Economic Growth, They Say

They're Doing It Wrong

Nick Xenophon made an interesting remark last week that the RBA should shift its focus from inflation and on to nominal GDP growth. This is one of those interesting shifts worth considering because which ever way you look at it, inflation isn't the problem it used to be when Keating cut the RBA independent of government, so that it could independently set rates with the ai of controlling inflation. We're at a far cry from the era when Paul Volcker tamed inflation in America through jacking up interest rates. That world seems quaint, for we haven't been in that environment sense before the Dotcom Bubble burst at the turn of the Millennium.

Anyway, here's something interesting by Greg Jericho, going into the rationale for why Nick Xenophon might push for that change:

With the current policy, the worry is always that were inflation to rise due to fiscal policies, then the RBA would raise interest rates.

Thus we had the absurd situation last year where then Treasurer Joe Hockey was claiming the RBA had “room” to cut interest rates because the Abbott government’s spending cuts meant it “had been able to control the inflation genie”.
He said this at a point when underlying inflation hadn’t been above 3% for five years and nominal GDP was growing by just 1.3%.

Targeting nominal GDP resets the conversation.

Rather than having the government cutting spending (which reduces growth) in order to allow the RBA to cut interest rates to stimulate growth, both the fiscal and monetary arms could focus on improving growth – and it would put more pressure on the government rather than the current situation where it is leaving most of the work up to the RBA. 

Given government revenue has been hit due to the decline in nominal GDP growth, making that a focus would also assist with improving the budget balance.

Yes, it would make too much sense but of course the system isn't built for quick handbrake turns of policy like that, no, no.

It's worth going back to Glenn Stevens' last speech as Governor of the Reserve Bank.

Reserve Bank governor Glenn Stevens has used his farewell speech to implore the Turnbull government to take on more debt, saying that rate cuts alone can no longer "dial up the growth we need". 

Although interest rate cuts still had some effect, they worked through encouraging private borrowers to borrow more and had "possibly less" effect than in the past.

"The problem now is that there is a limit to how much we can expect to achieve by relying on already indebted entities taking on more debt," he said.
The government had far more room to borrow and spend than the private sector – owing only 40 per cent of GDP instead of 125 per cent.

"Let me be clear that I am not advocating an increase in deficit financing of day-to-day government spending," he said. "The case for governments being prepared to borrow for the right investment assets – long-lived assets that yield an economic return – does not extend to borrowing to pay pensions, welfare and routine government expenses, other than under the most exceptional circumstances. 

"The point I am trying to inject here is simply that popular debate in Australia about government debt and how we limit or reduce it seems so often to be conducted while largely ignoring the size of private debt. Foreign visitors to the Bank over the years have tended to raise questions about household debt much more frequently than they have raised questions about government debt."

So it's one thing for Nick Xenophon to say we need the RBA to prioritise growth rather than whacking signs of inflation. Given the toolset available to the Reserve Bank, which is basically raising or lowering the interest rates, there's really not much more the RBA can do to help growth.

That is to say, the limits of RBA policy - any Central Bank policy - resides at the zero-bound where Zero-Interest-Rate Policy lives. Glen Stevens may well retort to Nick Xenophon, "what the hell do you think we've been doing for the last 8years since the GFC, with historically low interest rates?"

Indeed, that's exactly where the Bank of Japan is at, trying to get economic growth to happen. It's trying massive "trans-dimensional" quantitative easing and yet there are minimal signs that the Japanese economy is coming out of its long slump. The conservative Prime Minster of Japan is telling the heads of the major corporations to raise wages instead of sitting on hoarded profits. It's a wild frontier of Central Banking experiments over in Japan, and really, I'm sure they wouldn't care which came good first, growth figures or inflation figures.

I'm going to go out on climb and say something that would scare fiscal conservatives and hawkish bankers. What Australia needs is a kind of debt forgiveness. So if the economy ends up at the Zero-bound with ZIRP, the RBA needs to forgive the private sector debt and helicopter that printed money into banks. People are going to hate that because basically they'll scream "moral hazard",   except when the economy has flatlined at the zero-bound, then the whole show needs a complete re-boot; and if there's one thing that keeps any economy from re-booting, it's debt.

Ben Bernanke's 'Helicopter Money', Applied

The logic for doing Helicopter money in Australia is pretty simple. People are not spending money because they're busy paying down mortgages as fast as they can. This isn't doing much good because it means the money goes from the bank to employer to employee and back to the bank without going through the economy. So you alleviate the mortgage stress, and the people will be inclined to spend their money. The government hands the printed money to the banks, buying out the debt on paper. Immediately there should be inflation because people now have money to go spend it on the next asset, That's when the Central Bank can re-set the interest rates at a more historic normal level.

Of course, it won't go that way because the bankers would lose out on long term money, but that would be the point. Somebody has to take a loss and the bank would have to get its money while losing out on future profit based on the booked loans. It hasn't happened because ultimately the economy is owned by the 1% and the 1% stands to make nothing out of "helicopter money". But the alternative is the current, comatose, low-growth low-inflation state in which we find ourselves.

The problem with QE as it's been carried out to date, and lots of it, they're finding in Japan, is that the money simply doesn't go to where it's supposed to go. The BOJ stuff the banks full of money, but the banks don't lend to sell businesses and entrepreneur. The lending practices still tend to lead the banks towards lending for fixed assets like property - and even then there's just not as much of that going around. The big companies of Japan's old industrial growth era are still profitable but they don't pay out dividends, and they don't give out pay-rises. They tend to sit on the big piles of cash and say they see nothing in which they want to invest.

The only way to make sure the money gets out an about in the economy is to hand it to the consumer and have them spend. In other words, it's like Capillarity Up economics. They cam very close to pulling the trigger on 'Helicopter money' this year in Japan, but at the last minute they held back. I guess there is something fundamentally weird for government stop simply be giving people money. Be that as it may, the Japanese may eventually have to do it; and if the precedent is set, other countries will do it. It's not like it's a new idea.

The Wisdom Of Solon And All That

It doesn't get discussed a whole lot unless you read a bit of ancient history. Solon, famously forgave debts. He also forbade the export foods except olives. He encouraged the cultivation of olives specifically as en export commodity. Meanwhile he forbade the export of foods because if staples got sent away, the poor would starve and that had terrible consequences for society. If you asked Solon, he'd object to 'Helicopter Money' as a policy but his big thing was debt forgiveness.

The ancient world is full of instances of debt forgiveness. The people in power in the ancient world probably looked at debt as something that becomes intractable and kills the economy. The Romans famously refuse to forgive debt and of course the aftermath of the Roman civilisation were the Dark Ages. So it is worth pondering what the hell we're going to do with a financial system that has created so much debt the world's GDP cannot begin to repay it. It's not likest's a problem that's going to go away. The more it sits there, it's going to chew away at the future, just as it is doing right now, only worse.

That's the historic context of all this bickering about debt. Something tells me the debt won't be forgiven, there won't be Helicopter Money, it's all going to crack up and turn to shit right before our very eyes. So much for civilisation.

Quick Shots - 02/Jun/2016

What Yanis Said About Australia

Walk-Off HBP sent in this one a little while ago. Former Greek Minister For Financial Crises Yanis Varoufakis recently was in Australia and was asked a few questions about our economy. This bit sort of popped out so I'm quoting it here:

“The first thing that has to happen in this country is to recognise two truths that are escaping this electorate, and especially the elites. 

“Firstly, Australia does not have a debt problem. The idea that Australia is on the verge of becoming a new Greece would be touchingly funny if it were not so catastrophic in its ineptitude. Australia does not have a public debt problem, it has a private debt problem. 

“Truth number two: the Australian social economy is not sustainable as it is. At the moment, if you look at the current account deficit, Australia lives beyond its means – and when I say Australia, I mean upper-middle-class people. The luxurious lifestyle is not supported by the Australian economy. It’s supported by a bubble, and it is never a good idea to rely on the proposition that a bubble will always be there to support you.

“So private debt is the problem. And secondly, because of this private debt, you have a bubble, which is constantly inflated through money coming into this country for speculative purposes.” 

Varoufakis is unequivocal in his conviction that current growth – which he likens to a Ponzi scheme – needs to be replaced with growth that comes from producing goods. 

“Australia is switching away from producing stuff. Even good companies like Cochlear, who have been very innovative in the past, have been financialised. They’re moving away from doing stuff to shuffling paper around. That would be my first priority [if I were Australian treasurer]: how to go back to actually doing things.”

I jokingly asked him who this read like and he answered yours truly so... just saying, it's not like the views expressed here are off the planet. At least the former Finance Minister of Greece is espousing them as well. 

Varoufakis is pretty unequivocal about the idiocy of allowing the auto manufacturing industry to leave Australia. It's worth noting that the flip-side of Varoufakis' concern for manufacturing is that the more FIRE - finance, insurance and real estate- sectors grow in proportion to the rest of the economy, the less the economy seems to be able to grow. That is to say, the more 'financialised' an economy becomes a great part of the economy is taken up with the activity of shuffling paper wealth around. This is typically soon the USA here Manufacturing went from 30% of GDP to about 11%, and the FIRE sector went from 13% to about 24%. If the economy is producing things at around 10% and yet the paper shuffling wealth is 25%, it's not surprising you get low growth as well as lo wages growth and gross inequality.

This Damned Election In Australia

The one forgivable aspect of elections in Australia is that under the Westminster system these campaigns tend to go for weeks and not 18months like over in the USA. Even so, Malcolm Turnbull has opted to go for one of the longest campaigns leading up to the polls and well, there's still a good month to go before we show up at the voting booths.

Even so, things are running so tepid and boring, people are conjecturing whether Bill Shorten is - how do you put this? - trying as hard as he can to win this election. That maybe he's secretly going for a two-election strategy instead of trying to seize the day.

Electorally, in the wake of the Rudd-Gillard years, Shorten's approach prioritises the reconnection of the ALP with its disillusioned base over attracting the extra middle-ground voters needed to win an election. And that in turn explains why insiders in both camps report Labor is doing better in its heartland - i.e. safe seats it already holds - than it is in the marginals where swinging voters will decide the election. 

The result could be a repeat of 1998 - a sizeable swing to Labor for only a modest return of new seats. Yet for Shorten personally, that would bring an upwelling of affection from the Labor faithful, casting him as a defeated leader who had fought the good fight for "Labor" values - very useful if your challenger is the darling of the rank-and-file, the Left's Anthony Albanese.

All of this suggests Shorten may well be already thinking about his own survival as leader beyond the horizon. Don't expect him to use the term or even to accept the logic, but the inescapable conclusion is that he has a two-election strategy having concluded months ago that gaining the 19 Coalition seats needed to win on July 2 is unachievable.

In other words, he's really not putting the hard yards into winning the middle. It's a bummer because of the thought of Turnbull getting a full term and then continuing with these Abbott-esque policy positions is going to be a real drag. You kind of wish Shorten would go hard for the Lodge this time around, if only to make up for the ridiculous loss in 2013.

The more interesting news to do with the elections coming from fringier areas. Like ABC friends who want to target Coalition seats. 

"Vote Mal, Eat Pal" Pt. 2

You Have Got To Be Kidding Me

The government wants to claw back some money without raising taxes or closing loopholes for their own rich constituents, so the new idea is to collect HECS debts from the dead.

The Turnbull government is considering the controversial move of collecting student debts from the dead, as well as increasing university fees, as it seeks to find higher education savings in the May budget. 

Former education minister Christopher Pyne backed the idea of recovering HECS from deceased estates two years ago, but was quickly shut down by Tony Abbott to avoid a scare campaign on the sensitive issue. Labor slammed the idea as a "death tax" - even though most other loans, such as mortgages and credit card debt, must be repaid upon death. 

Ending the HECS write-off from deceased estates worth over $100,000 would save up to $800 million a year, according to leading higher education analyst Andrew Norton.

Sources in the higher education sector said the proposal had been raised in recent discussions with Education Minister Simon Birmingham, who is under pressure to find substantial savings in his portfolio. 

Asked if he was considering recovering HECS from deceased estates, Senator Birmingham said: "The costs to taxpayers of higher education over recent years have grown dramatically "Since 2009, taxpayer funding for Commonwealth supported places in higher education has increased by 59 per cent as compared to nominal growth of GDP that has risen by 29 per cent."

It's downright evil, is what it is. I get it that they have pressing needs to shore up revenue but increasing Tertiary Fees, sticking the student with the massive debt, and then chasing them beyond death and into the grave for that debt seems like a total breakdown in the social contract. The model of user-pays and education as vocational training model that successive Australian Governments have been pushing should mean that when a person is dead-but-in-debt, they are no long in their vocation (I can't believe I had to write that just then) and therefore are no longer beneficiaries of the said user-pay vocational training. 

It's bad enough that this government like its predecessors is downright anti-intellectual. Reducing education to vocational training happened under the Hawke-Keating government when they committed to the Dawkins reforms. Connecting up the earning potential of university graduates and then lining up a fee in correspondence to future earnings was a Howard Government decision. None of these decisions understand education at all. The point of education is to understand the world in broader terms - whether it be through science or the arts - so that when they are eventually employed, they can work with a wider perspective on what it means to be doing that work.  

The anti-intellectualism of this government is so deep, it views education strictly as a means of creating taxpayers. Tertiary education is clearly the means of extracting bigger tax money out of Tertiary graduates, and that's it. And should they die young, this government is saying the tax from the unearned money over the career of the dead person still belongs to the government. They don't understand that even talking about this makes for a great disincentive for people to get more educated, when in fact our democracy needs as many educated people it can get - and by educated, I'm not talking about vocationally trained people, I'm talking about people who can do critical thinking and analysis. 

Just when did our government get so stupid and so evil all in the one go? 

Steven Keen Says Recession By 2017

Here's the article. In a nutshell, for all this talk of 25years of constant growth, parts of it were accomplished by going deeper into debt for the private sector to goose demand through the rough patches. Now it has gotten to the point where Australia's private sector is the most indebted per capita in the world. The consequence of all this is that there can't be much debt that can piled on top, and any drop in debt will usher in a collapse in demand. There's nowhere to go with the debt upwards, and the only way for demand is down. 

This is the inevitable debt crunch coming Australia’s way, but conventional economists are oblivious to this danger because they’ve brainwashed themselves to ignore private debt as just a “pure redistribution”, to quote Ben Bernanke. This deluded textbook thinking is why Bernanke didn’t see the GFC coming. 

The day of reckoning can be delayed by encouraging yet more private borrowing, which the RBA can attempt to do by cutting interest rates, and the government can reduce the crunch by running a large budget deficit. But these are likely to happen after a crisis rather than before it, because our Reserve Bank and our politicians are as oblivious to the dangers of private debt today as Bernanke was back in 2007. 

The 2016 election could be a good one to lose.

Yes, it could be a real bugger. I sure wonder what the debt crunch is going to look like in Sydney. 

The RBA is taking a steady-as-she-goes view on the economy. This would lead one to suspect that Glenn Stevens isn't likely to see the next downturn coming over the horizon. Of course, there probably isn't much more he and the RBA can do at this point. They're not going to raise interest rates for a whole gaggle of reasons, and they're not going to cut them any more because the worst isn't here just yet, but chances are we're sill headed towards Zero Interest Rate Policy when this recession arrives. We're just suckers for punishment.

Shutting Out The Scientists

The true hallmark of this Coalition Government is its anti-intellectualism, which is exemplified by its constant shift to appease those who deny climate change is happening or that it is man made. As such, it tends to find itself on the wrong end of science and scientific fact quite a bit. Indeed, they are slashing the budget to actually study the climate at the CSIRO.

One of CSIRO's main climate science units planned to slash four out of five researchers, all but eliminating its monitoring and climate modelling research, a new document reveals. 

The cuts are contained in an analysis for the Oceans & Atmosphere division, dated January 25, 2016. CSIRO handed over the document to the Senate committee investigating plans to slash 350 staff overall, and it has been made public on the Senate's website.

Doubts over the rationale and planning of the cuts flared on Tuesday in another CSIRO section facing deep job losses, with many Land & Water staff walking out of a meeting with chief executive Larry Marshall.

"People got fed up of having their questions marginalised, trivialised, and with being lied to," one senior researcher told Fairfax media. He added the division's head, Paul Hardisty​, had led the walkout. 

"We understand CSIRO scientists are passionate about their science and also about some of the changes to the structure of their organisation," a CSIRO spokesman said, declining to elaborate on the meeting. "CSIRO is committed to continuing to have open and transparent dialogue with staff and hearing staff views and concerns." 

The new document, though, highlights the extent of the original cuts being considered by CSIRO before pressure – including from thousands of international scientists – prompted a scaling back of the job losses.

The rest of the article makes for depressing reading. 

Here's what I don't get. This government is pretty disdainful about the Arts. Here it is also having a go at Science, making stupendous cuts. It doesn't really put its money where its mouth is at when it comes to Engineering or manufacturing or any kind of secondary industry - it tells us outright we can't compete and is happy to ship those jobs abroad. They shut down the automotive industry. They won't build VFTs, sabotage their own NBN, but they'll build more unwanted motorways so they can collect more tolls. They won't build submarines, they'll opt to buy them instead. They'll allow agricultural land to be sold off to overseas interests. They tell us our economy is going to be built on construction and housing and service sector jobs. And let's not forget they want to squeeze HECS debt out of the dead. 

Just what kind of country do they think they're building here? On the evidence, you'd have to conclude even they have no idea whatsoever. 

News That's Fit To Punt - 14/Mar/2016

Taro Aso's Lecture Revisited

I'm a bit amazed to read this in the SMH today.

"There's an acknowledgment, even in the investor community, that monetary policy is kind of running out of ammo," said Thomas Costerg, economist at Standard Chartered Bank in New York. "The focus is now shifting to fiscal policy." 

 That's where it should have been all along, according to Modern Money Theory. The 20-something-year-old doctrine, on the fringes of economic thought, is getting a hearing with an unconventional take on government spending in nations with their own currency.
Such countries, the MMTers argue, face no risk of fiscal crisis. They may owe debts in, say, dollars or yen - but they're also the monopoly creators of dollars or yen, so can always meet their obligations. For the same reason, they don't need to finance spending by collecting taxes, or even selling bonds. 

The long-run implication of that approach has many economists worried.
"I have no problem with deficit spending," said Aneta Markowska, chief US economist at Societe Generale in New York. "But this idea of the government printing money - unlimited amounts of money - and running unlimited, infinite deficits, that could become unhinged pretty quickly." 

To which MMT replies: No one's saying there are no limits. Real resources can be a constraint - how much labor is available to build that road? Taxes are an essential tool, to ensure demand for the currency and cool the economy if it overheats. But the MMTers argue there's plenty of room to spend without triggering inflation. 

The US did dramatically loosen the purse strings after the 2008 crisis, posting a deficit of more than 10 percent of gross domestic product the next year. That's since been trimmed to 2.6 per cent of GDP, or $US439 billion, last year. 

The Congressional Budget Office expects the gap to widen in the coming decade, as retiring baby-boomers saddle the government with higher social security and health-care costs. That's the risk often cited by fiscal hawks. 

Mainstream doves accept the long-term caveat. But they point to record-low bond yields and say investors aren't worried about deficits right now, so why not spend?

Pretty amazing how that is seen as 'radical' economics but that's the same argument Taro Aso was mounting. The Sydney Morning Herald is way behind the curve on this notion - heck they're even behind this blog.

The article also makes the point that conflating household debt and government debt leads to much confusion - like it did with Tony Abbott's garbled wagon government debt when the real debt problem in Australia lies with the private sector debt.

Temperature Spike 

This is not good news.

Global temperatures leapt in February, lifting warming from pre-industrial levels to beyond 1.5 degrees, and stoking concerns about a "climate emergency".
Unusual warmth in waters off northern Australia also prompted an alert by the Great Barrier Reef Marine Authority about the risk of widespread coral bleaching. 

According to NASA analysis, average temperatures last month were 1.35 degrees above the norm for the 1951-1980 period.

They smashed the previous biggest departure from the average - set only in the previous month - by 0.21 degrees. 

"This is really quite stunning ... it's completely unprecedented," said Stefan Rahmstorf, from Germany's Potsdam Institute of Climate Impact Research and a visiting professorial fellow at the University of NSW, noting the NASA data as reported by the Wunderground blog.

So it appears we've run out of headroom for the denial. The rest of the article doesn't offer much good news either.

Nobody's Talking About North Korea

Philip K. Dick said reality is that which won't go away when you close your eyes. When you think about that, most things reality that would qualify would be not-so-nice things. Like North Korea. The rogue nation has basically announced it can build nukes the size small enough to mount on a missile - and seeing that their Rodong missies can get out to the Pacific, it puts South Korea and Japan well within its range. This has resulted in Japan and South Korea calling in anti-missile armaments from the USA, but it has also ratcheted up the tension with North Korea.

So... there's that reality that gets under-reported here in Australia. In that light, here's a bit of interesting analysis here.

Now, after repeated and renewed provocations by the North, the gig is up for Abe and his two-track approach with the North. Last month, Japan imposed retaliatory sanctions on the North following its missile test - staged as "satellite launch".

Pyongyang responded by terminating the inquiry on the abductions, effectively cutting the lifeline Abe had worked so hard to establish. The hostility between the two sides has increased even more after the subsequent imposition of new UNSC sanctions and the attention-seeking news release by the North highlighting their advances on miniaturisation.

In retrospect, it was not too hard to see this end - as both tracks of Japan's policy on North Korea consistently overlapped despite Tokyo's attempts to decouple them.
In fact, Tokyo previously pushed for this intersection as evidenced by the inclusion of abduction discussions on the sidelines of the now moribund Six Party Talks.

With denuclearisation talks effectively dead, the Abe government gambled with a more risky two-track approach to North Korea, by hedging between a hawkish line on Pyongyang's missile and weapons of mass destruction programmes and a more dove-ish approach on the abductions.

This gamble has failed. As tensions continue to increase on the Korean peninsula, it is time now for Abe to cut his losses - at least for the time being - and maintain a united front alongside the US and South Korea in deterring the Kim Jong-un regime.

It looks like it was a complete and utter waste of time talking to North Korea about anything. The Six Party talks through the 2000s and now the independent lines of diplomacy out of Tokyo and Seoul has ended up with the worst case scenario. The North Koreans have got the nukes they can put on missiles, and neither Japan nor South Korea got their kidnapped people back. The UN Security Council is pushing for harder sanctions, but of course China won't be completely cornering North Korea.

Oh and meanwhile some idiot has gone and blown up the toilets at there Yasukuni Shrine. The man wanted for the bombing is a South Korean national. That's going to be another bone of contention between Tokyo and Seoul, making it harder to coordinate policy against North Korea. It's a mess. It's a worse mess than the usual mess too.

The Mythic Catastrophe Of Government Debt

Taro Aso's Version

Japan's government is deep in debt. Some are claiming this is catastrophic, if not today, some time soon. Taro Aso, the Finance Minister for Japan - former Prime Minster and manga aficionado - begs to differ. In fact there's a video of him explaining why, that dates back to 2010. It's interesting so I'll try and pick the eyeballs out of the little lecture.

Basically, everybody's jumping up and down about government debt. What nobody stops to consider is just to whom the government of Japan owes this money. The answer is simple, it's the people of Japan. If you have any loan book, you'll have a column for debts and column for credits. So on one side of the ledger the Japanese government is borrowing, say 100yen, and then on the other side there must be somebody correspondingly lending that 100yen.

Now, people might disagree and say they don't hold any national bonds for Japan, but actually, they do. They put their money in the bank, and the bank then has to either invest or park that money somewhere, and it turns out, they buy national bonds of the government Japan. And it all happens in Yen.

As for the Banks, they are in their essence simply money-lenders, so if they don't lend out the money deposited to them, they're not going to make money. Unfortunately nobody's borrowing in Japan. There's roughly 30Trillion Yen = AUD$300billion each year of the money, looking to be invested with nowhere to go. And if it doesn't get invested, you get deflationary pressures from the money not getting invested - so the government borrows it to stave off asset deflation.

So yes, the government has borrowed a lot, but the lenders by and large are the people of Japan. Something like 94% of bonds are held by Japanese people, and the rest by foreigners. And even those people are buying those bonds with Yen, so 100% of government debt in Japan is in Yen and no other currency. This is in stark contras to Greece, where only 30% of Greek government debt is held domestically, and it's all denominated in the Euro and not a domestic currency. Greece thus puts out 70% of its government debt to be financed by international markets, who in turn don't trust the Greek government so the going interest rate for their bonds sits at (in 2010 figures) 13%. By contrast, Japanese bonds are going for a return of 0.9% or so, which means Greek debt is going around with 13times more risk.

Even if the debt comes due, the Japanese government can simply print the Yen and pay it. If the money was owed overseas in foreign denominations, the story would be different. It's a totally different kettle of fish to Greece, according to Taro Aso.

How Much Of This Applies Here?

This is the interesting bit. How much of Australia's Government debt is issued in foreign currency? One imagines the international market version is denominated in the US Dollar, so if the AUD goes down, it gets harder to pay back the government debt. Even so, in a pinch, the Government of Australia could just print what's necessary to pay it back. If the debt is enormous, then presumably this would lead to a currency collapse, but in most part nobody's going to be calling all the debts at once, and the RBA knows exactly how much money there ought to be in the market place to the extent as to know what the currency price should be, or whether printing that money is going to usher in massive inflation or not, as the case may be.

So even if government debt in Australia were to reach, say, 100% of GDP, it's probably not going to be the same as the Greek government's debt situation. And because it is more like 20-odd% and not 100%, there probably isn't a case for making the kind of fuss the Coalition made in opposition and then during 2014 with their fateful budget. Which is all an elaborate way of saying, all this fixation about government debt that the Coalition keeps using to bludgeon the ALP is a load of bullshit.

Not only is Australia not in any kind of debt crisis as the Coalition alleged at the top of their lungs this decade, even the debt we have is not going to have the kind of dire consequences for us as private sector debt is going to have. If the Coalition government under Tony Abbott had had a shred of decency and intellectual honesty, they would have formulated policy to tackle the ballooning private sector debt instead of banging on about the government sector debt. After all, if there are savings there looking to be invested and the government doesn't utilise that money, it contributes to a deflationary pressure on assets, as per Taro Aso 's lecture.

As things stand, the Australian Dollar is stubbornly high by the RBA's estimation; money is flooding in to Australia, buying up property and commercial assets. It's hardly the picture of currency collapse. People want 'in' on the Australian economy as it is. The constant banging on about the government debt essentially exposes the Coalition as inferior economic managers, who will necessarily hurt the Australian economy through their policies that always centre around cuts. You'd certainly wonder if this government actually understood what it was dealing with when it talks about government debt. One wouldn't advocate endless stimulus packages, going deep into the red like the Japanese government has done in the last 25years (it isn't necessary), but one probably shouldn't be fretting about the debt level when there are other things to worry about like a looming economic slowdown.

Twenty-Five Years, No Recession

This leads me into this weird anomalous state of affairs, of what's been happening for twenty-five years. There is a whole generation of people walking around Australia who have never experienced a recession. Back in the 1980s, Australia spent half its time in a recession of one kind or another. There are many explanations for how this came about, one of which is the rapid expansion of the Chinese economy and our role in supplying that demand; but also the cumulative effects of the macro-economic reforms and deregulation that unleashed the massive growth in the domestic economy as well as the enormous impact of IT on productivity.

If you look at any one of these elements, we're not likely to get them again. So, if you think about the slow down and change in China's economy, the limits of deregulation, and the limits of IT-induced productivity growth, we're not likely to see the same sort of stretch going forwards. That would indicate that at some point we'll be back to the 1980s scenario of a recession every few years, and by then we'll well be wondering just how lucky we got when we had 25years of uninterrupted growth.

It really is hard to see where the next big growth engine is going to be. Some have suggested India, but India is wilfully avoiding the kind of manufacturing-&-export led growth that east Asian nations have undertaken. They've gone straight into developing a high tech sector based on computers, IT and services. This means it is unlikely to duplicate the Chinese scenario for Australian commodities exports. Both the Gillard and Abbott governments banked on housing and construction as growth engines to take over after the mining boom but it ignores that constructing buildings or infrastructure isn't a growth engine for an economy in of itself. If anything, it's a recipe for sending us back to boom and bust cycles of the 1980s.

Of course we could get lucky again and have another mining boom. It's hard to see who would fuel it, but we tend to get lucky that way - hence our self-inflicted moniker, the lucky country - but the problem remains that we don't really have a good plan for when the luck is not there. When the luck is not there, the Federal government is going to have do a lot more than run around talking about government debt; we've seen how austerity in down times simply does not work. If anything is likely to lead us to being like Greece, the obsession with cutting government debt at all costs just might be the path that leads us there.

News That's Fit To Punt - 02/Oct/2015

The Bubble We Had To Have

Not sure how people construct notions like that, but here you can see it as the headline.

"The government has to try and talk it down and say it's inflated, but at the same time all they can try and do is control the ongoing growth as best they can," Mr Van-Petersen said. "If they wanted to prick it, they could, but Australia simply cannot afford to." 

New Zealand and Singapore have enacted strong policies to force adjustments in housing markets and Mr Van-Petersen said Australia could easily deflate the bubble by pulling the stamp duty tax charged to foreign buyers from properties of more than $15 million to, say, $1.5 million. 

But the property market is one of the few areas of the economy that is growing adequately as terms of trade plummet and mining companies shed value because commodity prices are falling in light of a slowing China. 

"Australia can't afford for property to have a hard landing. If housing prices bust, the banks will get hit hard. And then what is there? It's in everyone's interests right now."

Pretty spooky when they couch it that way. There are lots of places and things that can't afford to have hard landing - for instance China - but we know they're going through one as we speak; and if we are to understand correctly how our real estate market is connected to the Chinese economy and the money trying to get out of China, then it's likely not going to be the happy 9.8% growth prognostication.

What Banks Are Doing To Hide Bad Credit

You won't hear this anywhere else. This is my exclusive. :)
Recently a 20year old kid borrowed 25k from one of the Big Four banks. At the time he had a steady job, and he had the patter to sound like he was a good bet to pay it back. So they lent him 25k with a 5year repayment schedule. He then went and splurged the 25k on what you and I might surmise are more toys than chattels or assets. Then he lost his job and couldn't pay. Thus he marched into the bank and told them the situation. They asked him just how much he could pay, and he replied $20 a month. So the bank said that was okay and took the $20 per month on good faith. It took a few months for him to find a job again but by then the bank unilaterally closed out the account, saying the 25k had ben paid (news to the kid, he couldn't imagine who it might be). What happened is unclear, but basically the bank told him because the loan had been paid off, the loan account was closed.

I know it sound amazing but it's true. The bank closed out the 25k in bad debt by writing it off quietly, rather than pursue the money. The 20year old kid effectively walked out of the bank 20k or so richer, for no reason other than the bank didn't want that bad loan on its books. So the banks purged the bad loan off its books.

The question you should be asking yourself is, just how much of this kind of things going on? How safe then are the Big Four banks? I'll leave that with you to decide.

There's Water On Mars

The big announcement of the week was that NASA says there's liquid water on Mars. It seems like it's been coming for a long time, but it's taken until 2015 for NASA to verify all the data and say, yes, there's liquid water on Mars. If you stop to think about it, it seems quite obvious that there would be water, and liquid water at that given the conditions of the planet, but that is just an aside. Science says, not until all the data is in, is it incontrovertible, so here we are.

The weirder turn was how Ridley Scott knew that NASA knew, but couldn't revise his film 'The Martian' to include that new discovery, because it would have let the cat out of the bag. Ridley Scott also made news in that he spoke to Foreign Minister Julie Bishop saying he wanted to shoot the sequels to 'Prometheus' in Australia.

The fact that there is liquid water on Mars bodes well for a possible future human colony on Mars.What doesn't bode well still are the low gravity, thin atmosphere and punishingly cold temperatures. It's not like we can grow things with much ease on Mars which means we won't be getting a food cycle happening easily. Ironically, what Mars needs for human habitation is a good dose of greenhouse effect.

View From The Couch - 17/Sep/2015

The Crippling Global Debt

Walk-Off HBP had this little conversation he wanted to share. It's Satyajit Das talking about the problems of our global economy. The gist of it is pretty much in line with the prevailing observations about where we are in the debt cycle. There's a mention of Hyman Minsky in there as well, describing the various stage of debt financing and how the Australian housing market is definitely in the third phase out of three phases wherein it is no capable of paying off the loan principle or interest, and the only hope of making the money back is through capital gains of the underlying asset.

Satyajit Das' cheery interview leads us to understand that there is no real distinction between public and private sector debt, which in turn means our colossal private sector debt in Australia is ergo problem for the government and society at large. Not that it matter much today, but when Tony Abbott was going on about the debt, he really should have looked at the private sector debt instead of the government sector debt.

Even so, Das doesn't think there's much governments can really do to address this problem. After all, when looked at globally, since the peak of the GFC we've leveraged up 17% more global debt rather than pay any of it down. Nobody really deleverages, nobody really get through austerity and austerity in of itself does nothing to address the large mountain of debt. Das doesn't think debt jubilee is even possible without wholesale destruction of value.

Which is in many ways the crux of the problems. Nobody wants to give up the price tag on what they are sitting on. The people who carry on how there is no property bubble in Australia do so on the basis of trend lines and market relativism (so to speak) but completely ignore the absolute numbers and what they mean. They argue "It's in line with what things are worth" and totally ignore the fact that "worth" might be the most contestable notions - much more so than "I never had sex with that woman" or "I am not a crook". Thus, as Das points out, we're living in houses with price tags that have been 'financialised' and inflated - but we're happy to bask in the wealth effect which is the dtluionary thought that we got wealthier sitting in our houses doing nothing. Worse still, the inflated price represents how global capital tried to find returns and being unable to do so, landed in housing. As the money recedes when debts are called in, people's positions are exposed, and suddenly the price tags don't look so tenable any more.

Yet the world over there are people who borrowed money to buy things and when the debt gets called in early, are forced to cash out on the spot and lose money, or work very hard to stave off the debt collector. The post-GFC world has been marked by one effort after the other to secure these positions of 2007, trying to fix them in amber so people don't have give up their positions, their things, their assets that they got through borrowed money. The reason we kick the can down the road is essentially to preserve those people. And to that end the world has seen Quantitative Easing to facilitate that there is enough cashflow otherwise to make up for the debts that *can't* be called in, added with the monetary easing through low interest rates.

If that's not spooky, I don't know what is. We're doing all this "kicking-of-the-can-down-the-road" so Deutsche Bank doesn't blow up over Greek Bonds and derivative products based on Greek Bonds. Thus the Greeks have to wear austerity to save a German bank except of course in Iceland, they just let the banks fail. It probably worked out a lot better for Iceland to do so. The Greeks have no such choice. But Greece is actually what the future looks like for many parts of the 'Emerging Markets' world. Global debt will rob sovereignty from nations, communities, right down to individual people.

On Tony Abbott Being A Sore Loser

Look, he might be a sook. In the vernacular I grew up with, we call those, sore losers. Being a sook is what my office cat does on Fridays. Sore losers is what humans do, even when they're told not to do it. Kevin Rudd was a sore loser too, but hey, he came back like a champion. At least, my old tennis coach PB would mount those kinds of post-hoc argument: "That's what Champions do!" (Bless you PB wherever you are today.)

Julia Gllard's speech about being a woman wasn't everything and wasn't nothing, but something, was her only sore loser moment. Judging from 'The Killing Season' she does like to kid herself of a lot of things, but she doesn't seem to go sore all that often.

...but Tony Abbott? he's just.... argh...  For fuck's sake he faxed in his resignation to Sir Peter Cosgrove. Who the fuck does that in this day and age?  It says everything about the man who came to power promising ruin the NBN and 'fulfilled that sorry promise". To the end, a techno-loser, unfit to be PM in the 21st Century.

So I get it - he's a sook AND a sore loser. If you don't get it there's something wrong with you. But then this is a nation of sore winners, which is  a category I've never comes across outside Australia. Yes, we as a people can bask in the moments of great defeats and deep humiliation even though we won the war, so make of it what you will. Tony Abbott was in some limited ways, an exemplar of his nation.

Quick Shots - 01/Jul/2015

Greece Is Now In Default

It's weird how they've been beating about this bush but Greece is in default as of last night when they failed to pay that 1.6billion euros. They couldn't pay it because the IMF wouldn't lend them any more bail out money unless they cut pensions instead of raising taxes. The weird thing of course is that the people Greece failed to pay was the IMF. Yes, that's right, all these 5 years, the money has been cycling through Greece to keep paying its debts right back to the people bailing them out. The apparent convoluted and seemingly redundant move of money is of course because the IMF bought the Greek bonds to stop bond holders getting a haircut except those Greek bonds are tied to trillions of derivatives sitting on Deutsche Bank's ledgers and if they blow up, it really will be Europe's Lehman Bank moment.

So what happens now? There are many scenarios, but they're all made doubly complicated because Alexis Tsipras announced a referendum for his people as to whether Greece should or shouldn't accept terms from the Troika. In a nutshell, if the referendum votes No, it opens the door to the Grexit and backs Tsipras' hardball tactics with the Troika. If they vote Yes, it sort of steals the thunder from the Syriza Government. Either way it's nice to see the country that gave us words like drama and democracy is going to the mats with both.

'Prexit'

Unbeknownst to most of he world, Puerto Rico is also about to default. Once again, this one is mired in some strange complexities that make the situation worse than it appears on paper. Basically, Puerto Rico is not one of the states of the USA. It is a 'commonwealth' which allegedly means it can't declare bankruptcy like a city the USA, which means it is a little like Greece in that it can't get out of its functional union with the USA and it can't pay its debts. It's a little interesting this is coming to a head at about the same times Greece is trying to wind up its farce.

China's Share Market Crash

It was only a couple of weeks ago in the middle of June people were noticing how much the Chinese share markets had risen in such a short span of time. All kinds people were coming out of the woodwork to place bets on the markets and lo-and-behold they had share bubble going in no time flat. Now there's a big correction going on and it has sunk 20% from the peak, which is of course the definition of the start of a bear market.

I bet a lot of mum-and-dad investors in China would be spooked by that; but you had a market with terrible fundamentals drawing enormous amounts of money. Some of the companies being listed were no better than shell companies with nary a product to their name. It's the classic model of bubble behaviour when too much money is chasing not enough good stuff; that show yo get the kind of frothy market you have in China. It's like that anecdote about Joe Kennedy who sold short on equities in 1929. It is said that once he saw a shoeshine boys giving stock advice, he knew the bubble had to be over. Let me tell you they had articles about exactly that in April this year.

If you can't read tea leaves, the least you can do is read history.

News That's Fit To Punt - 16/Mar/2015

We Said The Same Thing About Julia Gillard

The not so big news is that the Federal Liberal MPs are unhappy with their Prime Minister. Former Minister and prominent-blowhard columnist Amanda Vanstone was heard making this remark in a 'Four Corners' episode:

Speaking on the ABC's Four Corners program, Ms Vanstone said it would be a simple mathematical calculation in the end which would determine Mr Abbott's grip on his job. 

"Understand this, as you get closer, every marginal seat member is thinking 'I could lose my seat', every safe seat member is thinking 'we could lose government and I won't have a chance of being a minister and I might be too old next time', so they're gonna be looking at what the polling says and whether they can win and they will stick with a prime minister who can win and they'll cut one off who can't," she said.

They're not words you want to see spelt out if you're Tony Abbott, but I remember these moments on the ALP side when Julia Gillard's polls stayed at 27% approval rating for months on end. All kinds of arguments were mounted as to why she should be doing better but ultimately she never recovered, and the backbenchers removed her for Kevin Rudd in order to "save the furniture". Oh what fun times those weren't. 

So the rough locus of politics being what it is, it's unsurprising that Amanda Vanstone can see the writing on the wall for Tony Abbott's Prime Ministership. He might have gotten himself a 6month reprieve but if the next Budget dogs it like the last - and let's face it, the last one is still dogging it, - then he may not have that 6months grace that he thought he had won at the spill.

None of this is really new news. What's more interesting is that the electorate has moved on to a post-Tony-Abbott sort of brain-space and have essentially written him off. The SMH has pulled the article from its site but this morning it was reporting that the swinging voters Western Suburbs of Sydney had abandoned Tony Abbott and called him an embarrassment. It was so bad the article is now off the main page and has to be dredged up by Google. 

In the groups, Mr Abbott was described as "just very incompetent and an embarrassment internationally" by one participant. 

Another said Mr Abbott was "an embarrassment. He is an absolute embarrassment. Every time he opens his mouth he just says the wrong thing." 

Some participants viewed Mr Abbott as unreliable and untrustworthy.
"He doesn't present well," said one participant. "He doesn't give you ... no matter what he's talking about, you don't feel confident." 

One woman declared: "He could be talking about the weather and you'd still think, oh… I don't know." 

The latest Fairfax/Ipsos NSW poll revealed close to one in 10 voters who supported the Coalition at the 2011 state election intend to change their vote on March 28 due to the performance of the Abbott government.

You'd hate reading that if you were a Liberal MP, no? 

I Owe, I Owe, It's Off To Work We Go

It's not exactly news that Australia's private sector debt is a much bigger problem than the public sector (i.e. Government) debt. Here is an article outlining just how bad it is. 

Barclays chief economist for Australia Kieran Davies says private sector debt-to-income gearing is currently at an all-time high of 206 per cent, up from a pre-global financial crisis (GFC) level of 191 per cent. This put Australia just within the top 25 per cent of the world when it comes to leverage.

However, when it comes to household debt - which includes mortgages, credit cards, overdrafts and personal loans - Australia leads the global field, according to Mr Davies, with credit continuing to pile up while the rest of the developed world is paying it down.

Using nominal gross domestic product, the bank estimates household debt at 130 per cent of GDP, which is the highest level on record.

The ratio compares with 78 per cent globally, down from an all-time high of 81 per cent in 2010. However, Australia is not too far ahead of a range of European countries. 

"Examining the distribution of household debt, Australia has the highest gearing of our large sample of countries, although it was practically a tie with Denmark (129 per cent of GDP)," Mr Davies said. 

"Switzerland (120 per cent) [and] the Netherlands (115 per cent ) were the next closest countries."

And so there it is, in fairly easy to read charts. The problem of course is that the more government tries to cut its expenditure, the more the private sector takes on debt. So to some extent the private sector debt reflects the government cuts that have already taken place - except it's not businesses taking on the debt. 

Mr Davies also found that while consumers and mortgagors are busy racking up debts, Australian companies have become more thrifty.

It said that non-financial corporations reduced their gearing from 84 per cent of GDP in 2008, as the GFC began to bite, to 67 per cent in 2011. It was the first period in which outright debt levels fell since the early-1990s recession, said Mr Davies. 

Companies had since leveraged up again to where debt represents 76 per cent of GDP. Even still, corporate Australia was markedly more prudent than the country's individuals.
"Although Australian corporate leverage is high by past standards, it is surprisingly low compared with other industrialised countries," said Mr Davies. 

"That is, world leverage, calculated as the simple average of the sample of countries, is currently 106 per cent of GDP, down modestly from the all-time high of 111 per cent of GDP reached in 2009." 

The bank warns that risks continue to build in economy, particular as the Reserve Bank of Australia eases monetary policy.

So, to some extent the government is right in trying to contract and cut, given that the Private business sector can afford to take on more debt... but for the housing bubble. And so, the RBA can't exactly be cutting rates even more unless it wants the housing bubble to go even more ballistic. 

But back-tracking a bit, you wonder how the RBA might have found itself in this rather silly position. My best guess is that ever since they changed the way they calculate CPI, they've been under-reporting inflation; and this under-reporting of inflation has been going on for some time, which bolstered easier monetary policy in the last 20+years. We know this because the cost-of-living has been skyrocketing ahead of CPI for the duration. Which means households have been getting a sweeter deal on property in the last 20years which accounts for the great housing bubble we've managed to engender. It's easy to see in hindsight, but who's really counting? Nobody's owning up to it; they were denying it even existed as recently as last year. 

In a very real way, we can now see the interest rate should be sitting higher but for the GFC where every other central bank has embarked on easy-money and ZIRP and QE programs which has essentially dragged our own RBA towards a similar kind of easing. It really is a rock and a hard place. If they raise rates, it would cool down the housing market but it will discourage the already low business investment, smash confidence and raise unemployment. If they go towards ZIRP, the housing bubble will continue to expand, and when the next crisis hits, it would be time to print money so the banks that are too-big-to-fail, don't blow up. 

But, as the Demtel man used to say, there's more. If the AUD keeps falling past the US75c mark, the import prices will go up significantly enough that even the artificially suppressed CPI will register the inflation. In which case, interest rates would have to go up, and with it will go housing prices and consumer confidence. Inevitably we're going to hit a recession. The question is how deep it's going to be and for how long. If 20years of growth comes to a shuddering stop, then it might be a very long recession. 

And, as the Demtel man used to say, there's even more...

The Free Set Of Stake Knives In Our Backs

The engine for the 24year run of growth of the Australian economy, Communist China is - to not put too fine a point on it - pretty fucked up. 

So where does Shambaugh see evidence of imminent collapse? He lists five "telling indications of the regime's vulnerability". 

First is that "China's economic elites have one foot out the door, and they are ready to flee en masse if the system really begins to crumble". He cites a survey of 393 millionaires and billionaires by Shanghai's Hurun Research Institute; 64 per cent said that they were emigrating, or planning to do so. 

Second is Xi's harsh political repression: "A more secure and confident government would not institute such a severe crackdown. It is a symptom of the party leadership's deep anxiety and insecurity". 

Third is the hollowness of official belief in Xi's doctrines. Officials are only going through the motions, he says. He recalls sitting through a conference on Xi's call for a "China Dream" where it was "evident that the propaganda had lost its power". Demand for a pamphlet by Xi was so feeble at the Central Party School bookshop that the sales staff were giving it away. 

Fourth, Shambaugh says, corruption runs deep and will outlive Xi's anti-corruption purge, which will succeed only in enraging powerful interests. 

Finally, the economy "for all the Western views of it as an unstoppable juggernaut is stuck in a series of systemic traps from which there is no easy exit," he says. Xi's attempt to break the traps, his economic reform plan, is encountering stiff internal resistance.
The exact manner and timing of collapse, says Shambaugh, is impossible to predict.
Predicting the demise of China's regime is not quite as startling as it might seem. In some ways it's entirely routine. 

The blindness of the West to the imminent collapse of the Soviet Union was a chastening experience. Analysts since have been hyperalert to a Chinese Communist downfall.

And there we have it. Peter Hatcher spends the rest of article making a case for why it might not be so fucked up, but the economic problems are starting to mount up - and they are remarkably like the problems faced by the rest of the developed world. Too much government debt, a housing bubble, capital flight, ageing population and stagnant growth. And generally speaking the case against a Chinese collapse are just as based on inductive reasoning as those who predict it on the basis of history. 

Plus, we know that the GDP reported by the Chinese is often party wish-casting and no reflection of reality. It may take a while yet for complete collapse but the collapse in commodity prices is telling us quite a lot about how bad things are in China. It was enough to prompt Gina Rinehart to hurriedly sell up her stake in Fairfax Publishing. 

Absence Of Sustained Leadership

Just a quick note about NSW politics which goes to the polls in a fortnight. In the last so many years since Bob Carr retied, it has gone: Iemma (37months), Rees (15months), Kenneally (27months), O'Farrell (37months), Baird (11months). It's pretty choppy no mater how you look at it. Iemma won an election but Rees didn't get to one, Kenneally was booted out for Morbid Obeidity, O'Farrell did himself in with the wine bottle gift thing and Baird is trying to keep government with just under 12 moths under his belt. 

This has run parallel to Rudd I (30months) Gillard (36months), Rudd II (3months), Abbott (18months and counting to the end). What we can discern from all this is that even if you're offering good government from a managerial point of view or policy aspiration point of view or operational point of view, 3years is about the grace you get from your own party, and this is so short because the party gets so little grace from the electorate. And apart from Rudd and most parts of O'Farrell, bits of Rees and start of Kenneally, and Baird where polls were good, extreme unpopularity in polls essentially drives change. 

I would posit that what has happened is that the electorate has chosen the polls as a means of sending a message when they cannot vote. With the ever tightening news cycle and the advent of social media, everything has to be immediate, and this is reflected in the fast an furious change of leaders on both sides. It is no accident that Tony Abbott is in strife. If he thinks the people vote in a Prime Minister, then he has to accept that the polls are telling him they made a mistake and want him gone.  

I am yet to decide if this is an improvement or a form of political decadence, but I do think Australia has hit some kind of new phase in democratic politics that is quite peculiar. It may not end if and when Turnbull or Julie Bishop take over, and when they lose, it won't change with Bill Shorten in the Lodge. 

The Debt Limit In China

The Crash That's Taking A While

For the better part of this decade so far, there has been talk that China and its property bubble and ghost city would come to a crash-landing of sorts instead of a much mooted soft-landing. One of the things about these different landings as described by economists is that nobody really manages a 'soft-landing', and those that appear to be soft-landings usually involve kicking the can down the road through stimulus spending. Theses partly why we are beset with the feeling that ever since the GFC of 2008, we've seen this before and China hasn't exactly blown up and crashed on the tarmac so  things likely are going to be okay. This is classic normalcy bias wherein we're inclined to think things are going as normal even when things are wildly spinning away from normalcy.

Just exactly how well or unwell China is doing is up for a lot of debate. The cracks started to show last year around May when companies started to default on their bonds, but "a Mysterious Mr. X" would altruistically save the day by buying out the debt position. Most would have read that Mr. X to have been an agent of the Chinese central bank, not wishing to start a credit crisis or a bank run, stuck a fingering the hole in the dyke. All the same, the Chinese government has been announcing that it has been growing at a pace of well over 7% for some years now, so we tend to get lulled into a sense of false security. After all, if China is growing at 7%p.a., it can surely pay off all its debts unlike the first world nations that can't seem to muster 1% growth.

And so, we come to this interesting video:


Anne Stevenson-Yang's presentation essentially kicks the rungs out of everybody's perception of the Chinese economy. It's much worse than one would think and it's in too much debt to do any heavy-lifting for the world. -2% on consumer spending? Zero growth? Saturation debt and no new credit as most of the credit issued is used to rollover old debt? I don't know about you, but she sure talks up a scary set of figures, and she may well be right. That Bob Davis isn't exactly doing a good job of refuting her well-researched points - he sounds more like he is trying to hose down the burst of bad news erupting from her research.

That is some badness she's painting there. It's certainly a far cry from the rosy, "China is growing at 7% p.a. rate" story the world has been swallowing hook-line-and-sinker for some years. As Ms Stevenson-Yang notes, that figure is what we might call "aspirational" in the sense that when the politburo announces the GDP growth, the industry uses it as a target benchmark. It most likely has no bearing to what is happening in reality at all.

For some time it's been postulated that China has been overly optimistic (we won't say lying, because they're aspirational figures, not measured ones), and so the real economy in China is not as large as people think it is based on the yearly announced figures. So China right now might just be a victim of its own PR success, with not enough of a developed economy to do the kinds of lifting through its consumer spending. This would explain the static non-growth in consumer spending figures Ms. Stevenson-Yang has been able to capture through her research.

And so property prices are sagging and commodity prices are falling and state-owned-enterprises are having a devil of a time paying of debts but they keep on making stuff because they need to keep making stuff, regardless of how little it returns. The ramification for Australia is frightening, for Australia has been riding a commodity boom on the back of China for better part of two decades, which explains how Australia hashed sustained economic growth for 22years.

That's all about to end.

The crazy thing is that what Australia and its people have done with the commodity bonanza is spent it and spent it big on housing. We earned this foreign currency and subsequently tried out-bidding one another for housing. Worse still, just as with the Dutch disease, the mining sector and its success, combined with the stampede toward real estate has hollowed out the economy. Manufacturing has totally been beaten out of Australia and handed over to Asia. We haven't grown a lot of industry to take the place of mining as an driver of the economy and have hitched our wagons to housing as the next engine for growth. Alarmingly, Australians have gorged upon debt so that private debt is at an alarming, historic high.

In short, we might have missed the full impact of the GFC, but that's only because China kicked the can down the road for us. When China undergoes its hard-landing, then of course there will be so many debt positions that will get unwound. As Ms Stevenson-Yang notes, at this point in time, the only question is whether it ends with a bang or a whimper. From the figures, it looks like it's going toe a bang and that would suggest the shock to the Australian economy is going to be substantial.

We can predict going back to the early 90's when the Australian dollar was US50cents, and unemployment sat closer to 10% than 5%. If the Coalition Government is still going to be banging on about surpluses then and trying their austerity measures, you can count on the RBA will be slashing interest rates right down to ZIRP. At that point, the GFC would have finally arrived on to our shores.

Miscreants On A Mission

The Predictable Drive In To The Ditch

The news this week is that Tony Abbott's poll figures suck more than ever. Hands up if you find his surprising? No? Didn't think so.

The really interesting bit in all of the commentary is how Tony Abbott is trying to characterise his first year and a bit in government by saying there are accomplishments a plenty to go with the things they couldn't get done. In the list are things like the repeal of the Carbon Tax and the Mining tax. He doesn't seem to understand that these taxes weren't some idle notions dreamt up by the Left to destroy conservative Australia, but fairly important planks of public policy, in as much as revenue raising for the government was concerned.

For a guy who came to power banging on about deficits, Tony Abbott sure has't helped himself as Prime Minster if he thought the high points of his government were abolishing taxes that were paying for useful things. It also ignores the great retreat of car manufacturing out of Australia, a sequence of events precipitated by TonyAbbott's own government. The point being, all the accomplishments he lists are things that probably need not ought to have been done, while all the things for which he is receiving blame and rancorous criticism and - let's face it - hollered insults are things also he shouldn't have undertaken especially because they are his ideological projects.

In short he may well claim the glass is half full but it's no good if the fluid in the glass is urine.

The Tricky Submarine Situation

Not a lot of people are standing up to point out the problem with the ASC. It's a shame that the person making the most sense is Paul Sheehan. Maybe it's like a broken clock being correct twice a day, but after he pens his usual poisonous character assassinations of the ALP politicians, he points out something that needs to be pointed out (God knows I hate quoting this man):

"ASC was delivering no submarines in 2009 for $1 billion. They have not improved their output … They are $350 million over budget on three air-warfare destroyer builds. I am being conservative. It is probably more than $600 million but because the data is so bad I cannot tell you. You wonder why I am worried about ASC and what they are delivering to the Australian taxpayer. Do you wonder why I wouldn't trust them to build a canoe?" 

At last the truth about this from a defence minister. Billions of dollars have been poured down the drain by both sides of politics on this giant pork barrel for South Australia. The ASC could build a canoe, but it would cost a million dollars and spend more time in repairs than on the water. 

The ASC has accumulated an abominable record of cost over-runs and should never have been awarded the air warfare destroyer contract. Johnston's refreshing candour was an admission that the ASC has been a financial sinkhole for decades. It is more a strategic liability than a strategic asset. 

Senator Johnston is also the first Defence Minister in a hundred years to seriously confront the bullying sub-culture in the Australian military, which has a recorded history of rationalising these practices dating back to 1913. 

And there's the crux of the biscuit. The ASC has been going for some time chomping up money at a greater rate than desired while delivering sub-standard product (pun unintended). There is no competition for the ASC, so if the Australian government dreams up a product it needs, the ASC is there to take the money and waste it until it delivers a poor product that roughly approximates the brief. It's a happy little monopoly where there is no need to cut costs or make savings.

Yet this very monopoly has led to the notion that Australia should buy ready-made subs off the shelf from Japan, which is causing a lot of heartburn in the ranks of the white Australian sentimentalists. After all, how could we fight them in Kokoda and Darwin and wherever else and suffer the indignities of the Burma railway; and then buy their bloody submarines? Why indeed? The noises coming out of Tokyo and in particular the Maritime Self Defence Service is the mirror opposite where they would rather not part with hard won know-how of how to run proper submarine fleets, just for mere filthy lucre. Why indeed? (And I say, with allies like that, who needs the Chinese?)

It is a rational and sensible idea to buy the submarines from Japan. However it is obvious as daylight that it won't be happening. It's a bit like the high speed railway thing - If they ever decided to do it, they'd have to ask the Japanese to help, and of course, rural Australia would have a fit. It's about as likely as buying Space Rockets from Japan, Fighter Jets from Japan, Helicopter carriers from Japan, Tanks from Japan, small arms from Japan, communication devices from Japan... You get the picture. Cultural sensitivities being what they are, it's going to be "No Jap Sub, No Jap Anything."

And this is before we mention the problem of not having our own industry to build our own defensive wares. Bob Katter knows all about that one.

This leaves the Abbott Government squirming and Defence Minister Johnston twisting in the wind because they don't want to keep throwing money at the ASC. But they need to keep throwing money at the ASC because it's pork-barrelling that has to be done. And while I am a decidedly pinko leftist social democrat sort of dude, I have to say the ALP argument that buying subs from Japan is bad because of job losses in South Australia, seems too much of an endorsement of pork-barrelling.

So what can they do? They ought to split up ASC vertical into three companies and make them compete for tenders for contracts. It's the only way: Break up the monopoly. It's one thing they should be looking at privatising. But you know they won't - and more's the pity.

A Decade Of Pain To Come

This one's from Walk-Off HBP who is probably rightfully worried that things can get worse than merely having a government of miscreants and nincompoops. Yes, it seems if things don't look bad enough now, they can get a whole lot worse.

My worry has more to do with Abbott's economic priorities, which ignore how rapidly the world is changing around the Lucky Country. Although Abbott has talked about diversifying the economy away from its dependence on China, his policies have effectively done the opposite. 

Where the previous government moved to tax outsized mining profits to fund investment in education and infrastructure, Abbott has changed incentives so that commodities and mining companies become a bigger share of the economy and have an even bigger voice in politics. Scrapping plans for a carbon tax, and resisting any serious limits on emissions, has made the economy more vulnerable to international shocks and made Australia a punch line at this week's global climate talks in Lima, Peru.

Instead of undertaking painful and costly restructuring, Abbott has prodded the central bank to loosen monetary policy more and more. Whether all that easy money is pushing Australia toward a subprime-loan crisis has now become a matter of serious debate.
Over the last year, anytime a journalist asked Abbott or Treasurer Joe Hockey about frothy real-estate prices, they were dismissed as nervous nellies. When I probed Hockey myself in September in Sydney, he derided such views as "rather lazy analysis". 

Yet in an interim report in July, David Murray, the former head of Commonwealth Bank of Australia, called the surge in housing debt since 1997 and banks' exposure to mortgages a significant risk. Since that time, Murray's panel said, "household leverage has almost doubled," and "higher household indebtedness and the greater proportion of mortgages on bank balance sheets mean that an extreme event in the housing market would have significant implications for financial stability and economic growth." 

On Sunday, in the final report to emerge from his yearlong inquiry, Murray urged specific reforms, including cuts in much-loved housing tax breaks. The report called for "unquestionably strong" capital levels, which could force the four biggest banks to keep another $25 billion on hand for a rainy day.

It's a bit long but then, the list of things the miscreants and nincompoops are doing is long. What can I do? Some times I think we must look like idiots to the world. Here we are donning the hair shirt of unnecessary austerity and going around pretending that Global Warming isn't real. It's not exactly a government of integrity and clear-thinking that we've voted in for ourselves.

Clearly we're idiots. 

Is Public Debt Worse Than Private Debt?

Stupid Is As ... Stupid Governs

Tony Abbott ran into flack with his interview with Karl Stefanovic. You'd think an interview with Karl would be mostly soft-toss fluff balls in the morning, but no. Karl sent a question right at Tony Abbott's head, pointing out that the ALP is being about as obstructionist as he was when he was in opposition. If it worked for Tony and the Coalition, why wouldn't Bill Shorten do the same?

Of course, in the dissembling that followed, Tony Abbott said that the mission of his government was to reduce the deficit so future generations would not have to live under the burden of debt. Now, this is a very curious construction because to cut back on the deficit, his own government is proposing deregulating the tertiary education sector, whites predicted to raise student debt substantially. In other words, the Coalition are under the delusion that if the debt doesn't show up on the government's ledger as public debt, this is somehow greatly beneficial to the people who will be saddled with the debt.

What Tony Abbott is proposing is to privatise the debt right back onto the future generations. With minimal public debt, subsequent governments would look great for future politicians, but individuals would be saddled with massive private debt incurred for getting an education.

Now, I'm not suggesting public debt isn't a problem - especially if it is massive like Japan's debt. That being said one wonders if Tony Abbott has taken a closer look at the ballooning private sector debt in Australia, the repayments for which are slowing down the economy. It makes no sense adding even more on to this pile, just so the government can pretend to be doing something important through washing its hands of education funding. Clearly it's a crock.

Maybe The Work Ethic Thing Is Not Universal

The Weird Things You Think Up When You've Got The Flu

I had the flu (again) and was laid out for a couple of weeks. I'm really only recovering my lungs this week and I've had a lot of stuff to think about at work so I haven't been writing much here. Apologies for the break in transmission.

Anyway, in-between the moments of headaches and coughs and general ordinariness, I had this insight that maybe our society putting too much emphasis on the work thing. It sounds crazy, I know, but here's the thing. We've come to the point where our government has so demonised the 'dole bludger'. that they don't want to hand out unemployment benefits to somebody under 30 for 6months while they are unemployed. The work-for-the-dole programs are presented as this great idea where these young long term unemployed people are made to work for their unemployment benefit money.

But when you think about that, you have to ask if that job they're doing is absolutely necessary. If it is necessary, then why isn't the government paying proper money to get that done by proper professionals? It's paradoxical because if the government had that kind of money it wouldn't have to cut the dole. So what you have is the government insisting that some random, context-free 'work' be accomplished when in reality it might not be relevant to the economy except it makes some people feel better that lazy people are being made to work.

What if the point of life isn't work and getting money? Maybe we're looking at unemployment benefits all wrong. Maybe what the dole really is, is a kind of dividend we pay out to members of our society based on the increasing efficiency of our society? Consider for a moment that the rewards for work are not distributed in any kind fair way.

Take Gail Kelly, the retiring CEO of Westpac who reportedly got paid 12.8million dollars this financial year. No wonder she's quitting. That's like winning lotto. With all due respect to her fine acumen as CEO and qualifications, there's no way her efforts were really worth that much. And her effectiveness probably had a lot to do with turfing people out of jobs to make Westpac a more efficient organisation. Which is to say part of her $12.8million remuneration involved putting people on the dole and taking their share of the capitalist money pie.

This sort of distorted sharing of the profits of business is happening all over the place. If there's such a disconnect between work and the rewards, I don't see why we have to pretend that it's all about the effort. Let's face it, somebody can only work so many hours the work-for-the-dole program, as hard as they can, for as long as they can, but nobody is ever going pay that person $12.8million a year. That $12.8million is simply not related to effort or dedication or skill. How can we then pretend that it represents fair value for Gail Kelly's work?

It's more rational to say, at some point there is no connection between work and its rewards. It's just circumstance and chance. So why do we insist that the connection applies to unemployed people all the time? It seems more delusional to think that the merits of the work ethic applies to everything all the time, given the extreme ends of employment and unemployment.

And it's not like the unemployed come from nowhere.

Economic Rationalism Always Kills The Golden Goose

Try this for an example. Imagine a person working for company A, manufacturing product B. Company A decides to move production to China. This is good for the company because the production of B gets cheaper. usually, it's like the fraction a cost, so let's say there's a 75% saving right there.

So let's say they're generous and Company A might pay out a redundancy to the worker which effectively buys them out for length of time until they allegedly find another job. But the person might not find another job because all the companies are moving their manufacturing to China to get that 75% saving. Pretty soon you have all these workers who lost their jobs who can't get another equivalent job, because those jobs disappeared too. Pretty soon, they're the long term unemployed.

Meanwhile, company A has pocketed the 75% saving in manufacturing costs and posted it up as profit. Shareholders lap this up because it represents 'efficiency' and 'productivity'. So in one fell swoop, they've made an unemployed person in their own country and then given that job to somebody halfway around the globe, and pocketed the change. This has more in common with killing  the golden goose; but this kind of thing has been the mainstay of managerial theory for something like three decades. And they keep coming up with reasons why this is somehow going to lead to a better economy while in fact the middle class has collapsed in America and is sinking in Australia. it's clearly self-serving corporate nonsense.

What most governments say when this happens is that these people have got to be re-trained. In reality the retraining programs often fly in the face of what actually happening in the market place for jobs. If a person loses a join the manufacturing sector, then it's cheap and easy to retrain them for something else in the manufacturing sector. If the entire manufacturing sector is shrinking overall, then it's just musical chairs where somebody misses out on the chair each round. At some point the government has to re-train these workers out of their sector which is going to cost more time and money.

The point of all this is to say, corporations regularly export the jobs and collect the difference as profit. They even devise ways to pay taxes by going international and feeding earnings through some weird tax scheme in tax havens like Luxembourg. It seems incredibly inequitable to lump the government with the costs of the unemployment imported from the third world, then complain that the government is spending too much money on welfare. If the business lobby don't like this so much, they should just bring those jobs back and employ people. It always amazes me that the ALP don't just tell the business people this, but instead go on about working with businesses and hand over subsidies which are bribes to stop them killing these golden geese.

Behold The Emptiness Of Political Promises - I Blame The Media

My New Rhetorical Toy

This week saw me in a bit of an argument about the merits of Jean-Paul Sartre's philosophy with a Christian who just came in with "Behold the moral emptiness of French Existentialism. I blame Nietzsche". That was a red rag to a bull, but the alarmingly funny thing (as in not hah-hah) was that the Christian didn't even know how deeply fucked up and offensive his rejoinder was, and kept digging himself into the ground. He just didn't get it until I turned the rhetorical device on to him to ridicule him.

So if you're wondering why I'll be saying "behold the empty" and "I blame (x)" in the coming weeks, it is to rub more salt into the wound and have a little fun with the outright obnoxiousness and insouciant petulance in the device.

Years ago at BTF, somebody quipped that they were getting sick of movies where a bearded wizard would appear and say "Behold!" You know those movies. LoTR, Harry Potter and any number of the rip offs. After that it became a bit of a joke where people would sign in to BTF as 'the Bearded Wizard' and type "Behold!" and nothing else.

So Who Are We Beholding?

Pleiades sent in this link because he would like you all to know that if debt was a problem, Tony Abbott and his sidekick Boy Blunder and Worst Treasurer Ever Joe Hockey have racked up even more debt than at any time under the previous ALP government. It's a pretty telling article so don't miss it.

That chart above tells us where we sit in the wide world of government debt. Greece is bad, so is Portugal, and Italy. Their problem is that they can't devalue their currency to get back into the export game and start paying off debt because they're Euro nations. Japan is - to put it bluntly - trying to inflate away the problem by printing money and calling it Abenomics. There are lots of other countries sitting above 50% GDP.

This raises a couple of questions. One is, is it really all that bad to be in this kind of debt as government? Sovereign risks aside, like where Argentina is being barred form paying creditors by a New York court, Governments of countries can't do the bolt. It's not as if you turn up one day and Japan or Italy have moved elsewhere like some failed business leaving behind an empty shop. And contrary to the people who make back-of-the-envelope calculations and doom-laden pronouncements about public sector debt, nobody has ever figured out really how much is too much debt to carry into the future, given that a sovereign country can always inflate away the debt. Public debt is not like private debt in that crucial sense.

In one sense public debt is more like a mortgage.
People take out mortgages that are way above their net worths all the time. And banks figure that's okay because the people are going to keep paying money like rent. If governments make sound choices in infrastructure investment, then they can borrow money and the infrastructure would provide the lift in productivity to help pay off the investment at an accelerating rate. What low debt says about Australia is that for all the talk of being the infrastructure Prime Minister, Tony Abbot is actually unwilling to be that infrastructure Prime Minister in his deeds. Instead, he wants Australia to pay for its way through direct taxation (i.e. your PAYG), shunt out the GST receipts to the states, and see what the returns are like on mining.

Given that commodity prices falling are directly impacting mining-dependent states like Western Australia and Queensland, it's become a recipe for a recession. The Federal government is going to let the states twist in the wind while it happily cuts away at things they oughtn't. We'll leave that discussion for another day.

The second question it raises is how can they move the discussion forward into borrowing to invest when they've demonised government debt to the degree that they have? I'm not asking how they sleep at nights. I'm sure it's crooked with a side order of shitting their beds. I'm asking how on earth this eminently inept government is going to do anything that actually involves infrastructure investment that increases productivity? Remember, this is the same bunch of luddites who want to dumb-down the NBN and dismantle the Green energy sector; let the automotive industry leave and shutdown whole swathes of manufacturing in Australia; sold off agribusiness to the Chinese; allowed rampant property speculation that has resulted in killing the margins of businesses - their alleged base. Having established fine economic-vandal-credetials, how in the name of Schumpeter are they expecting to encourage economic growth without investing in the economy?

We all know how mendacious and scurrilous these people were in their election campaign when they claimed Australia was in danger of becoming Greece. When you look at that chart above, I can't stop laughing at how asinine their campaign claims were. Look at all the countries we would have to pass on the way to becoming Greece. Some of them are powerhouse economies, even with great amounts of debt. I guess it's like that Forrest Gump adage: Stupid is as stupid does. We sure elected a bunch of stupid-doers.