communist but you’ll pardon me if some mornings I think to myself there must be a much better way than what we’ve got.

Is QE Really Working?

This is what makes me ponder each and every day. It seems that the most successful thing Quantitative Easing has done is shore up the prices of equities and risk assets. The second most successful thing it has done is gone out of the first world into emerging markets in the carry trade – which is another way of saying it didn’t really go to the places in the economy for which it was intended. This is disturbing because the ramification of this is that the economies that most propped up asset prices did so by shipping inflation out to the emerging markets.

I don’t know about you, but I imagine this is having an effect on commodity prices because frankly, you can’t print that much money and not have inflation showing up somewhere.  It sure hasn’t been appearing in America or Australia or the UK, but lately the price of food staples have gone up steadily. The last time this happened it prompted the Arab Spring so we may be headed for even more instability around the globe.

Just to make things a little tricky, Bernanke’s successor Yellen has announced the taper will progress at a constant rate and this is sending investment money back to America, but you have to wonder if the emerging markets are going to be able to handle the drop in liquidity and the rise in commodity prices for food staples.

Then there is the little issue of moral hazards associated with the bail outs. It seems the people who benefited the most from QE and TARP and all the socialised losses governments have taken on around the world as debt (and bad debt at that), were not the people on ‘main street’ as they are called but the top echelon of the wealthy. Not the 1%, but in fact the top 0.1% have made the most wealth out of this exercise. If you lost your house and job in the GFC, I think you’d be entitled to feel quite duped by all of this stuff. The data coming out of the USA saying there’s a recovery going on seems to betray the fact that a lot o the jobs created since the GFC are lower in value than the jobs lost. If the Fed and the US Government worked so hard for this outcome, then surely there’s a problem in reflexively thinking that the bail outs were a success. Thus,  seven years on from when the GFC started to happen, we should be asking just who is benefiting from all this Quantitative Easing?

Ukraine, The Ugly

It’s one of those situations that won’t go away. Russia has essentially taken the opportunity of the instability to annex Crimea back into Russia. While there has been much tub thumping condemnation of Russia by the first world, it seems the other nations in the BRICS have tacitly moved behind Russia. NATO i making noises about moving troops in to Ukraine while the interim government in Kiev has declared the Russia-sympathisers as terrorists. You can see that this is not going to go in any direction of pretty.

Putin and his government have been saying this week that Ukraine is on the brink of a civil war. They may well be heading in that direction right now. All the while I’m a little curious as to what exactly the Obama Administration thinks it is going to accomplish in Ukraine. There is a growing bit of incredulity every time the White House announces it’s going to send a ship through the Bosphorus into the Black Sea. This lone vessel encountered (or rather, got buzzed by) a Russian jet that came within 1000yeards.

It’s enough to make you wonder if Obama and Putin want to repreise the Cuban missile crisis. Unlike Kennedy ad Khrushchev who had to work through elaborate diplomatic channels. Obama and Putin have been on the phone 6 times with very little to show for it. Putin being an ex-KGB man makes it immensely difficult to read, let alone game for advantage, while Obama has a record of drawing lines in the sand and letting people walk all over them.  If all of this ends up as a hot war in Ukraine with NATO troops on the ground, I think that would be the day things have gone incredibly wrong.

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