View From The Couch - 10/May/2016

This Low Growth Thing

It's been accepted for a long time that as economies mature, you hit lower growth. The explanation even for this phenomenon is that as economies mature, the scope for growth diminishes. It makes sense mathematically that a jump from 1 to 2 is 100% but 2 to 3 is 50% and 3 to 4 is 33.3% and 4 to 5 is 20%. If you expand this out to the entire economy and include everybody within it, then GDP growth is naturally diminishing in returns. Conversely if you start with little, there is greater scope for growth so we find the later starting developing economies grow at higher rates.

That being said, the first world has been a good 30years where growth has been low single digits and the funding for this growth has been done through credit. We know this because countless data shows wages growth has been relatively stagnant in the same time span. As economies grow to the vanguard of development, they become increasingly like zero-sum games. If there was away of pocketing the growth, you win - and so we've seen in the stagnant wages growth, 30years of the wealthier 1% pocketing the growth.

Not surprisingly we find flagging aggregate demand, which then creates deflation. This is the very thing the governments of the first world are trying to avoid. At this point in history, we have governments that meet at things like APEC and G20, and they try to spur more growth around the globe without necessarily understanding what that would mean. And to date corporate Australia has called for an increase in productivity - which involves things like abolishing overtime penalty rates and so on.

So here's the thing. Productivity gains are strictly to do with supply-side. I'm no economics expert but I can tell you there's nothing in productivity gains that would be applicable to the grand problem of aggregate demand. In the near-zero-sum game of postindustrial economics, the 1% have played hard to win as much of the growth for themselves without actually growing the economic pie at all. It never seems to occur to them the fact that they've cut so much from people's wages has led to the sagging aggregate demand.

Over the thirty-odd years commerce and the corporate lobby has beaten out labour interests 40-0. The rise of inequality is no accident - it is directly attributable to the trickle-down economics that have cut taxes for the wealthy and apportioned more and more of the cost of government on to the poor. In fact corporations are arguably winning so much they're beating up on governments - but that is another topic. The main point here is that the corporate lobby has already won a lot without giving up much. But in so doing, it has forced out the power of the consumer it so need to sustain itself.

One of the strange outcomes of Abenomics in Japan is that a conservative Prime Minister is running around telling the major corporations to raise wages. This is because the reductio ad absurdum of seeking maximum profits by cutting back on labour costs has gotten to the point where the working poor cannot afford to be the consumers the businesses demand. For the economy to grow again, it needs to "relate"; and to "reflate", the consumer has spend a lot more to power growth. In other words, Abe's government has admitted that chasing productivity is a fool's errand when you're trying to shore up aggregate demand. You have to shore up the spending power of the consumer in a sustained manner.

So here's the thing back in Australia... under this Coalition Government we've heard noises and seen signs that they wanted to raise the GST as well as give states to rights to chart their own income taxes. They've cut back on the welfare spending because that is what all conservative governments do, while tried to figure out a way to cut penalty and overtime awards. None of these things are actually putting confidence in the consumer. None of these things are adding to the spending power of the average Joe; it's not going to help with aggregate demand. Thus it follows that for all the talk about the Coalition being good economic managers, they're really not addressing the real problem of our economy to get it growing again.

Vote Compass

The election is near and so it was time to go and do the Vote Compass test.  As little indicators go, it's a nice little toy for those who want to put a grid to one's own political inclinations and where they might stand. As usual, I landed a bit left of even the Greens, and halfway progressive between the Greens and the ALP, which is much more left and much more progressive than where the Coalition are pitching their policies. Not surprisingly they thought I should vote Greens but of course I'm wary of the ideological bent of the Greens when it comes to their policies outside of the environment. I'm also not happy about the way things played out with the Rudd Government ETS discussions and the Greens' role in that debacle which in effect brought about the terrible sequence of events whereby we now have Direct (in)Action as our carbon emission abatement policy.

The disturbing part of the vote compass survey is that it puts me so far to the left as it does when in fact I don't feel that far to the left. I maybe witnessing the great shift to the right by all parties which has left me stranded to the left of all conversation being had by the political parties in Australia. I'm not terribly radical, I don't even go protesting or marching anymore. I just write this blog here and point at how stupid the major parties are but you couldn't put me so far to the left beyond the Greens. Frankly I'm a little mortified. Where have all the hardcore left people all gone? Those irritating leftwing ideologues back on campus in the 80s? Where the hell are they now?
Probably paying off a mortgage some place.

Maybe we're all kidding ourselves in thinking that we have divergent views. Maybe the tragedy of our contemporary political state is that the views are so convergent there isn't any scope to be different or radical or interesting. Maybe the Coalition and the ALP and The Greens are a lot closer in their positioning than we normally think  all of them bunched around the same old tired bad ideas that leads to this sad stagnation. The illusion is that voting one way or the other is going to make a big difference. I'm beginning to think that might be one of the big lies in our society.

For the record, Antony Green's election calculator says there needs to be a uniform swing of 4.0% to oust the Coalition. I don't know what the historic precedent for that would be for a first term government. But then, this has been a pretty awful government most of its three year term.
Hope springs eternal.

The Budget Comes Home To Roost

This really was a sucky budget so you wonder how the government is hoping to win an election.
First off, whatever consumer sentiment boost that was handed out by the RBA's interest rate cut during the day was blown out of the water by the budget.

ANZ Banking head of Australian economics Felicity Emmett said the budget appeared to have neutralised any sentiment lift from the interest rate cut. 

"While the RBA's cut to the official cash rate last week is likely to have been well received, any positive impact looks to have been somewhat offset by consumers' reaction to the commonwealth budget," she said. 

"According to the polls, the reaction has been largely one of moderate 'disapproval'."
A Fairfax/Ipsos post-budget poll showed that 46 per cent of households disapproved of the budget while only 39 per cent approved. Although not loathed like former treasurer Joe Hockey's ill-fated first budget in 2014, the coalition's latest effort did little to buoy spirits at a difficult time for the Australian economy. 

"While this is a better reaction than the one to the 2014 budget, the lack of traction from [this] budget would be disappointing given the government is now in election mode," Ms Emmett said. 

"With the coalition and Labor running head-to-head in the polls, the government has its work cut out for it to win over the electorate by the 2 July election."

Way to go ScoMo!

If that's not bad enough this government's finding all kinds of problems putting its budget across as good. Take this Q&A thing that happened:

"I've got a disability and a low education, that means I've spent my whole life working for minimum wage. You're gonna lift the tax-free threshold for rich people," he said, addressing federal minister O'Dwyer. 

"If you lift my tax-free threshold, that changes my life," he went on. "That means that I get to say to my little girls, 'Daddy's not broke this weekend. We can go to the pictures'. Rich people don't even notice their tax-free threshold lift. Why don't I get it? Why do they get it?" 

After a sympathetic hearing from Goldie, the question came to O'Dwyer, whose answer eventually wound its way through to missing the point of the inquiry almost entirely - with Mr Storrar's eyes all but popping out of his head at the minister's assurance that when it came to budgetary tax measures: "It's all about balance."
On the contrary, minister. 

"To rich people it is a Coke and a milkshake or whatever," Mr Storrar said of tax breaks for higher income earners. 

"To me it changes my children's life … People who make $80,000 a year … well, they don't even notice it, love. We notice that sort of stuff." 

And it was pretty much all downhill from there. 

O'Dwyer helpfully launched into a cheerful monologue about pies - growing the pie, rather than carving it up as the Greens were inclined to do - but the look on Mr Storrar's face suggested the only thing he could smell was waffle. But the minister soldiered on with her pastry metaphors. It was a bit like watching Mary Poppins trill "Supercalifragilisticexpialidocious" - the thing you say when you have nothing to say; then before you knew it, she'd taken wayward flight to offer a description of her plans as Small Business Minister.

These people damn themselves. One can easily imagine the ire of Malcolm Turnbull as he watched one of his ministers pretty much immolate his cause. Of course, then there was the $6000 toaster write off that Kelly O'Dwyer mentioned. It's a corker! When the SMH is making fun of you at the top of their website you know you've laid a giant turd in public.

UPDATE:
Oh, And Look, More On ZIRP

The race to Zero Interest Rates They Say.

A Memorable G-20 Is Looming

To Hell In A Handbasket

Things in global markets are looking pretty crook. The first real signs of trouble that the markets are beginning to unravel around the world, are over in Europe where deflation fears are riding right over the rhetoric of the ECB saying they're willing to do anything - including their own version of QE3.

RBS estimates that the inflation rate has already dropped to below 0.1pc in the eurozone if one-off tax rises and fees are stripped out, and this measure may turn negative in October. “Deflation is already knocking on the door. We think it could happen as soon as next month given the latest fall in food prices,” said Mr Roberts.

“We are reaching the end game in Europe. If they don’t launch real QE and start reflation by the end of the year or soon after, the consequences are too awful to contemplate,” he said.

Ruben Segura-Cayuela, from Bank of America, said low inflation has become “the biggest threat to the dynamics of public debt” in the eurozone, warning that debt ratios risk “spiraling up” even at levels of around 0.5pc.

France’s debt will keep rising from 93pc to 102pc of GDP by 2016, even in the best of circumstances. It will reach 117pc under a “lowflation scenario”, and 120pc if there is no further fiscal tightening. Spain’s debt will hit 113pc under similar circumstances. “What worries us is that we are not even stress testing for deflation,” he said.

It's all going south because of the threat of deflation; deflation of course means the investor class have to take a rap in the economic cycle, and that is something all the central banks want to avoid. Though it has to be said after all through the years of QE 1 through 3, we've had a nagging feeling that the economy is fundamentally broken. If you have to print that much money to fill all the liquidity holes and keep things going, one has to start questioning if the whole global economy itself is actually viable. It might be that we've been pumping litres of blood through a corpse in the hope that it springs back to life.

They may (and will) talk about a lot of things to do with deflation at the coming G-20. You would have to wonder if they will be talking about the current unfolding market mayhem as a correction or the beginning of the end.

Interest Rates At Zero or Near-Zero Makes For Bad Decisions

When we Gen-Xers were kids, we used to have saving accounts, and these things would bear interest. You would be taught the benefits of saving by having these accounts, but more importantly the banks were legitimately interested in investing in some way as to return interest to investors. After the 1989 market rout, Alan Greenspan cut rates, and they never went back up to where they use to be. Through his tenure, Greenspan gave to the markets what is known as the 'Greenspan Put', and cut interest rates every time investors ran into trouble. In one sense, the economy never really recovered from 1989 because US Fed's interest rates have never been as high as they were then. Similarly, Australian interest rates have never been as high at the time it hit 17% just before Paul Keating's "recession we had to have". Since then Australian interest rates have fallen to historic lows and have been there for 15months-and-counitng.

The upshot of all this is that it absolutely punishes savers. It drives them to chase dividend yields and take risks they would not like to take. Investing gives way to speculation, and worse still, it makes it cheaper for people to borrow money to play the markets. Whatever you might say about the risk appetite, when interest rates reach close to zero, it opens the door for people to make really risky bets.  Just how risky? It's said that there are 7 trillion dollars worth of derivatives that could blow up if the US Fed were to raise their interest rates half a per cent. And if such moneys should go up in smoke, you can bet your bottom dollar that there will be a liquidity problem and markets would seize or crash or both seize and then crash.

It essentially means there is a sword of Damocles hanging over the US Federal Reserve to keep printing money and keep interest rates at zero. You can well imagine there's no such thing as 'prudential' in any of this. Worse still, it has effectively turned the market into one giant too-big-to-fail problem. And so we continue with the ZIRP (Zero-Interest-Rate-Policy) and Near-ZIRP around the world. It does make you wonder if the economy has flat-lined, if the only thing making the money markets go around is speculative bets made with borrowed money on near-zero interest. It seems completely non-sensical, but there you have it.

This article says we might even need QE indefinitely into the future. Ben Bernanke even said he would be surprised if QE ended during his lifetime. That's surprising on the surface, but not so surprising when you consider just how distorted markets have become.

There Is No Cavalry To The Rescue For Investors

The simple truth is, when you have America's Federal Reserve running Zero Interest Rate Policy AND Quantitative Easing (money-printing) for as long as it has, you sort of expect them to come to the rescue. That's been the moral hazard of printing money and giving it to Wall Street banks.

Except when the interest rate is at zero, and you've printed as much money as the Fed has, you have to say they've run out of bullets. So why are the markets jittering now? That would be because this is the month QE3 which started under Ben Bernanke's watch is going to finish its 'taper' under Janet Yellen. This is the end of the free punchbowl. The market jitters are a bit like an alcoholic's shaking hands when the grog supply is cut. It's amazing how the whole world's markets are jittering. That's a lot of investors who got drunk on the Fed's punch.

Anyway, with even the RBA in Australia at record lows in interest rates, there's really not much room for any of these Central Banks to move. I mean, what is the Bank of Japan going to do, when it's already doing 'Abenomics' and printing money like there's no tomorrow (...and maybe there isn't a tomorrow. Now there's a thought). And what has it done? Not enough to lift Japan out of its two decade long deflationary spiral. Maybe when the shit really hits the fan in Japan, they'll have jubilee and just cancel debts.

For the rest of us, we have a decades-long deflationary cycle looming up ahead. I wonder how they're going to address that at the G-20. Naah, they'll probably just throw Vlad and Tony in the ring to box and sell tickets.

Home Is Where The Bad Investment Decisions Live

It's like there's some chorus of bad news going on out there. Here's an interesting article about the property bubble in Australia.

No, blame high home prices on the global financial crisis five years ago. It gave us record low interest rates and a building slump even as the rate of population growth was increasing. 

So demand was fuelled by low interest rates and supply constrained by a lack of new building. 

If you believe the latest QBE annual Australian Housing Outlook, compiled by BIS Shrapnel, prices are going higher. 

I must admit each year it seems overly optimistic about property prices but that was so only once in the 13 years it's been published. Unfortunately that was a doozy because it got the direction wrong as well, and being in 2010 was just recent enough to survive my short-term memory. 

In Sydney, the market where the shortage of housing stock is the most chronic and investors are apparently running amok, it predicts prices will rise 9 per cent. Oops, that's over three years. In fact, the forecasts are for 7 per cent this financial year, slowing to 5 per cent the following year and then falling 3 per cent. 

Brisbane is the place to be. Its values are forecast to rise 17 per cent over three years with the Gold Coast not far behind with a projected 15 per cent.

That would be the standard explanation of how the current property bubble was allowed to remain in place by the RBA, back when the GFC began. This is the real trick. The RBA decided deflation was bad because it would hurt 'investors'. So they decided to run what amounted to a Price Keeping Operation for Australian property market by running a low interest rate policy. Naturally the real estate market and its rampant speculators stayed in the game - unpunished of their bad calls, rewarded with moral hazard removal. As a result, seven years later we have even more private debt, a lot of which is tied up in real estate, and the four major banks are even more Too-Big-To-Fail.

This is all very vexing because the real estate bubble is wreaking havoc on the rest of the economy. Australia is not alone with this problem. Canada, New Zealand and the UK all share this problem, and the property bubble in America certainly got a second wind in the last 24months. None of the  Central Banks have figured out a way of unwinding it without investors taking a real hit so they keep jawboning the future outlook of the property market down, but nobody seems to believe them; and they're right not to believe them because all these central banks are running ZIRP or near-ZIRP, the biggest enablers for the purposes of furthering speculative activity in property.

I do wonder if they'll be bringing up this problem at the G-20 as well.  This may well turn out to be the last G-20 meeting before the markets tank and global turmoil is unleashed in the markets again.

The Money That's Not There

Deficits? What Deficits?

A few weeks ago I made an observation over elsewhere on the interwebs which I forgot to note over here. Once upon a time in the 90's when Pauline Hanson was a tyro crank politician, she was much ridiculed for her views. They were in most part totally outlandish and powered by a kind of backward looking xenophobia that made your skin crawl, but in particular she had a solution for Australia's debt problem, which was "print more money."

The press went to town on this statement as a clear indication that this would not work because printing money wold cause a massive outbreak of inflation; the likes of which crippled the Weimar Republic, so clearly this was a stupid idea born out of a stupid person. So the narrative went. And who amongst us who bothered to study modern history didn't know of the crazy inflation that engulfed inter-war Germany as the Weimar Republic busily printed money to pay their reparations for World War I? Print money, you get Weimar Republic.

Fast forward 15 years and 5 years on from the GFC we find, in fact that is exactly the US Federal Reserve Bank is doing in its guise of Quantitative Easing, and even the Bank of Japan has joined the ranks of central banks 'printing money' with the celebrated 'Abenomics' in progress. The interesting thing is that inflation - the kind we read about in history books about the Weimar Republic - hasn't exactly broken out in neither the USA nor Japan. In fact the Bank of Japan is running the printing presses much faster than the US Fed, and it might not make its inflation target of 2%. Go figure that one out.

No Inflation. All that money printed, and still no inflation. If anything central banks in the advanced economies are scared shitless of a collapse in asset prices.

I hate to say all this because I really dislike Pauline Hanson, but if the amount of deficit of the Australian Government was the size that it was - such that it could be paid off by the selling of assets under John Howard - maybe the Hanson plan of printing money back then might have been better? That way, the Federal Government, and by extension we the people would still have those assets.

Or maybe government debt isn't as big a deal as the private sector is making out. What's really bad about Greece and the other distressed euro economies probably is the fact that they can't devalue their currency by printing their own money. But if we go by the - ahem, *gulp* - "Hansonomics", Greece ought to quit the Euro zone and just print whatever money it likes to pay its freaking debts. And as crazy as that sounds to educated minds the evidence seems to be the case. Stick that into your objectivity pipe and smoke it.

This brings me to this article here.

In a 34-page review for clients of how a Coalition government might change economic management, Mr Eslake, chief Australian economist for Bank of America Merrill Lynch, also highlights the potential for "significant and ongoing tensions" in an Abbott government between its "genuine economic liberals", such as shadow treasurer Joe Hockey, and those who are "more sceptical about markets ... including in many cases Tony Abbott as Prime Minister".

He predicts that the Coalition will ultimately adopt all of Labor's proposed budget savings measures, except for ending the tax break for cars bought through salary sacrifice.

Even so, Mr Eslake estimates, the Coalition has so far committed to $28.4 billion of tax cuts and $14.8 billion on new spending in the next four years, a total of $43.25 billion. But he estimates the nine savings measures the Coalition has announced so far would save only $13.44 billion over the same period.

"By our reckoning, over the remainder of the election campaign, the Coalition needs to announce additional savings measures totally in the vicinity of $30 billion over the four years to 2016-17 in order to be able credibly to claim that it would produce better bottom line outcomes than those projected (by Treasury and the Department of Finance), he said."

"That is a substantial sum, although it is considerably less than the $70 billion 'black hole' suggested by the government."

And that ought to give you a bit of a scare. If the polls are to be believed the incoming Liberal National Coalition Government is selling itself on being fiscal hawks and that 30billion will come out of something somewhere along the way in a fit of austerity worship. I don't know where it will come from, and by the sounds of it, neither does treasurer-to-be Jolly Joe Hockey, but knowing their political persuasion it's likely to come out of welfare cheques and education budgets.

Yet in a bigger picture sense, all this pain it will inflict on millions of people will basically hurt the economy anyway while doing not much good. It's almost enough for you to endorse Hansonomic Printing Presses and ask them to simply print the money to pay the freaking debt. It's what grown up countries do.