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. 

Quick Shots - 14/Mar/2017

Arrival

This got a lot of good reviews so I was really looking forward to it. I have to say its a bit naff and maybe even condescending. I did have an odd idea as I watched it, that maybe the reason we don't hear from other alien races in space is because no other sentient species wants to traverse to distance to find another sentient race. That maybe earthlings - homo sapiens - is somehow the crazy species in the galaxy that keeps on imagining scenarios of alien encounters that essentially hinge on paranoid violence.

Maybe it's not quite what i thought it would be, while some of it looked like a parallel text to 'Independence Day' without the out and out spectacle of cities getting destroyed. It also seems to owe a debt to 'Close Encounters of the Third Kind'. Clearly this is about the fifth or sixth kind.




Sarajevo

A little perdue piece about the aftermath of the Grand Duke Ferdinand getting assassinated in Sarajevo which of course triggered World War I. An oddly depressing topic, tackled with some amount compassion and intrigue.

Below is the only relevant clip I could find. It gives you a sense of the understated nature of the drama.



The main contention of the film is that the assassination of Franz Ferdinand was a false flag operation perpetrated by the Australian military who were champing at the bit to fight what became World War I. Had they any amount of foresight, they might have avoided such moves at all costs.

The RBA Fears Apartment Price Collapses

Just following on from the previous day's entry about the RBA and its seeming indifference to the property bubble, it turns outfit is a little worried about the apartment glut they think is going to happen in Brisbane and Melbourne.  They think Sydney should be fine, but then, it's not the prices as such that worries them but the systemic impact on the banking sector such a shock would have:

"It is about whether or not they are adequately provisioned, whether their lending standards are adequate, and if there is an oversupply and falling prices, whether they end up under water or wearing larger losses than they expected because they hadn't anticipated this. 

"Have households purchased these apartments in the expectation of rising rents and rising prices, and with a glut may not be able to rent them out and may not be able to get the price they paid for them?"

Although the Prudential Regulation Authority instructed banks to tighten lending standards for investors in 2014 and succeeding in bringing the growth in investor lending down below 10 per cent, "everyone would be aware that more recently investor housing growth has started to speed up again". 

Between October and January, the annual growth in lending to property investors jumped from 9 per cent to 27 per cent. Investors borrowed $13.8 billion in January, more than the $13.6 billion that was lent to owner-occupiers. Of the $13.8 billion, only $1.2 billion was for building new homes. 

"We are watching it because investors can be the first ones to get out if things turn down," she said, warning that a rush for the doors could make a slump "much bigger than it would otherwise be". 

Invited to repeat an assurance by Treasurer Scott Morrison on Monday that rapidly climbing house prices in Sydney and Melbourne were "not the function of any sort of investor credit bubble or anything like this", Ms Bullock declined, saying: "I would not like to speculate on what is a bubble and what is not, personally".

That's a funny response. When you ad this scenario to the stranded housing assets out in WA in the wake of the mining bust, the apartment glut would be a classic case of supply arriving in time to rebalance the market. After all, all the politicians have been saying there's no bubble, merely a shortage in supply. If the system can't handle the arrival of supply, it raises serious questions as to just what the fuck is going on with the price rises.

In any case governments are moving to readjust some policies on the edge to "make housing more affordable" - which is semaphore for deflating the bubble slowly. Nobody seriously disputes that this is necessary; there's even bipartisan support for it in NSW - but of course the vested interests are already howling.

The property industry slammed the move to increase the surcharge as ill-conceived, cynically populist and counter-productive. 

Developer lobby group the Urban Taskforce said it would put the brakes on supply at a time when Sydney was still delivering new homes at below the Department of Planning's target rate of 40,000 a year. 

Chris Johnson from the group said "lifting the surcharge on foreign investors will obviously slow down to some extent that market which provides homes for renters in Sydney. Throttling down supply is not a good move." 

Glenn Byres from the Property Council said foreign investment funded large scale developments and boosted pre-sales. 

"Adding more taxes to foreign investment would actually hurt supply, particular at a time when lending conditions are more stringent on offshore income," he said.

Premier Gladys Berejiklian has repeatedly said that boosting supply was the key government response to the housing affordability crisis.

Steven Mann from the Urban Development Institute of Australia NSW said foreign buyers were an easy target.

"By targeting a group of people that are unable to vote our politicians are showing a predilection to winning votes rather than obtaining the best outcome for the greater good," he said.

NSW Treasury calculations released in a call for papers after the 2016 budget showed that the government's own modelling predicted foreign buyers would be discouraged from the NSW market by the 4 per cent foreign investor levy.
Treasury estimated a modest decrease of about $30 million a year in its stamp duty collection from foreign buyers for 2016-17 after the levy was imposed.

Labor pointed to this as evidence that increasing the surcharge would improve housing affordability. 

So, there's that. All those people want the Bubble tontine for as long as possible, but they don't seem to have an exit clause for themselves so naturally you have to question their judgment if not sanity. The RBA and State governments as well as the opposition is moving to rein in the Bubble. Screaming against it only makes you look out of step. 

More On That Vested Interest Thing, Part 1008

The mining lobby went pretty hard against Kevin Rudd because of the Mining Rent Resources Tax. Julia Gillard took the opportunity presented by the fall in his polls to assume the Prime Ministership, and wound back the tax so it hardly hurt the mining companies. By the time Tony Abbott became Prime Minister, it became a target for repeal, much like the ETS, and so the mining lobby got away with murder. I know, that's not nice language to describe it but their campaigns killed the tax, which deprived money for the Australian government that would have been spent on health and education amongst other things, so it stands to reason that in some chain of events, the austerity of the Abbott Government would have killed somebody, and that blood belongs on the mining lobby's hands. It's not hyperbole, it's logic.

So, naturally, it's interesting to see the mining lobby went after WA National Party leader who said there should be a mining tax.

West Australian Nationals leader Brendon Grylls has conceded defeat in his seat of Pilbara, following a $2 million campaign against him by the mining industry angry at his iron ore tax proposal. 

Mr Grylls said he had contacted Labor's candidate Kevin Michel to congratulate him on his victory. 

The ABC's election computer no longer lists Pilbara as a seat in doubt, putting Mr Michel more than 500 votes ahead and declaring the seat for him. 

"It's quite clear that I can't catch up in preferences now," Mr Grylls said.
"The Nationals remain strong in the West Australian parliament and just like I replaced a leader, I'll be replaced and they'll get on with the job.

Just in case you're wondering just how much our democracy is being fucked with by lobbies, and how our government can't get its proverbial shit together to enact sensible laws  like having an ETS, or having a mining tax, there it is in black and white.

Politicians might be dumb, but they know enough that political necessity forces solutions. Sometimes they are against their own side of politics. After all a great leader can only be measured by their willingness to whack their own to make deals stick. It's eminently understandable why Mr. Grylls might want to propose an iron ore tax, given the parlous state of WA's affairs. Therefore, it's interesting to see the mining lobby is entirely happy to whack their own - and by extension we can see who wears the pants in conservative politics. It's the vested interests, all the time, all the way. The actual politicians are just sock puppets.

News That's Fit To Punt - 13/Mar/2017

Mining Bust Out West

Jeez, that election in Western Australia looked like a real rout. It's funny how the state votes in the conservatives during the years of the boom and somehow trusts them to do the right thing with it, and then when the boom turns into a bust they discover the conservatives have squandered it. It seems to be like a collective insanity that takes hold of the state. During the mining boom years, the rest of Australia had to listen to utter idiocy coming out of the WA Government thanks to the fact the recent mining boom turned  WA into a net contributor to the GST regime rather than a net recipient. Then they cried poor about it , and got very little sympathy - as they should - and now that the state finances are in ruin, the people finally vote in the ALP. When you consider that at one point the WA LNP were mouthing off about seceding from the rest of Australia, it's certainly laughable that they will be a net recipient to the GST regime once more.

I guess one shouldn't laugh at the misfortune of others, but this one was pretty predictable.

Mining booms often turn to busts. Most Australians know this, except it seems, the outgoing administration of the nation's resource-rich west. 

Western Australia's now former premier Colin Barnett bungled the bonanza, splurging windfall cash during the good times only to find the cupboard bare in the bad ones. The upshot is the state's budget deficit and debt have spiralled, the AAA rating is gone and people are fleeing, the latter at least has the advantage of containing an unemployment rate that's already the nation's highest. 

"There's an element of Dutch disease there, and the government certainly mismanaged the boom, but it also reflects the sheer size of the mining sector in WA so when it collapses it drags everything down," said Shane Oliver, head of investment strategy at AMP Capital Investors in Sydney. 

"WA didn't seem to learn any of the lessons from Australia's past mistakes during commodity cycles and now the state is effectively in recession." 

(edit)
Western Australia's Treasury was projecting the revenue windfall from mining would still be continuing in 2018-19, despite commodity prices peaking in the third quarter of 2011 and mining investment not too long after. 

As a result, the government has been trying to cut outlays in a weakening economy and there's even been talk of tax increases as gross debt is on course to surpass 20 per cent of gross state product in coming years.

It's pretty laughable when you have a long memory. So much for the notion that WA somehow had organised things differently to all the other mining boom and bust cycles in the past. Tire's a lesson in there for the fossil fuels industries too.
There's a lot more to be said bout all this, so I'll come back to this below.

100 Days Of Tesla

We live in times such that a tech billionaire tweets something and it turns into a head-to-head discussion with the Premier of SA and PM of Australia. It's weird but all of a sudden people want this project to happen - which would be nice of South Australia but also, - which would be the proper part of the renewables tech business getting a crack at the Australian electrical grid.

Tesla's Elon Musk may have put large scale battery storage on the national agenda with his offer last week to solve South Australia's power crisis for free if he did not deliver a large system with 100 days of signing a contract, but both the Prime Minister and South Australia's Premier are looking for more detail before taking him up on the offer. 

Mr Turnbull and Mr Musk spoke for an hour early Sunday afternoon, with the Prime Minister yet to form a view on the merits of power storage systems in solving South Australia's power supply woes. 

"They had an in-depth discussion on the value of storage and the future of the electricity system," a spokesman for the Prime Minister's Office said. 

Their discussion was not political in tone, but rather a discussion between two people "picking each other's brains" over the options for energy storage in Australia, one source familiar with the discussion said.

Elon Musk for his part has resumed campaigning for a shot on Twitter. You'd look an idiot if you turned him down now, wouldn't you? Of course these are people in government in Australia are people who don't mind looking like an idiot, so you have to subtract your optimism. Or is that curb your enthusiasm. In any case, the offer is there. Now begins the process of looking the gift horse in the mouth.

Time To Start Collecting Canned Food?

This link is from Pleiades.

While economists love trade, it has extremely political ramifications. And it is politics that in Every’s view is driving the world back to a 19th century style trade world. A world where after a period of free trade, high tariffs were set up and where trade became a conflict involving domination of one country over another.

And the problem is that economic conflict can quickly become real conflict.

It was a scary prospect – not only would raising trade barriers reduce our standard of living – but if the path of the next 10 years follows the path of the late 1800s and early 1900s then the world gets very dangerous very quickly.

The biggest difficulty for those selling the idea of free trade is that a soon as you start talking about things such as “comparative advantage” people quickly switch off. It’s much easier to understand trade in what is known as a mercantilist sense – the “domination” point of view, where the aim is to export more than you import.

That is certainly the view of Donald Trump and his trade advisor, Peter Navarro, who has recently argued that because GDP is made up of consumption, government spending, investment and net exports (exports minus imports) reducing the US trade deficit is a good way to grow the US economy.

The problem with that view is that in the US – as in Australia – the size of net exports pales in comparison to consumption, investment and government spending.

Clearly, if the benefits of trade are not doled out to the public but instead, accrues to a small percentage, as has happened in the last 30years, the public becomes less enamoured of free trade; and so we must wonder if we've hit that point where the public has decided it won't back free trade any more. It would explain the shift toward  parochial kind of anti-tradepolitics as seen in the Brexit debate/debacle as well as the rise of Trump-ism (devoid of any coherent ideological framework, it does seem to to be a cry against free trade).

A Scary Passage From Crikey

Also from Pleiades was Crikey's entry about the WA election, which I think deserves a long quote.

They have to do something. They should have done something before. When the red dust settles and the tallying’s done, the verdict on the mining boom in WA will be a harsh one. No Norwegian-style social fund was established — Norway now has a trillion dollars under management from North Sea oil and gas, and the whole country could retire — and much of the money that did come in served principally to inflate prices to, well, Norwegian levels. FIFO was imposed on people who wanted settled jobs, and no government stepped in to oblige the companies to give their workers more options. Men and women of modest skills and earning capacities were suddenly pulling in huge wages, with little advice as to how to invest it. Many bought houses in regional FIFO towns at prices approaching capital city levels — and then saw them halve in value as the boom died away. Meanwhile, the towns that became FIFO bases — from Singleton in NSW’s Hunter Valley to Kalgoorlie to Bunbury — were drained of the communal stability that makes life possible. “How can you organise a footy team? How can you even get a picnic going,” a woman had said to me in Singleton, two years ago, “when you never know who’s going to be here? The shops are empty, the town’s bled dry.” Two days ago, someone said the same thing, near word for word, in Kalgoorlie. In both towns, and many others, the miner’s mansions have “for sale” signs in front of them, directed at a market that isn’t there. 

Some didn’t even make it to the bad-investment stage. A lot of people were drawn to FIFO by the idea that it would allow them to make big bank, on the simple principle that once you’re in camp, there’s nothing to spend your money on. But that scheme misses the effect of 14-day, 21-day, 28-day stints of 12-hour shifts on the human psyche. Beyond a certain point of such punishing, inhuman labour, it is all but impossible for most people not to blow their money in the first days off, especially if they’re young. Everyone who’s done night shifts, continuous shifts, back-to-backs knows this. The money spends itself, burns its way out of your pocket. Potlatch, the old tribal custom of wanton destruction, takes over. You stride into a bar and fuck it, you’re not going to drink beer, or Red Label, you’re going to drink Chivas! A double! Chivas for everyone! For some people who just came to do a couple of years in the mines and party up, that’s probably no great tragedy. Others have worked years at grinding, dirty, dangerous work and have nothing to show, a fact that must be part-cause of the suicides, depression, domestic violence and addiction that has broken through FIFO communities like a long wave. 

Given a free kick by 4 billion years of geology, and a chance to reinvest, Western Australia appears to have created a situation in which Wake in Fright and The Unknown Industrial Prisoner serve not as dystopian warnings, but as HR manuals. Now a state that has spent a decade chipping bits of itself off and floating it northward for silly-money prices cannot pay for its most basic services, pay down its debt, and is proposing taxes that should have been being levied since the 1990s and scrambling to fill the gap with infrastructure projects it can’t afford to start. Services cut include those to Aboriginal people, which in turn has produced unwilling population movements, pressure on centralised and reduced services, and a resultant and distinct fraying of white-black community relations in a range of towns, a fall away from such detente and mutual understanding as has been achieved in recent years. What looks like a racial political issue, is, in reality, a product of the state’s fiscal crisis, and its panicked efforts to plug the gap.

That's pretty bleak reading. It turned out they needed a mining tax but realised it after they campaigned hard to get rid of it. Oops. What do you do with this kind of collective hubris and stupidity? It doesn't end well:

The gap has been plugged, instead, with meth, a drug that has boomed out of control in WA, simply because it has become so cheap, easily made from base chemicals, in suburban labs springing up in every city and town. Those looking to explain its reach in WA by its occult power to turn people into speedfreak zombies are ironbarking up the wrong tree — meth hit the big time when it became cheaper than dope. Its popularity is a product not of addled obliviousness, but of the judicious application of rational choice theory by substance abusers, looking to maximise their investment. It’d make the Institute of Public Affairs proud.

All that, in overlapping bits and pieces is the conversations you get into across the state — with everyone. Miners, ex-miners, civic boosters, NGO officers, emergency services, journos, snappers. In WA, everyone’s become an amateur political sociologist, hot on the trail of where it all went wrong, and what the solution might be.
Whatever happens on Saturday, the state’s dilemma concentrates the mind wonderfully. Kalgoorlie stands as a metonym for Western Australia; Western Australia for Australia itself. We are all aware that we have not stored away for the lean years, and the fat years come to an end. The prospect, delicious for pundits, less for the public, is that either major party will fall short of a majority, and have to cobble together government in both houses of Parliament. Looked at clear-eyed, this often delivers good government, but the public rarely thinks so, and the golden west exemplifies the decay of political legitimacy and effectiveness in Australia, and if that occurs here, it may not be too long before the state is back at the polls once more. 

What WA needs is the Unflux, the many nations in one — a party with a realistic and integrated program to deal with the reality of resources-led states, not the fantasies they offer. As goes the state, so goes the nation.

Everybody's got 20-20 hindsight it appears. Right now, it's hard not to think of all those mortgages underwater in Western Australia and what that's doing to the banks' bottom line.  It all went crazy out there with the low interest rates and the seemingly low inflation as 'measured'y the RBA. If the reality was in fact significant inflation, then clearly Western Australia was not served well at all by the RBA's policies in the last decade. You can start to see the whole thing start to unravel. You have to wonder just how long will it be before it hits the East Coast?

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 - 05/May/2016

ZIRP Is Coming

I bet you've been thinking I've been crazy talking about Zero Interest Rate Policy as inevitable in Australia. Well, here's something for you to cogitate upon.

The idea that the official cash rate will eventually hit zero in this cycle is far from a consensus opinion in Australia. Economists are more likely to laugh than seriously entertain the idea. But last week's shock deflation data for the March quarter, which sparked an immediate reaction by the Reserve Bank on Tuesday, adds weight to the concept that Australia is simply coming in late to the inexorable downdraft of lower inflation and rates. 

"There is going to be a very long environment of low, near zero or negative rates, and clearly Australia is converging to that environment," Mr Gallo said from London. 

Source: Algebris 

He pointed to the "extreme overinvestment" in mining and energy sectors that would need to be unwound, weighing on growth. Over the past 25 years, Australia's exports to China had grown from 3 per cent of the total to about 30 per cent, Mr Gallo said, while in more recent years, the housing market had become increasingly dependent on foreign investors, particularly Chinese. 

"If you think about the last 20 to 30 years pre-crisis, Australia was a poster child of the credit boom and the China boom," he said.

There it is. And while that's not conclusive, it's nice to know other people can spot it coming.

There's A New Central Banker

After years of guiding the RBA through the GFC and post-GFC years, Glenn Stevens' term is up. He is being replaced by his deputy Dr. Philip Lowe.

Fifty-five year old Dr Lowe has worked at the bank since 1980 while still a student at the University of New South Wales. He has served as its head of economics, head financial stability, head of domestic markets and assistant governor responsible for the financial system. 

He also served as head of the financial institutions and infrastructure division at the Bank for International Settlements in Switzerland where he authored important research on role of central banks in low-inflation environments. 

Governor Stevens described the appointment as "superb".
"There could be no one better qualified than Phil Lowe to lead the bank through the next seven years," he said. 

"The bank will be in the best hands." 

"Dr Lowe brings a wealth of knowledge and experience to the role of governor, having served as the RBA deputy governor since early 2012, heading up many of the RBA's analytical departments, and publishing on a wide range of issues relevant to the operation of monetary policy over his three decade career with the RBA," Treasurer Scott Morrison said in a statement. 

Shadow treasurer Chris Bowen who worked with him while treasurer in the Gillard government described Dr Lowe as "one of the finest Australian economists of his generation".

I'm sure he'll be the one to take us to ZIRP and if necessary NIRP. 

More On Negative Gearing

Negative Gearing is a problem because it distorts the market. Just how much this happens is always debated with the argumentative finesse of people who regularly compare apples and oranges and some how discover theirs taste better. 

The Guardian had this article which is worth a read. 

In reality it is changes to capital gains tax in 1999 that really set the fire under the housing market by turning negative gearing from a niche activity to one which the treasurer would suggest is a favourite of nurses and teaches and police officers – the archetypal “mum and dad investors”. 

Prior to 1999 capital gains were taxed at a real rate – the nominal return less the inflation rate over the period you owned the investment. The Howard government then changed it to taxing the nominal rate, but only for half the amount. 

At the time there was actually debate over whether or not this would lead to people paying more tax.

Mark Latham – then on the opposition backbench – argued the change was “an open invitation for the tax minimisers, the tax avoiders and the capital speculators to do their worst in the Australian economy”. 

And whatever you might think about Latham’s more recent contributions to public debate, he sure as heck was on the money on this issue.

That's the thing about the old Howard Government and its mantra of small government was that is never saw a tax cut it didn't like. And so with a blind eye to how this would send the wrong incentive, they proceeded to rewrite the Capital Gains Tax.

When I reflect on it, it was around the turn of the century when one of my friends who was an IT boss started looking for an investment property. He'd been advised by his accountant that he was better off selling up his place in Glebe, buying a big house as an investment while renting a small flat. The logic wasn't obvious to me at all, but it was then explained to me that negative gearing would let this arrangement be very profitable. You could well imagine how this was going to lead to a rapid growth in people arranging their lives in a counter intuitive way so as to get this Negative Gearing to deliver profit.

But really the issue is of a tax policy that drastically changed people’s habits towards minimising tax and had the side effect of setting fire to the housing market and leading to a massive spike in the level of housing debt:

Over and above whether negative gearing or the capital gains tax benefit the wealthy (which they do) the issue is whether the tax policy has distorted Australia economy.

It clearly has and as a result at the very least, the discount to capital gains tax needs to be reduced.

And there you have it. It's going to be a big point of contention in the coming years. There are plenty of people who benefit from it and their lobby is strong. The whole finance, insurance and real estate industrial complex will fight tooth an nail to keep the gravy train running.

The truly sad thing about our government is that it's taken this long for the problem to even be a discussion point, well and truly after things have gotten well out of hand. It really doesn't bode well at all. 

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!

Quick Shots - 06/Nov/2015

That's Not Chump Change

Making the headlines is how increased regulatory scrutiny has revealed there is an additional $50 billion of property investor loans on the banks' books. This is such a big discrepancy, it was enough to boost the portion of investor loans on banks books from 35% to 40%. Naturally the RBA is letting it known they are unhappy.

The Reserve Bank's deputy governor has scolded the banks over poor home loan data that is "complicating" its understanding of the housing market and clouding its ability to make and enact policy decisions. 

In a strongly worded speech delivered at the Finsia regulators' panel in Sydney on Thursday, Philip Lowe said he was surprised and concerned over recent problems with the data relating to banks' owner-occupier and investor housing loans, a development he described as disappointing.

Disappointing might be an understatement. Figures like this mean the banks are far more precarious than previously thought.

Ross Garnaut Spells It Out

With all this talk of tax reform you would think that they were going to make taxation feel good. They're not. Yet it also needs to be said that the whole reason they should look for efficiency and better balance is to spur better growth in the economy. So in the quest for more revenue, the government's going to hurt our wallets, but it's all for the good of the economy so that you'll get something in your wallet again, okay? Uh-huh.

Ross Garnaut has come out swinging saying that there's no point in doing taxation reform if it adds to the inequality.

"Does increasing inequality and stagnant or declining real incomes of ordinary people in the developed countries matter if it occurs alongside rising incomes in the developing world?" he said. 

"I think it does," he said. "Stagnant incomes for most people place a great strain on a democracy. Governments tend to be nasty, brutish and short. 

"If there was any doubt about this simple reality, it was removed through observation of the fate of the Abbott government. We have no experience of democracy flourishing with stagnant or declining living standards for most people."

As strange as that seems, he's got a very big point. If at the end of raising the GST, and then compensating the low income earners, and they are worse off for the exercise, the taxation system being more balanced and efficient isn't going to do much for the betterment of society.

It's true that unbalanced taxation systems give rise to perverse incentives. The same could be said of all the corporate welfare given to rentseekers. When you look at the kind of money the GST may raise (the maximal version sits at about $130billion), and you look at how much corporate welfare is expended, one might think it was stupid not to cut the corporate welfare first before raising the GST. 

Hypocrisy At Its Most Shameless

George Brandis is a funny man, isn't he?

Attorney-General George Brandis has hit out at criticism of Tony Abbott's religious beliefs, describing the "ridicule" to which the former prime minister was subjected as "bigotry at its most shameless". 

Senator Brandis, who last year defended people's "right to be bigots" amid debate over proposed changes to the Racial Discrimination Act, has told a roundtable meeting of religious and non-religious representatives that "religious freedom is every bit as important as political freedom".

So, the man says people have a right to be bigots. AND the ridicule of Tony Abbott's religious beliefs  was bigotry at its most shameless" because Tony Abbott is religious freedom to have his religion the way he likes it. I mean, by his own reasoning, the people doing the ridiculing of Tony Abbott have a right to be doing it; he can't very well be complaining about the kind of ridicule when he's not willing to stand up for others, like say, Muslims.

Besides which religious freedom does not include freedom from ridicule. Get over it George; especially if you go around espousing freedom of expression.

He then says Catholics cop it hard from prominent intellectuals and this is bad. But he's a Liberal Party MP - it's not that long ago that the Liberal and Nats on one side and the ALP on the other, was a cover for a Protestant/Freemasons versus Catholic split. It's kind of weird seeing Liberals who are Catholics, and Liberals who want to defend Catholicism. 

Really, the world has changed. 

Puncher & Wattmann

I started part-time work at the niche publisher this week. It's pretty cool so far. It's closer to home, the work's pretty clear cut. There's lots of it, but that's the good part. I won't starve, get bored, live in anxiety or for that matter lose headspace to the work. It's just what the doctor ordered. 

News That's Fit To Punt - 19/Sep/2015

ZIRP Didn't End Today

After months of threatening to lift interest rates, the US Fed decided not to raise interest rates today. Which is pretty damn amazing really because it does nothing but punch a hole in the credibility of the US Fed when it talks about how it sees its own policy. Think out it for a moment. If it were the RBA and Glenn Stevens, it would be unthinkable for him to spell putsch a move for 9 months of the year, only to squib on the threat when you were supposed to do it.

As it is, the RBA has us on a strange parallel world to ZIRP with our very own TWIRP, which is causing its own havoc. Interesting then that the constraints of the US Fed running ZIRP forcesAustralia to adopt its TWIRP and so Glenn Stevens wants to urge Janet Yellen to just get on with it.  Of course if the US Fed does raise it even 0.25%, about a trillion dollars worth of derivative contracts go up in smoke. but this is the thing about derivative contracts: they're only tangentially related to the real world economy.

Of course, the reason the US Fed didn't raise their interest rates according to Janet Yellen's statement is that they are concerned about China's economy - Something both Glenn Stevens and Michael Pascoe think are over-stated as being problematic. And yet, you have to wonder what the US Fed knows about China.

The Wild Wishcasting Phase

Those conservative chumps in the Coalition must be dreaming big, now that albatross Tony has been sent packing, and the poll bounce shows they would demolish a Bill Shorten-led ALP if there were an election held today. They haven't had numbers like since the days of Julia Gillard and even then Tony Abbott himself had terrible poll numbers. They might have to go back to 2010 just before Kevin Rudd got knifed by Julia Gillard to a time when they had a commanding lead in the polls.
Which is to say, at least for this week they've got it good.

They're probably starting to think big about how this might translate into votes, but really we need to put a big caveat on Malcolm Turnbull's alleged popularity. For a start if your predecessor is Tony Abbott, even a pile of dog dung is bound to come up smelling roses. This electorate was dying for something much better than Tony Abbott, so naturally there would be a poll bounce.

But here's the thing, if Malcolm Turnbull is really going to capture votes from the Left, he's seriously going to have to do something that even the hardest credential-ed lefty is going to admit is good, and that means having to do something the right hates, and there's simply no leeway in Malcolm Turnbull to do any such thing. And that being the case, it won't be long before the stench of old Liberal and National Party policy positions will stink like the dead fish that they are, and bring Malcolm Turnbull's popularity down to their level.

In turn, the smart advice going for Lefties is for them not to get too excited.

Not All That Dies Old Is Bad, Not All That's Young And Remaining Is Good

I haven't paid much attention to the Canning by-election brought on by the death of Don Randall. Don Randall of course tabled to motion for a spill back in February and was founded in his car not long after that. If this were a mafia movie, you'd draw your own conclusions - but it is not, they say he died of a heart attack in his car. It's hard to tell what sort of MP he was, but if he thought enough to urge his party members to dump Tony Abbott, there was probably a decent man right there.

Andrew Hastie is the man running for the coalition in his place and he's an ex-SAS man. This sort of candidacy makes my skin crawl because those guys lead a pretty narrow life with a narrow world view and they might have a world of experience in the extremes of a combat zone, they're not guys known for a deep and compassionate outlook on their fellow man.

Andrew Hastie has accused the ALP of not supporting our troops in the Afghanistan based on his personal experience. It seems like a really crass thing to say in your run up to your polls, and really shows you the sort of grubby candidate that he is. It's pretty bleak that a sensible elder dies to be replaced by some narrow-core one-eyed zealot. Our polity is doing really badly right there.

Ragging On Bill Shorten

You can count me as one of the people who got very hot under the collar about Bill Shorten's role in bringing down Kevin Rudd in 2010. I'm still not that crash hot about how that all went down as you know; but then, I wasn't exactly crazy about the whole ALP way before Kevin Rudd even became Leader back in 2007. For a better part of 24months while the Abbottoir reigned, Bill Shorten's stint as Opposition leader has looked at times like a very contrived, stage-managed wave to *his* people, a knowing wink that he was just going to sit pretty and be a small target - even though Tony Abbott made things simple.

An even then I have enough perspective and patience to say, the ALP need to let Bill Shorten do his thing, what ever it is. There isn't an easy road to government; there isn't a short cut.

In the wake of the Turnbull seizing the day, Shorten's approval rating has sunk to 24% and there are now grumbles in the electorate about his 'performance' already. This is galling because it's from the very same people who wanted Malcolm Turnbull over Tony Abbott but vote only for the ALP anyway.
Folks, you need to grow up and grow a brain.

Mind you I had a chance to chat to somebody who told me they were one of these ALP voters who wanted Malcolm Turnbull and their reasoning was that independent of sides, Abbott *had* to go for the good of Australia (which is hard to dispute) and that it was now time for the ALP to step up and put in their best leader to square off against the best the coalition has brought to the table. I enquired of them who they thought the better leader would be and they answered in a heartbeat, "Albo!"

When I expressed incredulity, they replied that Tanya Plibersek would make a better leader than Bill Shorten. I just want to point out that the ALP haven't contested a single Federal Election with Bill Shorten as leader. Do you think there might be a problem with the Australian political culture precisely because the electorate is already so bloodthirsty? These politicians are only reflecting our choppy-changey electorate.

It's not shopping for shoes or the next sugar hit at the candy store. It's political leadership we're talking here. ALP supporters would be out of their fucking minds to want to start jockeying for replacing Shorten.

View From The Couch - 27/Aug/2015

Norovirus

I've come down with some weird lurgy this week. It's giving me nausea and acid reflux. I burp like a baby and can't seem to keep food down. My joints ache, moving around is a pain, and all the old sports injuries are barking. We grow old, we grow old and all that; but you really get to feel it when the joints hurt. Judging from the symptoms, my best guess is that it's the Norovirus. I've been going to work because it's not like I've got a fever or I'm totally incapacitated, but today I was just overwhelmed by this thing. It's a weird thing wanting to vomit and not wanting to vomit at the same time. There are few bodily functions where you simultaneously want to do it and you don't. Ejaculation comes to mind, but that's about it, and it's worlds apart from vomiting in the unpleasantness stakes.

Anyway. Let's really have a spew!

Markets Are Up!

I guess the predictions for a global meltdown were misplaced after all because share markets are up today. Sydney was up yesterday, defying global trends towards the financial apocalypse. This was possibly because going any lower would have made valuations totally 'under', on too many stocks. Jokes aside, BTFD ("buy-the-fucken-dips") is a legit strategy until you find yourself cresting on a bubble like the markets in China. The ASX on the other hand hadn't bubbled at all in comparison to some of these other changes around the globe, and so had less to fall. For all the screaming headlines of "$60 billion lost in a day!", that was roughly a 2.5% drop or so and much of that has recovered. If you bought in on "the-fucken-dip", then you would've done alright.

A lot of commentators are saying this was no Lehman Moment. Maybe that's true, but having experienced the original Lehman Moment, I don't think anybody wanted to chance it, which explains just how much things got oversold in markets outside of China on Monday. Michael Pascoe even had a column yesterday crowing about how he was going to BTFD. Like I said, if you bought in on "the-fucken-dip" this week, then you would've done alright.

The mid to long term is much, much murkier. I'm not the grizzliest of Market Bears, but China still scares the hell out of me. There's still a lot of drama to be played out in response to the share market bubble popping, especially when the people decide what they need to do is string up the market boss. It might be the case that there aren't that many shareholders in China, it's also true that they would have lost a bundle if they were leveraged up to their eyeballs leading up to the share bubble popping. There's still all that Property Bubble out there in China, with all the empty cities, leveraged shadow banking using commodities as collateral, and the commodity prices have bottomed out so you know there are margin calls going on. None of that has changed. There's no reason to think that we're out of the woods with all this China mess business.

Hockey's CYA Republicanism

Out of the blue, WTE Joe Hockey says he wants Australia to become a Republic. It's kind of weird, but I guess it's one way to rebrand yourself as "I'm not with Tony Abbott, I'm not on that team of suck". Uh, WTE Joe, oh-but-yes-your-are!

The other possibility I thought of was that Joe fears the incompetence of this government so much, he even fears the Governor General sacking Abbott's government. In which case, moving to a republic would kind of cover his ass. Perhaps I shouldn't try to guess the motives of the Worst Treasurer Ever.

The Republican debate is one of those interesting things that bring out all sorts of spurious arguments of identity. Admittedly, when Paul Keating was pushing for it, I thought the notion was totally logical and the conservative forces allayed against an Australian Republic were doing so out of zombie loyalties to a crown of a distant land who cared so little about any of us to the point of mutual irrelevance. And while that may be true, in the years since the referendum was lost I've had some time to read and think about all this.

One of the more disturbing things about a Republic - with a President - separate to the Parliament/Congress assembly is that you have to begin asking who gets to call the shots on the military. In America, this is the President and since some time around Lyndon Johnson, has been able to go to war without the approval of Congress. This is a big issue because hidden in it is the possibility of an exacerbated conflict between the Presidency and Parliament. It hasn't come to blows in the USA, but the track record of Republics around the globe are pretty telling. This problem happens far more often than not, and on a long enough timescale, it seems to happen inevitably.

It is such a woeful record that so many Republics fail, and give rise to military juntas that it is worth reflecting on whether the Republican model of any stripe can forestall this problem. Some argue that Australia's democracy is more mature so it won't happen. Yet I have it on good authority that during the Dismissal crisis in 1975 a trade unionist suggested to Gough Whitlam that he order the Army to remove  the Governor General. Gough laughed off the idea as lacking in common sense - but Australia's maturity as a democracy hinged on Gough Whitlam's good common sense. These things that inform good common sense are razor thin, and hardly robust at all.

As a centre-left-voting-pinko-pseudo-intellectual, it's tempting to remove the Queen, let the ancien regime be damned. Yet the historian and nascent political scientist in me says this is a dreadful risk to be imposing on this nation. I'm not as gung-ho as I used to be in the 90's about a move to a Republic. Maybe I'm getting old, maybe I'm just sick and tired of an abstract debate when we have actual, real-world difficult problems lying ahead of us. Malcolm Turnbull might ride again as the standard-bearer for the movement, putting in the good fight once more but that alone won't do it for me. I'm so leery of this topic, I don't even want to change the flag.

Speaking Of Our Real World Problems...

Former head of treasury Martin Parkinson says the Abbott Government is sleep walking its way into a recession. If things stay the course under this go-slow, do-nothing, collect-the-rorts Government, we would lose 5% of GDP in the next decade, which would be a pretty serious recession.
Pretty sobering, no? He wasn't the only one pointing out the problems we've got. Try this bit:

Economic modeller Janine Dixon from Victoria University had told the summit the Treasury's Intergenerational Report had painted a "rosy" picture of the future, projecting average growth in real income per person of 1.4 per cent, meaning that by 2055 Australians would enjoy real incomes 75 per cent higher. 

Her own modelling had real incomes growing by less than 1 per cent per year, meaning that by 2055 incomes would be only 44 per cent higher.

Put another way, it would take an extra 20 years to reach the income forecast in the Intergenerational Report for 2055," she said. 

Her modelling has productivity growing at only half the pace assumed by the Treasury, whose assumption was based on the unusually high decade of productivity growth that followed the economic reforms of the early 1990s. 

Melbourne University economist Ross Garnaut said if her estimates turned out to be correct, the budget would "never get back to surplus". 

Reserve Bank governor Glenn Stevens said Australia's economic growth rate had mostly started with a "two" instead of a "three", "despite the lowest interest rates in our lifetimes". 

Dr Parkinson said if economic growth remained nearer to 2.5 per cent than 3 per cent, as much as 5 percentage points of gross domestic product would be lost over the next decade. 

"If this is not happening because our population growth is slow, it means willingly accepting the impact of a recession," he said. 

"The loss of GDP from a recession is about 5 or 6 percentage points."
Without acting we would be "sleepwalking into a real mess".

Just as an aside, I don't know what to make of this new trend of one-sentence-pragarphs being written at the Sydney Morning Herald. It's like ADHD Journalism. Complaints about style aside, that's like a who's who of economic boffins saying - nay, shouting - to the government "LIFT YOUR GAME!". And my question to these esteemed boffins is, "WHAT IF THEY ARE SIMPLY INCAPABLE OF LIFTING ANY GAME THEY MIGHT HAVE, WHATSOEVER?!"

I guess we'll be kissing away that 5% in GDP. Still want to talk about Republics? I just want the Governor General we have now to sack this lot, pronto. Maybe it's not Norovirus that's making me want to vomit but simply living under this nauseating excuse for a government.

One More Plea From The RBA

So, at this conference going on, Glenn Stevens, he of the Reserve Bank of Australia had a few choice advice for this government.

Ordinary Australians don't relate to calls for reform emanating from politicians but they do want economic growth to create new jobs, grow prosperity, and provide long-term financial security for their families, Glenn Stevens has told policy makers in Sydney. 

However the Reserve Bank governor acknowledged that focusing on growth was no populist option and would mean squaring up to the kind of hard political challenges that both the current government and the opposition have shown no appetite for.

The call for growth came as Mr Stevens repeated his concerns that the Australian economy had entered a long-term plateau, in which trend growth is significantly lower than Treasury and therefore government forecasts assume.

In arguably the most significant contribution to the National Reform Summit, which has brought together business, union, community, and policy leaders, from around the country, the central banker said for economic restructuring to be embraced by voters it needed to be framed in terms of its end-stream benefits for people. 

To that end, he told the high-powered gathering that "the general public is much more likely to grasp, intuitively, a conversation about growth".

I don't know about you, but I take that to read, "do your jobs properly you stupid intellectual runts". And I think it applies equally to the Opposition as it does to the addled minds that are in power this minute. Collectively, this political caste has to stop playing too much politics, gaming the ideology stakes, and get on with the job of addressing the real issues.

Heydon Hanging On

You get a guy who is biased pretending to be unbiased. He subsequently gets busted for being biased. Yet the same biased guy gets to decide if his bias is a problem. He had last weekend to think it over and said he couldn't. Now that the week's dragged on to Thursday he says he still can't decide whether his bias is a problem in being a Commissioner for a Royal Commission. He says he'll tell us Friday.  In the mean time, the ACTU says not only did the guy biased, he misled everybody. That's being euphemistic - what I think they want to say is that he lied.

It just doesn't look good. So why would he opt to keep twisting the breeze any longer than he needs to? Imaginer's misplaced professional pride, but every minute he stays on runs through whatever professional credibility he has left. So he must be hanging on for some other reason right? Like... money, perhaps?

I guess it's just another thing going on in another ring in Abbott's Three Ring Circus Government.
I think it's time for me to give into this overwhelming desire to go puke. Good night!

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.