Quick Shots - 26/Jul/2022

The Reserve Bank Gets A Review

I guess there is some kind of informational osmosis going on. about half a decade ago I was complaining about how the Reserve Bank of Australia miscalculates inflation deliberately in order to suppress interest rates. After all, most central banks benefit from political support if they err on the side of lowering interest rates. Ben Bernanke totally missed the GFC coming his way but once it was underway, he dropped interest rates to maintain liquidity in the market and rode that to the cover of Time magazine. The next time there was a major threat to the economy, central bankers around the globe slashed interest rates and in the case of our own RBA, they made noises to the effect that they didn't see rates going up until 2024. 

Now, to be fair they didn't anticipate the Russian invasion of Ukraine, and also the supply shock of China which is still trying to fight the pandemic with a Zero Covid policy which has delivered unto the world a supply chain shock. These things combined have created the kind of inflation that not even the statistical gimmickry can hide. 

All the same it's been a solid decade of ultra-low interest rates, and house prices have gone stratospheric. In the same decade, the RBA has been struggling to see wages rise, and so there is an affordability crisis that has supplanted the Global Financial Crisis itself. You can understand that as the bill for the GFC has been handed to the Millennials and nobody is taking responsibility. And, as you know, I'm not a Millennial and even I think it kind of sucks for them.  

What really sucks in this turn of events is that the inflation in question still not a demand-driven inflation. It's not like people got massive pay rises and they've gone to spend their pay rises en masse. It's not even all the printed money of quantitative easing because the benefits of those tend to go to banking and other financial institutions and not the regular folks on Main Street. So much for the notion that the RBA wanted to wait to see wages increase before raising interest rates.  

Worse still, companies are using the inflation as cover to rase their prices exorbitantly. "oh there's inflation, our costs are up," they say and somehow they're turning in a truck load of profits in their announcements during this reporting season. It all seems like the central banks of the world rig the markets exactly so the ordinary Joe and Jane can't get ahead. It really is worth asking if the RBA really working towards making people's lives better if the outcome is out of control house prices and stagnant wages. If the exchange is that people have to lose jobs to tame inflation, you sort of wonder who exactly it is that is benefitting from this lowering of inflation through raising of interest rates. i.e. If I have to lose my job so interest rates can go up and then inflation gets beat, who is getting ahead here? 

In that light, it is unsurprising then that the ALP government has decided to review the RBA's role.  It's about damn time somebody looked into this racket. 

Russia Ukraine War Drags On Still

The dumb war without any hope of a Russian victory drags on in Ukraine. Still, the deposit in the Kremlin does not accept he doesn't  hold a hand resembling a winning hand. The world awaits for the penny to drop (maybe, maybe not), or for a coup to happen (less likely) in the Kremlin. A lot of people are needlessly getting hurt and killed all because Putin has lost touch with reality. Worse still he has insisted on his army proceeding with World War II era tactics and the casualties on the Russian side have been spectacular/ horrifying (depending on how you view it).

A basic comparison of the USSR army that invaded Afghanistan in 1978 and the Russian Army of February 2022 shows that the Russians are weaker now than then, and that they waded into a war with an opponent who is quantitatively and qualitatively much better than the Afghanis they faced in 1978. When you factor in the global first world support for Ukraine, there is not a scenario in the conventional war sense that Russia can win. 

None of this couldn't have been how the war was conceived in Moscow. Now that the Russians are finally culminating, it's worth asking if Putin actually has any kind of exit plan. Because staying on in Ukraine is going to kill a lot of young people, and Russia's demographic can't afford that. So really the only question that remains is when the hell is Putin going to realise what we've known for some time? 

I guess we're going to have to wait and see. Whoever replaces him is going to have to give up on they 'Greater Russia' horseshit just to get back to the negotiating table. 

Up And Down With The Numbers

Curious, No?

The markets go up and then they go down. Over a long period of time, they tend to go up a certain percentage - and so if you're wise to it, you should just go put your money in indexed ETFs. Warren Buffett even claimed that his wife's ETFs did better than Berkshire Hathaway during the 2010s after the GFC. It may well be true, I don't quite have the means to verify the Berkshire Hathaway end of it. 

Still a quick look at the last 5 years of the S&P 500 tells an interesting story:

So at the end of 2018, it hit a little divot of sorts and was at 2416.62. from there, it climbed to 3380.16 on 14 Feb 2020 when the pandemic hit. It tumbled through march but recovered quickly, responding to the incredibly loose monetary conditions and has been climbing steadily ever since. The most recent peak was on New yers eve at 4766.16. Roughly double from the divot I mentioned. All in a span of 36 months. If you bought ETFs for S&P500 in December 2018, you'd be larfin' hard right now. How extraordinary is this? It took from Feb 1998 to Sep 2014 for the index to go from 1000 to 2000. Doubling your money in 36months is like, I dunno, Sydney real estate?

It makes you realise that what we're looking at is quite extraordinary, and probably tied closely to the extremely low interest rates and Quantitative Easing program run out of the US Fed - the Bernanke Put, so to speak - which was carried on by Janet Yellen and Jerome Powell most dutifully. All that money that was supposed to prop up the economy essentially propped up and rocket-launched the equities market instead. It went on for most of last decade.  

So people have been wondering about the inflation rate over in the USA because since about April 2021, we've seen it go up to 4.2%and then stay above 5%, and now creeping up to 6.8%. The original explanation was that it was the supply chain problems caused by the pandemic. However, more recently the explanation has turned into this being a serious bit of inflation thanks to the Fed printing money. For that to be true, I want to know where all this inflation was between Jan 2007 and March 2021 because if there was one thing the US Fed could not get up, it was the inflation rate. 14 years of the Bernanke Put and no inflation. Then the Pandemic came along and screwed trade and flow of goods, so now you've got inflation. 

Do we honestly think this bit of inflation is because the Fed is printing too much money and wage claims are rising? Come on - I haven't seen wages rising in the 5-10% range at all. At worst, some states raised the US minimum wage in 2021. The way the commentary is going, you would think that the lowly paid got double their money, but really, it's equity holders who got to double their money. The minimum pay raise looks like this. Sad. Clearly nobody doubled their money and a lot of places didn't budge from their paltry $7.25 an hour. You can rule out wage claims as the reason for the CPI rising in the USA. 

And yet the narrative is out there. The Fed's printed too much money so that's why there's this inflation. They ant the US Fed to cut back the QE thing and raise interest rates. It reads like equity traders and investors wanting to have a crash so they can buy back in. They're coming up with any old story to put pressure on the US Federal Reserve Bank to raise rates. They may come to rue what they wished for, because all those beautiful gains in the S&P500 just might come tumbling down when the rates start going up. Just remember, blaming the QE for the inflation that causes the rate spike is a lie.  

View From The Couch - 22/Feb/2017

A Quick Note About Inflation

It's been this blog's contention that inflation has been under-reported for a very long time. It happened because the incentives were lined up in such a way that under-reporting helped successive governments point at figures that made it look like inflation was tamed, as well as businesses that wanted to borrow money more cheaply from banks, and so it suited them that inflation was under-reported and thus resulted in lower interest rates.

The net result is that we have today whereby Australian households have record debt, and housing affordability is at a minimum, while interest rates are also at a minimum which encourages maximum borrowing, and therefore in a circular manner contributes to the record debt. This is against the context where the ABS cost of living index has come in much higher than the Consumer Price Index for well over a decade.

A week ago Pleiades sent me an AFR article, and lo and behold, somebody is saying exactly that:

Martin Conlon reckons the so-called "great moderation" of the past two decades is, not to mince words, "bollocks". And investors need to wake up to that fact if they hope to get anything out of the local sharemarket in the coming years. 

At this past week's Portfolio Construction forum in Sydney the head of Aussie equities at Schroders Investment Management told a packed auditorium that "we have been sold down the river" by central bankers who "have been asleep at the wheel for 25 years". 

This may all sound like old hat to you, but it's worth taking that little trip down memory lane to appreciate where Conlon is coming from and why it still matters now. 

It was once common currency that central bank mathemagicians had tamed the business cycle. The developed world was growing at a solid and stable economic growth, and those damaging inflationary outbreaks were a thing of the past.

The GFC came along and exploded that conceit. Rather than fostering stability, low rates had fed a massive run-up in debt that, via the US housing market and helped along by dodgy lending and misincentives, almost crashed the world's financial system.

But instead taking a new tack, central bankers doubled down via quantitative easing and pushing rates to zero and below. 

Conlon's biggest bugbear is how this has happened thanks to the narrow definition of inflation as the movement in a basket of consumer prices. CPI growth has indeed been low and contained for many, many years.

But he finds it "anomalous to say the least" (read: bollocks) that we can say that building material prices going up is inflation, and is therefore bad, but you put them all together in a house, and when the price of that goes up, it's good.

The very details of how the central banks calculate inflation is hidden from view, but occasionally we're given a glimpse and we find that it includes things like extreme luxury vehicles. Given that they are by nature stable in pricing, and outweigh the price of household staples of any description, it's easy to see how the Central bankers have found it relatively easy to suppress CPI figures for quite some time. Add in the fact that if you choose to look at things that are least vulnerable to inflation for your index, when there's actually any inflation (or deflation) going on, it's even harder to find any movement to your index.

 So, here we are today and the consequences are what we have - high private sector debt, low growth, historically low interest rates, terrible housing affordability, and a Reserve Bank that is suddenly a little concerned about all this. 

"We have been seeking to balance the risks from having inflation low for a longer period against the risks from attempting to increase inflation more quickly, which would partly occur through encouraging more borrowing," said Lowe, who has kept rates steady since last easing in August. 

While there was a danger low inflation could lead to a self-fulfilling decline in inflation expectations, he did not see "a particularly high risk" of this in Australia. 

However, he did see risks in encouraging more borrowing by households where debt to income ratios were already at record highs. 

"At some point in the future, households having decided that they had borrowed too much, might cut back consumption sharply, hurting the overall economy and employment," he warned.

"It is difficult to quantify this risk, but it is one that is difficult to ignore."
This is a major reason financial markets have almost priced out the chance of another cut in the current 1.5 percent cash rate following two easings last year. 

Lowe noted that high levels of debt combined with subdued wages growth were already making households wary of spending freely, choosing to save more instead.
While some pick up in wages growth was expected, the RBA's liaison with business suggested the upturn was not imminent, he said.

Knowing what we know, that all reads really funnily. The RBA is worried that the illusion of low inflation they've created might lead to a deflation through perception - but the governor doesn't see a high risk. If the CPI is masking inflation, then yes, the physical economy might just prove to be entirely different to the fiction created by the CPI. Given that the CPI is what it is - an elaborate fiction - it's hard to see how there would be a real deflation breaking out anytime soon. 

The governor then follows with the idea that households borrowed too much money and can't spend, so if the interest rates go up, it "would cut back consumption sharply hurting the overall economy". It's contradictory that people have money but won't spend because they have an expectation of deflation, but at the same time have no money because they're stretched to their limits with debt. Furthermore, if inflation has been under-reported for a while, there's a good case to have a bias towards tightening, but the governor seems to be making a case as to keep things as they are.

Should we be worried?

If doing it wrong for 20-odd years has become the new normal, resulting in very distorted outcomes, do we begin to worry or do we consign such worries to outliers and pay no heed? If you set sail from Sydney for LA with a broken compass and three weeks later you find yourself sailing in the antarctic ocean amongst the icebergs and penguins, do you worry? I don't know. I would, but the RBA seems to think not. It's steady as she goes and onward into the storm.
I don't know how this is going to get unwound. I imagine a black swan is going to come and shit all over the status quo. The outlook is rather bleak that way.

May The Fourth Be With You 2016 Edition

Fighting Deflation In Japan

Here's something from Zero Hedge.

Interestingly, the BoJ’s attempts to achieve its price inflation target continue to end in failure with unwavering regularity. While the central bank’s astonishing ineptness in this respect is a blessing for Japan’s citizens (at least for the moment, their cost of living doesn’t increase further), it harbors the danger that even crazier monetary experiments will eventually be tried. 

While threatening additional easing measures at his press conference (such as driving negative deposit rates further into negative territory) Mr. Kuroda seems to have explicitly ruled out the adoption of “helicopter money” by the BoJ. This is quite funny, since it seems extremely unlikely that the BoJ will ever be able to extricate itself from its balance sheet expansion (which de facto amounts to an “unannounced” case of helicopter money provision)

Of course BOJ boss Haruhiko Kuroda ruled out 'helicopter money' provisions for the way to go about funding the government directly because it would be illegal. Thus it follows that they'll have to think up something else other than the Negative Interest Rates Policy to do in order to reach this 2% inflation goal. 

It's sort of interesting how the Bank of Japan went looking for this 2% inflation rate and did so by massively expanding the monetary base - which inlay man's terms is "printed lots of money" - and somehow still managed to have the Yen go up. From our old high school texts we learned that the Weimar Republic era Germany printed money to pay reparations and this resulted in astronomical inflation. It is therefore interesting that the emir scenario hasn't kicked in at all.

One of the reasons the expanded monetary base hasn't done the trick is because the printed money has gone to the banks who do not lend the money out as planned, and so the money sits there in the banks unspent. The banks for their part complain that there is nothing in which to invest. Thus the great printing press experiment remains stuck in the vaults of the banks. 

The problem is that the inflation would only go up if that money went around the economy chasing assets. To do that, they need consumers to spend, but consumers have all sort of reasons not to spend. Shinzo Abe for his part has been imploring the major corporations to raise their wages. Yet even pay has stayed largely stagnant. 

What this indicates is that the printed money went to the wrong place, pretty much as TARP and QE money went to the wrong places. As objectionable helicopter money is, the BOJ need to figure out how to shove that money into the pockets of the ordinary citizens so they feel they can spend that money. Otherwise all the prince money is going sit in the vaults of banks.

Reserve Bank Of Australia Cuts Rates

So much for the prognostication that the RBA might cut rates around June.
Instead, they were decisive.

Tuesday's historic interest rate reduction coincides with the federal government's third budget, which is expected to be mildly stimulatory despite pressure to narrow the deficit.
Deflation in the headline consumer price index, due mainly to falling oil prices and aggressive retailer discounting, was the first such quarterly contraction in seven years. 

Moderate inflation, the result of demand for goods and services – including labour – just outstripping supply, is usually the mark of a healthy economy. 

However, when prices and wages continue to fall, consumers often hold off on buying and companies on investing. Deflation also pushes up the relative burden of debt.
The cash rate is now easily at its lowest level under the current system of monetary policy setting. 

The latest cut puts Australia into the club of developed economies with ever-falling interest rates and bond yields. Japan, the European Union and parts of Scandinavia now have zero or even negative nominal rates. New Zealand, too, looks likely to keeping cutting from an already-low 2.25 per cent official cash rate.

Let's not kid ourselves. If the economy were actually running well, the RBA wouldn't be cutting interest rates. As the vagaries of politics go, it happened on the same day the Budget was brought down and really gave no scope for the Federal Government to argue it was managing the economy well.

If there's one dumb thing that the Howard Government entrenched in the public consciousness, it was the asinine idea that lower interest rates were a sign of better government. Now that interest rates are at historic lows and set to go even lower, it puts a big lie to the position that the Governments doing any good management of the economy. If this is good management of the economy, for goodness sakes give us the other stuff.

And So The Budget Happened

This year's budget would underline just how ineffective this government is.

Labor has questioned why the government is cutting corporate taxes while the budget is in deficit and only handing income tax relief to Australians on over $80,000 a year even though 75 per cent of Australians earn under that amount. 

In his first interview since Tuesday night's speech by Treasurer Scott Morrison, Mr Turnbull said he believed his first budget - which delivered tax cuts for small and medium businesses, new measures to encourage young people into jobs and cutbacks to superannuation concessions for wealthy Australians - was an "exciting" one.

"A lot of newspapers are saying, 'this is a bit of a dull budget'," Sunrise host David Koch told Mr Turnbull. 

"We all thought you would bring the big excitement and changes."
Mr Turnbull responded: "Scott Morrison was delivering a plan for jobs and growth - I think that's exciting but everyone has their on views on that. 

"The BCA [Business Council of Australia] described the changes to business tax, the biggest changes to business tax in more than a decade. 

"These are substantial tax reforms but these are reforms that are designed not for the short term, not for an election. 

"They are designed for the long-term, to ensure that we continue to get that successful, economic transition from an economy that was fired up by a mining construction boom to one that enables us to live within our means, have a sustainable tax system but above all, drive that economic growth and jobs upon which our futures and those of our children and grandchildren depend." 

Despite the RBA's shock decision to cut the cash rate to a record low of 1.75 per cent on Tuesday, Mr Turnbull said the economy remains fundamentally strong.

I like the insistence that it is an exciting time and that the economy remains fundamentally strong when on the same day the RBA goes and cuts interest rates to historic lows. For reasons and factors totally out of their control, the Australian economy is heading into the ZIRP twilight in the next few years without a plan to get out. It's not even as if Australia has a really matured manufacturing sector or the population growth is stagnating (thanks to immigration it's not) so it can be sheeted home to the massive amounts of money tied up in the Property Bubble together with the world's largest private sector debt per capita. If you want us to get excited about that, you've got another thing coming Mr. Turnbull. 

None of those problems are solved. Negative Gearing stayed in place, which was something expected, but you have to wonder about the wisdom of tightening the Superannuation loopholes fr the rich while keeping Negative Gearing going because some people think the money is going to flood into the property market, furthering the Bubble. It strikes one that the Federal Government - regardless of which party is in power - refuses to acknowledge the elephant in the room and keeps trying to talk around it as if there's room to manoeuvre. 

A crackdown on superannuation tax concessions for the rich, coupled with a budget day cut to interest rates, could increase the flow of funds into negatively geared investment property.

Ahead of the 2016-2017 federal budget announcement, two of the country's leading actuaries, Rice Warner chief executive Michael Rice and Mercer senior actuarial partner David Knox, warned that any crackdown on super tax concessions for the rich without any changes to the negative gearing rules could have the unintended consequence of pushing more money into property. 

That is exactly the policy combination that we got on Tuesday night. And to add fuel to the fire, earlier in the day, the Reserve Bank of Australia dropped the benchmark interest rate by 0.25 per cent to a record low 1.75 per cent.

In other words, this Government just fed the elephant in the room while not acknowledging it's there. 

All that being said, it's not as if it's making outlandish forecast projections for growth like WTE Joe Hockey's last budget. There's some difference between a plain old crappy crap sandwich and a double poo sundae. 

Deflation Shock?

What They Mean By Deflation

Where do we start with the news that we saw deflation in Australia in the last quarter? We haven't seen deflation since 2009 when markets were at their nadir after the GFC broke.

The surprise drop in the price of a wider-than-usual range of items drove the Australian dollar down more than 1.5 per cent and could force the Reserve Bank of Australia to cut the cash rate as soon as next Tuesday, say economists. 

The Australian Bureau of Statistics said on Wednesday the consumer price index (CPI) contracted 0.2 per cent in the three months to the end of March, taking the annual rate to 1.3 per cent, compared with 1.7 per cent at the end of December. 

More importantly, the core annual rate, after lopping off or re-weighting volatile items such as fuel, came in at 1.55 per cent, well below the bottom of the Reserve Bank of Australia's target band of 2 per cent to 3 per cent. National Australia Bank described the core inflation rate as "the lowest ever".

And so we are led to believe that interest rates will be cut soon. 

I know it's contrarian of me to say this, but the inflation rate has been under-reported since the ABS changed the way it measures inflation rate. Given that it is prone to (or rather, intended to) under-report the inflation, it's not surprising that a few commodities dropping below trend would give rise to such figures. In particular it's notable that health, insurance and education still went up. In an overall sense, things are not getting cheaper  in the cost-of-living stakes as the deflationary figures would have you believe. It's not even certain that the deflation would persist into the next quarter. 

Still, the cheated inflation rate has led to a very big tendency towards looser monetary policy which has fed the Property Bubble through low interest rates. In a way it is a self-defeating feedback cycle where, as inflation is cheated downwards it creates conditions for lower interest rates, which in turn create conditions that results in a Property Bubble forming because there is nowhere else for the money to go. As more and more money is tied up in Property and Financial instruments, the less money is spent in the economy so there is even more pressure downwards on inflation figures but not necessarily inflation itself. We know there must be heavy duty inflation going on somewhere because the very definition of inflation is too much money chasing too few assets, and Australia for all its riches isn't that rich in assets beyond housing and mining and banking.

What should be galling to the Government if not the RBA is how all the money that's flowed into the market through low interest rates is finding a way not into industrial capital investment but into housing and property. Given the lowered interest rates there should be a lot of money going around but somehow it all finds its way to the big four banks who then don't invest in anything because, well, there's nothing of note into which to invest. While the mining boom was going on, there were any number of things in which to invest, but the post Mining Boom economy has shown just how hollowed out Australia's economy has become. 

Let's face it, the most glaring problem might be that even at 2% official interest rates, there is only anaemic economic growth in a country that cannot be described as mature industrial. It's not like wages are rising rapidly. It's not like the government has a plan beyond being excited and wanting to be agile. It sounds as hollow as the economy when the same government spent enormous political capital crippling the NBN. Should our country be in the sort of economic-figure-doldrums like Japan, Germany or France? 

From TwIRP Towards ZIRP

Of course, the markets are factoring in a couple of rate cuts this year. If they do cut 0.25% in May and the another 0.25% by the end of the year, we'll be a lot closer to ZIRP than ever before. 

I don't know if the Property Bubble is starting to affect people's spending, not so much through debt being a problem, but more in line with the fact that lots of Millennials are staying at home. They probably won't be buying whitewoods for a start but they are also restricted as to just how much stuff they can buy if they're still dwelling in their parents' house. There's a lot of demand right there that's essentially blocked by the very physicality of the economy. Even if people had money to spend, they can't buy things because they have nowhere to put them. They can't spend on services because in most part they are met easily by living at home. The only things they do buy are gadgets like smart phones. 

Indeed, one of the interesting things about the Property Bubble in Australia is that has been going on for so long that it hasn't needed to pop to significantly hinder economic growth. The low interest rates that continue to fuel extraordinary valuations has led to record profits for banks, and that's no accident. The post-GFC economy might be hard on primary and secondary industries but the financial sector has been doing really well on the back of all the easing.

And lets face it, the Central Banks of the world are most likely swayed by the opinions of bankers so it comes as no surprise that banks have made out like bandits under these loose monetary policies. Pretty soon all the bankers are going to be telling the Reserve Bank how 'deflation' is killing asset prices and make it like there's a major crisis going on out there in the various markets. If the deflation goes two or three quarters, it will be a clamouring of bankers knocking on Glenn Stevens' door. You have to wonder then how long the RBA is going to take before it gets down to Zero Interest Rate Policy. When we get there, we'll understand the wealthy have locked in their advantage, and that Australia is officially 'post-industrial' like Japan and European countries with low interest rates, low inflation, and low growth. The joke would be that we were hardly industrial before we got there - we put the money into housing and the road came to an end.

John Howard Did Us No Favours

I guess you have to go back in time a bit to the Howard Government to see where the number-fiddling started. Unemployment in the second half of the 80s and first half of the 90s was a big thing. The figures were such that it was part of John Howard's pitch that he would bring these figures down together with the high interest rates. It was under the Howard Government that welfare was cut and privatised, while pushing people off unemployment benefits and on to things like disability pensions. It was an attempt to recategorised the people who couldn't easily find employment so that they wouldn't all show up as unemployed. They no longer showed up as unemployed so it looked like the Government was finding people jobs.

Similarly the under-reporting of inflation started during the Howard Government. When governments talk about inflation rates of the 80s and 90s as if those figures can be compared directly, they're being mightily disingenuous. Back then the inflation rate and cost-of-living figures were in line and almost interchangeable. Today, there is a huge blow out in the difference between the inflation rate and cost-of-living, so much so nobody's even talking about it any more.

So if part of the Howard Government's big achievements were lowering unemployment figures and interest rates then it did so by cheating on the numbers. By cheating so hard it set up this decade for the inherent contradiction of its claims to surface. The economic growth figures are so low because the Howard Government didn't make proper investments in its time - it chose to fiddle numbers and created the conditions for the Property Bubble to manifest instead. Now it's time for the subsequent Coalition government to clean up the mess but it's flying blind because the numbers are phoney. All thanks to the Howard Government.

But hey, we kept our AAA ratings!

Bloody Monday - 2015 Edition

Well, What Goes Up, Must Come Down

It's been this growing disquiet all year around China. The cracks were showing but maybe the market was in denial. Or maybe they convinced themselves all was well in the face of the share market rises in Shanghai. After all, if the shares are rocketing up, something must be going right in the market, people figured. But slowly we kept hearing things that belied that simple understanding. We heard that the growth figures were not something measured, but more like aspirational targets expressed by the Communist central government, which would prompt everybody to chip in and hit the target. We had read reports of ghost cities built on borrowed money with price tags too high; and then of course there was this notion that China would simply move to a consumer-consumption driven economy.

This must be the month where it all went out the window because fear has gripped international markets and everybody's selling out their positions. They're not even going to wait for October, they're going, getting right out. And so we're seeing the entire worlds' markets all retreating at once, one retreat feeding on to the next in the timezone domino of market collapses. It hasn't been quite like this since 2012, and quite honestly, it's sharing hallmarks of the 2007 collapse. It's all very ugly because the problems of 2007 haven't been solved enough to make us weather these moments better than 2007. And of course 2007 turned to the bailouts of 2008 and the rest fit has been about kicking cans down the road, which of course includes the Greek situation which is tethered to the rest of the PIIGS.

In short, we're on a clock of about 12 to 14 months before the Lehman Moment gets a sequel and people will scramble for bail outs - on the eve of a Presidential election. All the same, the most important notion is that this time, there's nowhere to go. They can't go below ZIRP to stimulate more credit growth; they can't cut taxes even more to stimulate consumption - that trick's already hit its limit; and none of the creditors can afford to let the debts go bad because it would blow up their own position - which last time prompted Quantitative Easing so people could get over the hump. "Moral Hazards" - and I say that with irony because you know it turned out that it was more important to save everybody's bacon than encouraging "Moral Hazards".

So depending on how badly this drop affects Australia and its consumer sentiment, you can count on the RBA to go to ZIRP, just to support asset prices. There's not much more they could do as the perfect storm hits for the second time in a decade.

AUD $60 Billion In A Day

Just how crappy was the All Ords today? Take a look at this:

Ouch. A few weeks ago, the ASX was hovering closer to 6000 than 5500. There was talk of a secular Bull Market forming, even though the earnings were not exactly like for what people had hoped. The splatting sounds you're hearing are leveraged investors leaping off the ledge. At least, it used to be in the 1929 crash. It's early days yet as investors will go on a big purge of companies carrying too much debt. The four major banks have beaten a retreat of 20% off their highs this year, just in this month, so this could transmogrify into something a bit scarier quickly. If you cast your mind back to 2008, when global credit totally seized up, there was talk that banks would fail and there would be a big run on banks. At the time Kevin Rudd stepped in by guaranteeing deposits and backing the banks to the hilt. He took lightning fast action to stave off the GFC induced collapse of banks.

This time, we're stuck with captain Snaily Failure in the Lodge, so we may not get a Decisive bit of action out of this idiot government until it's too late and even then it will likely be too little. Some ideologue - I'd guess Cory Bernardi or Eric Abetz - will bang on about moral hazard as Sydney and Melbourne property markets descend into carnage. Remember, we've got record private sector debt. A lot of positions are ready to burst if the margin calls are made. Hold on to your hats!

You Know What's Weird? Gold

Gold is a commodity as well as the metal by which currency used to be measured. Of course, none of the major currencies have the God Standard going, and it's been this way since Richard Nixon shocked the world and took the US Dollar of the gold standard. You'd think with this crisis brewing for the last few weeks that Gold would go up as people lost faith in equities and bonds and fiat currency notes. But no - it's been going down.

...which is weird.
So, in 2008, they start QE and you can understand the impulse to buy gold because, hey, they're "printing money". We would expect to see the sort of inflation that broke out in Germany between the war as it printed money to pay off the reparations for World War I. Now, inflation an the measurement thereof is a separate bugbear, but there simply hasn't been that kind of inflation going on. Instead the Central Banks have worried about deflationary pressures and so interest rates have plummeted to zero or near-zero in many advanced economies. Gold peaked at 2011, but has been sliding ever since - which I suppose suggests the inflation expectation is less than zero, and has been for a long time.

When you include the fact that gold actually has commercial uses beyond just being precious, then it makes sense that the Commodities collapse as well as the ongoing deflationary pressures has pushed gold down to this level we see today. What's weird is that if fear was really running around the globe, you would expect that gold price to jump.

Once More For The Dummies Blowing Bubbles

I'm Just Sitting Here Watching The Bubbles Go Up (I Just Had To Let It Go)

Yeah, I know I know. I've been saying there's a property bubble in Australia and it dates back a good decade and a half, but the RBA, Treasury and all governments have been talking it down for the entire time. All of a sudden this quarter, Treasury, then the RBA have come out and stated they've seen the elephant in the room. What's even more astounding is that in the face of expert advice, the Prime Minister said he just wants property prices to go up because it's in his personal financial interest; Worst-Treasurer-Ever Joe Hockey said, get a better job if you want to buy into property; and the real estate sector pundits are coming up with all manners of statistics why it might not be a property bubble that is unfolding. Some are even arguing that it can't be a bubble because it's only a shortage of supply - which makes as much sense as "get a better job". Post-hoc arguments like that don't really count as analysis.

The cycle of blame in the media has gone into overdrive as foreign investors who have bought up the top end of town are blamed, as well as negative gearing and the relative lack of supply, record low interest rates, and the notion that property never goes down. One imagines there are any number of journalists who will never get into the Sydney housing market with their straight up journalist's salary. But they're all barking up the wrong tree. Is there a bubble? Yes. Did it start yesterday? That would depend on what you mean by 'start' and 'yesterday'. I can assure you the phenomenon didn't manifest itself out of the blue, out of seeming nothing.

The point is, when too much money chases too few assets, that's the definition for inflation. In the past when inflation reared its ugly head, central banks would raise interest rates to calm down prices. This was how the inflation component of Stagflation of the late 1970s and early 1980s was tamed in America by Paul Volcker, and is the very mechanism by which we understand "the recession we had to have" in the early 1990s in Australia when interest rates soared to 17.5%. Those were some heady days!

Since then, our central banks and governments have indulged in a few naughty practices and it comes down to this: They've been screwing with the way inflation is measured in such a way as to under-report it. They've been doing it for some time, and to such an extent that inflation looked markedly lower than the Australian Bureau of Statistics' own cost-of-living measures. For a good decade now, we've lived in the condition where inflation has been reported markedly lower than the cost of living.

Simply put, the RBA is setting interest rates too low because it's measuring inflation incorrectly. Why does it do so? Because it gets rewarded easier that way, by lowering the hurdle just a bit each time. And because it's setting it too low, there's a property bubble going on; and because it's measuring it incorrectly, it took until this quarter for both Treasury and the RBA to come out and say there's a bubble.

Seriously folks, if inflation is reported lower, it gives licence to central banks to ease monetary policy rather than tighten it. By underreporting inflation for so long, there has been a cumulative easing of monetary policy to such an extent that we're now at 2% interest rate as a property bubble rages on. There's simply too much money chasing too few assets, but the RBA won't pull back from easing because it's believing its own inflation figures. Meanwhile, the general populace who have inelastic economic needs - food, clothing shelter, power & telco - have faced a rising cost of living for so long that they hardly have the disposable income to keep consuming. Private debt has reached incredible highs in Australia, as it has in other anglophone countries, and it's stopping people spending the way the RBA thinks it should. Adding more credit and easy money to the mix isn't going to work.

So what should they be doing? The answer is pretty simple.
The RBA needs to dust off the old way of calculating inflation used back in the 1980s, and figure out just how much they've under-reported inflation over the years; then they need to jack up interest rates just like they did in the early 1990s, to convincingly take away the punchbowl. But without doing so, they're letting all the easy money take up zombie positions in the economy and there will never be a return to strong growth. And at the end of the day, strong growth is their mandate.

RBA Cuts Rates to 2.00%

Historically Low Rates

Just as the scuttlebutt around the markets predicted, the RBA cut interest rates yet again. At 2%, it's never been this low in the time the Reserve Bank has existed. More over, they did so even with the threat of real estate prices in Sydney going even more ballistic. It's pretty much as the IMF suggested, and really hen you look at it, it's still quite high compared to the other countries running their ZIRP, especially if the Reserve Bank of Australia likes to move in 0.25% increments. We have 8 increments to zero, and 6 to the 0.5% being offered in the USA. It's enough to still encourage wary internationals to buy our bonds.

Of course, as I've discussed before, low interest forms a very difficult frame around what exactly we're seeing as our economic future. The collapse in interest rates in advanced countries has gone hand in hand with the collapse of the future horizon, where it's unclear where the next spurt of growth is going to come. The fevered investor activity in real estate happens exactly because the investors cannot see the future-industry-to-come beyond the mining boom, they're rushing to lock up their spoils in real estate in the hopes of squeezing rents for their cashflow.

Added to the fact that speculative activity increases as money supply becomes easier, and you have exactly the scenario where there's too much money chasing too few assets. There is inflation going on in the markets, but interestingly enough, we're being dragged towards ZIRP all of our own down under precisely because the RBA doesn't want to pop the bubble and create a stampede for the door.  The problem is, the RBA has to either wear a preternaturally high Australian Dollar, or wear a property bubble. It's already at the point where the RBA is finding it hard to raise interest rates, so the question that looms is just when are we going to get down to ZIRP? Because the rates really appear unlikely to go up any time soon. In fact going up would act like a margin call and suddenly all these happy home loans will become distressed. It would cause a shitstorm. Besides which, given the weight of globalised capital markets, the only way forward is no cuts or more cuts.

And what the hell is Sydney going to look like when interest rates hit even 1.00%, let alone a number starting with zero? It's going to be really wild.

What's really strange is that politicians of this land seem perfectly okay with all of this.

Where QE Has Taken Us

The Central Bank Conundrum

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

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

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

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

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

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

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

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

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

Discounting Inflation

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

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

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

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.

An Odd Phenomenon

The Inflation That Wasn't There

I'm trying to wrap my head around how something like this can happen.

The IMF's database shows goods and services costing $US100 ($A97) to produce in the US now cost $US41 to produce in India, $US67 in China, $US105 in Germany or Britain - but $US161 in Australia.
Only Norway and Switzerland are more expensive to do business, or spend money in. Since 2002, the dollar has turned Australia from a relatively low-wage, low-cost country to a high-income, high-cost one outpacing even Japan.

Here's the graphic from the page:

To be frank, I just don' get this. For the last decade, the Reserve Bank of Australia has been pretty rigid in insisting on sitting on the inflation rate, keeping it under 3%. To that end, they've run their interest rates up when the inflation figure hated up. During that 10year span, there were plenty of moments when they insisted the inflation rate was not so high even though cost of living figures kept coming in higher than the CPI.

So when you get to the bottom of the article you find that Taiwan has been printing its money furiously to keep their currency in line with China - to keep their labour force competitive - and somehow have experienced a price deflation.

This is really curious. The RBA didn't print money, sat on the inflation rate hard, and somehow Australia's index prices have inflated from 77 to 161. Taiwan printed money and somehow its index lowered from 62 to 52. I'm sure there's a tricky economics answer in there somewhere, but if I were to swing my Occam's Razor, I'd say the RBA has been getting their inflation figures totally wrong for a good decade and the net result is this rather nasty bit of price inflation. The article attributes the rise to the Australian Dollar, but this seems arse-about. The Australian Dollar is high because everybody else is furiously printing money and we are not.

It would also go some way toward explaining the elephant in the room, the property price bubble. Because the RBA kept reading the inflation to be much lower than it really was, it ran interest rates much lower than it should have, which resulted in too many people borrowing money to buy property, contributing to the bubble. So in that way, it can be understood that Australia did "print money" without actually printing the dollar bills. - we simply re-calibrated our property prices to being too expensive.

Which brings me to this other article today...

So Do We Re-Inflate The Bubble To Save The Government Now?

Here's Michael Pascoe saying that he thinks Wayne Swan is betting on a housing recovery.

Treasury's MYEFO forecasts for the 2013-14 domestic economy  make grim reading with predictions of flat or declining performances in all but two areas: dwellings investment and farm product.

It's a very brave decision, Minister, to get into the long-range weather forecasting business, but that effectively is what Treasury is doing by predicting that farm product will rise by 6 per cent in 2013-14, an upgrade from a 1 per cent rise guessed in the May budget papers.
More important for the credibility of the government's outlook is the belief that the housing industry will finally turn the corner.

Says Treasury: “Dwelling investment is forecast to be flat in 2012-13, before growing 4 per cent in 2013-14. Dwelling investment declined 3.3 per cent in 2011-12 on the back of continued weakness in the detached housing market. Conditions across the sector are expected to improve gradually over the remainder of 2012, consistent with the solid growth in dwelling approvals and commencements seen in the June quarter.

“The recovery is expected to gather momentum into 2013-14, driven by a pick-up in home buyer demand, improved affordability following declines in house prices over the past two years and the assumption that interest rates will remain below average across the forecast period.”
It's only housing and farm product and what seems a marginal improvement in net exports that hope to maintain real GDP growth at 3 per cent next year.

This business of the diminishing tax revenue for the Government is pretty drastic. The ALP government is gunning for a surplus as the world economy slips back into a double dip recession, and the commodity price boom comes to a shuddering halt.

In the midst of all the financial problems of the world, Australia has somehow managed to dodge the most lethal bullets. That doesn't make us bullet proof, as the world's problems really have started to impact on our receipts.  There's no telling how property prices could unravel if unemployment should go up; and nobody is saying it's going to go down. The most recent report somewhere had it that 12.5% of mortgages were in negative equity - that's 1 in 8 mortgages out there, which is no small number. 3% were in serious mortgage distress, if not defaulting. Property prices are still falling if anything - and the RBA wants it to be a slow deflation rather than a big bursting of the bubble.

So you have to wonder how on earth there can be a housing recovery if there are all these bad mortgages and distressed assets all over the place. A lot of people are going to have to swallow losses and be pushed to the wall before the sector can really  improve. I don't think the RBA has the stomach for such an outcome - probably because all those bureaucrats have properties too and don't want to take the loss. You can chalk that up to being a vested interest all of its own.

 

 

News That's Fit To Punt - 03/Apr/2012

O Woe Was Me?

They say the current unemployment in Australia sits at 5.2%. I don't really know if this 5.2% figure is as solid as the kind of unemployment figures we used to have back in the late 1980s when unemployment perpetually seemed to sit at 8.5%. Youth unemployment in my youth regularly sat at 15%-17%, and you would see these figures in the news and you'd think, "wow, that's a lot of people who are out of work."

Those were the days. Of course, that gave way to the Howard government reorganising both welfare and the way in which unemployment was measured, resulting in the downward trend of these numbers in the years since.

Still, it turns out that Roy Morgan tracks unemployment figures in the old way, and they think the real figure sits at about 9.3%. Of course, the folks at Roy Morgan then go on to say it's the IR  laws' fault and the government needs to make things more flexible for employers to hire (and fire) people - because that's exactly what the part-timers are looking for. They're not the only people who see a problem with this figure.

In September, there were 85,100 who wanted to work and were looking for it but could not start within the survey week, so don't fit the standard definition.

And there were another 1,216,700 who wanted to work but said they had not actively looked for work in the four weeks leading up to the call from the ABS.

The people in those two groups, just over 1.3 million, might be termed the non-unemployed jobless.

Combined with the officially unemployed, the number of jobless people who want to work is 1,934,400 - more than three times the number who fit the official definition of unemployment.

And they make up 14.4 per cent of an extended version of the labour force totalling 13.45 million.
It's a lot more than 5.2 per cent.

So, as you can see, the ABS tells us that the unemployment figure might be as high as 14.4%.

Which got me to be thinking a few things. The first thing that popped int my head was the brazen crookedness of the politicians that figured out a way of making the unemployment figure look smaller than it really is, just so they can make out that they've actually done something positive when clearly, they haven't.And there's not a damn thing we can do about it except point it out and keep it in plain sight.

The second thing that pops into my head is how little thought has been given to what kind of workforce Australia should have in light of the post-industrial, late capitalist world we find ourselves in. The rapid expansion of the service sector in the last 20years coincides with the massive casualisation of the workforce. While politicians talk up increases in guaranteed superannuation, it sort of misses the point that the casualised part of the labour force and the self-employed are likely to forgo the benefits of superannuation. (If there's actually been one big lie, it's been superannuation, but that's another topic for a gripe and a rant).

The third thing that popped int my head was, what the hell future governments are going to do when all these people hit retirement age? These people are most likely going to have massive shortfalls in their superannuation and suddenly the government is going to have to pay them a pension. Future governments are essentially going to be the victims of the predecessors who believed their own bogus figures and planned accordingly.

The fourth thing that occurred to me was that I was pondering all this in spite of having a job. I'm thinking about this because the world being what it is, my position is as precarious as any other person who is not locked in to institutions, government or the big end of town's corporate bodies. So even if one has some kind of job or going concern, you have to think about this stuff.

The sneaking suspicion I have about how they re-jigged how they calculate unemployment (They keep telling us it's to bring us in line with how the rest of the world does it) is that it's a figure that is brandished at the unemployed to say, "look, you have no excuses, there are jobs out there so go get them!"; when in fact if the real unemployment is sitting between 9.3% and 14.4%, then the state of the economy is clearly and manifestly much worse than presented by those who would brandish the 5.2% figure. It was bad way back when; but things are arguably worse now than back then because the government is believing its own spin in the worst way.

And yet, it is remarkably like how they changed the way they calculate the CPI (again, to bring it in line with how the rest of the world does it) and magically the CPI comes in much lower than the actual cost of living. In both instances, with unemployment and inflation - it appears that governments around the world have invented a way of measuring such things in such a way as to make it seem much smaller.

Still, it's a funny thing. If unemployment were higher than measured, the RBA would have to be lowering interest rates. If inflation was running higher than the current CPI measured, then the RBA would have to raise interest rates. For once, the RBA might be right in not doing anything, month after month. It is entirely possible that the margin that they are misreading both unemployment and inflation cancel each other out. I don't know if that can be sustained, but right now, this seems to be the case. This contradiction might also be why the RBA has not made a movement in some months. The two speed economy is too divergent in both directions, that the RBA has no choice but to stay in the middle by doing nothing.

Do I Trust Julia Gillard?

I'm going to some focus group on Thursday night, presumably to be probed about keywords the government can use to woo me back to voting ALP. Maybe it's the Liberal Party trying to figure out how to mount arguments that destroy the ALP's chances. I don't know and never will, but these things are always a it of fun.

As long time readers here know, my own views on the next Federal election are already fixed - I'm Don Quivote! - so I'm going to have a lot of fun giving these people a piece of my mind. My best advice to politicians at this point in time is "get a dog up ya'." That goes equally to Obama and Romney as it does to Gillard and Abbott. "Get a dog up ya!"

CPI And Cost Of Living Discrepancy

What To Make Of This

Just what good is the CPI - the 'Consumer Price Index - as a measure of inflation when the cost of living surges ahead of the CPI? This is the question in this article here.

Soaring food and rent costs have seen the cost of living outpace inflation over the past year, adding to evidence that households are being squeezed, new figures show.

"Employee" households saw their cost of living shoot up 4.5 per cent in the year to June, driven by soaring increases in the cost for food, alcohol and rent, the Australian Bureau of Statistics said.

The ABS said those rises were "due to increases in mortgage interest charges, fruit, automotive fuel, tobacco, electricity and rents".

The increase surpassed the 3.7 per cent rise in headline inflation over the year to June and comes as rising costs - combined with high debt levels for housing - have been blamed for Australia's slowing economy. The Reserve Bank uses its own underlying gauges of inflation based on data supplied by the ABS when deciding interest rates.

Food costs for employee households increased 5.8 per cent over the year, the ABS said, while alcohol and tobacco prices rose 5.6 per cent in that time. Housing costs, which exclude real estate purchases, increased 5.8 per cent for employee households in the year.

Now, that actually does fall in line with my own experiences of late. That is to say, the day to day things the form the inelastic end of my needs have been creeping up in price, while the things I have a fair bit of elasticity in have been falling in price. So if the CPI is measuring a wider spectrum of goods and it is coming in lower than the cost of living figures, then that indicates there's a bit of deflation going on at the bigger ticket end of the spectrum.

It's hard to say just how much we should be encouraged by the prices of computers today compared to even 5 years ago, but there does seem to be a trend for the bigger ticket items to be sitting cheaper than they did before. It is taking some stupidly obstinate pricing practices in the retail sector to keep the pricing at the same level as before we hit 95cents and above against the US Dollar. Most of anything imported has come down in price.

One imagines it benefits the government coffers greatly for things to be indexed to CPI rather than cost of living; especially things like pension and welfare payments, but that's basically the government making savings in a way that doesn't show up as a cut in the budget. Similarly, the mortgagees benefit greatly because it tempers the degree by which the RBA raises the interest rates. So it's a kind of passive transfer of wealth from the poor to the middle. Though saying that too loudly will get you labelled a crazy Marxist - or a gloating fascist.