Date: Wednesday, April 20, 2011
Author: Henry Thornton
Help is at hand, coming by virtue of a fine bit of analysis by ABC Chair/QIC Board Member Maurice Newman.
'The world remains on life support despite trillions of dollars of stimulus and monetary easing. There are few signs of autonomous growth. In the US, employment numbers have been mildly encouraging, but real wages are falling.
... Debt is rising rapidly in all the western nations - the USA, Britain, Japan, the nations of Euroland. Unemployment remains high. Policy is misguided.
'Well, after so much easy money and unprecedented fiscal stimulus, besides a speculative rally in risk assets and the spectre of inflation, what has been achieved? Regrettably, it appears only a postponement of the endgame. While it is true monetary policy has staved off some defaults and that fiscal stimulus has sparked activity, with treasuries now emptied and leverage already beyond the tipping point of some countries, the unanswered question is what will happen when that stimulus is withdrawn? How long will markets tolerate the constant debasing of currencies? At what point does too big to fail become too big to save?
'Where is the plausible evidence which can demonstrate how democracies can grow, tax or inflate their way out of such monumental obligations, with ageing populations and groaning welfare dependency?
'I conclude we are nearing the endgame, which I put at no more than eight years away, possibly less. That day will arrive because policy failures, rising social costs and the action of markets will create a crisis which makes a fundamental international settlement inescapable. Global imbalances and the renegotiation of private and public contracts in countries where these cannot be honoured will have to be comprehensively addressed. The event will trigger widespread trade and capital market dislocation, the aftermath of which will see the economically stronger BRIC countries with enhanced authority at the G20 and the IMF. Australia, Canada and Korea may well be beneficiaries.
... Australia needs 'policies which improve the competitiveness of the Australian economy. We need to bring the budget back to structural balance. All new taxes must be avoided and our complex tax laws should be reformed. Our trade practices laws need to more properly balance the real world of scale and international competition. We also need to rethink IR flexibility. Finally, well-intentioned policies to the contrary, we must maintain our comparative advantage in cheap energy'.
And on the politics of it all, including the carbon tax, Paul Kelly says: 'The enduring moral is that Labor and most of the media are addicted to misreading Abbott. They always fail to read the match. They savaged Abbott for the sin of appearing beneath some offensive banners but missed completely how he targeted and turned the workers against the carbon tax. Don't expect such misjudgments to be rectified.
'Finally, remember that industry has its eyes and its ears open. Beyond this, it can smell the weakness of Gillard Labor, the loss of its authority, the stench of Labor's vulnerability. It is emboldened because Labor is weak and because Labor is weak it is failing to consult properly with industry.
'This is a lethal political atmospheric for Julia Gillard'.
Saturday Sanity Break, 1 December 2012
Date: Saturday, December 01, 2012
Author: Henry Thornton
The parliamentary year ended more or less as it started - allegations flying, the speaker exasperated and new lows in the attitude to their leaders by people who will soon be gathering around BBQs to discuss the state of Australian cricket, next year's footy draws and prospects and the occasional disparaging remark about politics.
A wise man recently objected to the usual view that 'power corrupts'. Far more relevant, he asserted was that 'power reveals'.
This is one of those remarks that lodges in the brain, and Julie Gillard's progressive revealing of 'the real Julia' is perfect illustration.
Paul Kelly comments: 'THE final parliamentary week of 2012 was dominated by the stunning political persona of Julia Gillard - fierce, feminist and unrestrained - whose will-to-survival is Labor's last, best but highly dangerous hope.
'The real Julia is unleashed in her self-righteous fury and calculated aggression. Her voice now bounces across the summer landscape invading homes, hotels and workplaces. Her arch opponent, Tony Abbott, is traduced as sexist, relentlessly negative and an agent of smear as the nation divides between those who applaud Julia and those appalled by her.
'Gillard has summoned up all the hostility and prejudice directed towards her and thrown it back in the face of her accusers with added venom. At the dispatch box her vituperation assumes a shocking, sharper edge precisely because she is a woman,...'
Paul Kelly sadly but I fear realistically predicts there is worse to come. 'The mutual character assassination is guaranteed to intensify'.
The world heavyweight bout in test cricket is underway in Perth. Australia's bowlers rookie (apart from returning vet, Michael Johnson) fast bowlers dominated the day but South Efrica fought back with two quick wickets before stumps.
There are four exciting days to come and we remain hopeful of a century for Ricky Ponting and a glorious return to number one status for our team.
Speaking of the footy, why is an uncontracted superstar Kurt Tippett being punished? As Henry understands it, Mr Tippett signed a contract that guaranteed he could go to another club in 3 (?) years or so. Why is such a contract against the laws of the code? Seems like an infraction of his rights as a worker - where is 'Fair Work Australia ' on this one?
The commentariat is lashing itself into a lather in support of a rate cut next Tuesday.
This is the most likely outcome, but the board when it meets next Tuesday should be lashing each other with bamboo rods for the poor governance admitted (finally) by Governor Glenn Stevens on Friday in the forged polymer notes issue. Will ASIC step in to penalise the RBA for lack of attention to the need of appropriate disclosure?
Still, Terry McCrann has come to the board's rescue with a summary judgment 'remarkable job with interest rates'.
McCrann says a rate cut is 'all but inevitable', a judgment Henry made way back in October when he called for a cut of 50 basis points.
But he raises another interesting point: 'There are a series of important points to be made about the cash rate returning to the record low reached at the peak of the global financial crisis.
'First, it is simply extraordinary.
'We are not now in a crisis, either economic or financial, as we were in 2009. Then we all thought we might be looking into the abyss. Back then, we did not have the comfort of knowing that China would save itself and us, in the way it did.
'Even in conventional macro-economic assessment terms, a record low official rate seems odd if not indeed bizarre. Yes, consumer spending is subdued, consumer and business credit growth is in the low single digits'.
We shall return to this issue, which hinges in this writer's view on how to measure the stance of monetary policy, especially difficult in a small open economy such as Australia.
Image of the week
Courtesy The Oz
Investment drought; RBA culture
Date: Friday, November 30, 2012
Author: Henry Thornton
'THE investment outlook is souring rapidly, with mining companies reining in their growth ambitions while business across the rest of the economy plans for the lowest spending in six years', reports David Uren.
'The downbeat forecasts in the latest Australian Bureau of Statistics survey are in line with warnings from the Reserve Bank that the peak in the resource investment boom will come sooner and be lower than thought, and make it likely that interest rates will be cut again next week.
'Resource companies have cut $10 billion from their estimated 2012-13 spending since the latest survey three months ago.
"It is very rare for companies to cut their investment forecasts at this early stage of the financial year and has only previously occurred in 1991 and 1974," Barclays chief economist Kieran Davies said. "There is still going to be an enormous lift in resource investment, but there has been an unambiguous downgrade."
Other leading business stories this week concern the response of the big Australian mining companies, who have signalled they are entering a time of cost containment and retrenchment. As we have noted before, it is hard times that create productivity improvements, and now the good times are over.
The same ABS report discussed by David Uren also said that investment in manufacturing is dropping like a stone. There will be renewed efforts to improve productivity in this sector, but it may be Australian manufacturing has passed the invisable line in which giving up is the preferred strategy for over half the participents. Henry yesterday was involved in an intense debate of whether of not Australia's manufacturers, project managers and other relevant people were up to the task of conttructing and maintaining Australia's next submarine fleet, and I am hoping that there is a considered contribution on the 'yes' side of this debate for Henry's readers.
Henry is moved to ask why the parliament is not debating this question (and other big economic questions, like the extent Labor's IR legislation is holding back both mining and manufacturing) rather than the issue of the Prime minister's honesty and competance, which shall be decided whenever we all get to vote again.
A grizzled political veteran, now long retired, said with a note of deep resignation when asked this question: 'You know the answer, Henry, its politics'.
A parliamentary committee is (again) grilling Messrs Stevens and Battellino about the polymer note bribery affair, as a feature article in The Oz recounts in all is gory detail.
Henry's modest contribution is to report the view that in Henry's day the internal culture was best described as adverserial. Governors and Deputy-governors would jump on a supposed mistake or rash (in their minds) judgment with glee, and Henry was once said to 'write like an open sewer'. Painful at the time but, a bit like an English boarding school, character forming.
Henry suspects that with more modern management, the place has become far more forgiving and indeed positively lovey-dovey. I suspect a warm, soothing atmosphere, not unlike Kew Primary school. Why jump on a report of alleged bribery? Why say hurtful things to key officers? We mustn't delve Ric, better to let this matter take its natural course.
This is just an hypothesis, but it is perhaps worthy of investigation by said parliamentary committee.
Ricky Ponting has retired with grace and realism. We sincerely hope he makes a double century to make a return to number one his final gift to Australian cricket.
OECD cuts outlook; Poms summon a colonial
Date: Wednesday, November 28, 2012
Author: Henry Thornton
The OECD, a rich nations club, with some penniless members, has cut growth forecasts for 2013 and issued some serious warnings that it could be worse.
Growth in 2013 is estimated to be around 1.4 %, insufficient to reduce the rate of unemployment.
Reuters reports: 'Unemployment in advanced economies will remain high until at least the end of 2013, with young people and the low-skilled bearing the brunt of what is by far the weakest economic recovery in the past four decades, the OECD said on Tuesday.
'The jobless rate in the 34-country OECD area will still be stuck at 7.7 per cent at the end of next year, close to this May's 7.9 per cent rate and leaving 48 million people out of work, the Organisation for Economic Cooperation and Development said in its 2012 Employment Outlook'.
For the penniless members such as Greece, Spain and Italy, things are much worse. For young people, approaching or indeed over 50 % of the relevant youth workforce,a catastrophe for an entire generation.
And the changes may be permanant, as workers and potential workers fight losing battles 'against the machine'.
'Over the recent past, signs of emergence from the crisis have more than once given way to a renewed slowdown or even a double-dip recession in some countries', said Pier Carlo Padoan, OECD chief economist. 'The risk of a major contraction cannot be ruled out.
The eurozone economy is predicted to contract for the second successive year in 2013 and the OECD is warning (with Australia's Blind Freddie) that the currency bloc 'could be in danger' if there is a lack of sufficient progress by the region’s policy makers. Growth in the US is forecast at 2 % next year, while Japan’s economy is expected to expand 0.8 %, little more than half the growth expected in May.
The OECD called for interest rates not already effectively zero to be cut further. Why not pay people to borrow (negative interest rates) one is forced to ask. Some nations, include China (not an OECD nation) should add fiscal stimulus if the situation gets worse.
A colonial at the crease.
The once mighty Bank of England is to be run by a Canadian, like making Shane Warne captain of the Australian cricket team at its peak. Mark Carney is former (current?) boss of the Bank of Canada, former Goldman Sachs investment banker and is said to be highly respected in academic and central banking circles.
Martin Wolf comments both on Mr Carney's high credentials and the massive challenges he has to face.
Tax reform - a taxpayer`s perspective
Date: Tuesday, November 27, 2012
Author: Tiresias of Canberra
Further to your comments on tax reform, I’d have to point out that you seem too focussed on the state – why not approach tax reform from the other end, that of the tax payer? I’d argue that we need a tax system designed to meet the needs of small business and citizen-taxpayers, NOT the needs of anyone else.
The true cost of our tax system is not the combined wages of the ATO, but the time and money spent by taxpayers trying to comply with the existing system. The latter, unquantified, cost would be extraordinary.
And what do business want? A vastly simpler tax system that take up less time, less money and less attention. A tax system that is as easy to use as the operating system on a PC or as easy as a video game. And, ideally, one which creates incentives for productivity and saving/investment and that minimises hassles in taking on staff.
Small business owners and managers spend an amazing amount of time on compliance with Commonwealth and state/territory demands for licensing/registration, reportage and tax collection – time which should be spent on focussing on the business and on customers.
The trouble is that the public sector has not kept up with the key trend of our age: the ever faster, simpler and cheaper transfer of data. If it is possible for the banks to manage a payment system like EFTPOS, that enables truly vast amounts of data to be handled all the time and very cheaply, there is no good reason why the public sector cannot manage small business compliance in exactly the same way.
While they are about, both levels of gov’t should radically reduce the total number of taxes and charges (most add only a marginal amount to consolidated revenue) and aim for all small business to be liable for a maximum of two to three taxes only. The rats’ nest of registration fees of all kinds should be scrapped – why exactly should any properly incorporated lawful business have to keep registering for this and that all the time? And paying for the privilege too?
Also – scrapping ‘stamp duty’ (the Hanoverian impost that sparked off the US War of Independence) is centuries overdue. A trade off could involve extending capital gains to the family home, while scrapping capital gains on all stock holding lower than half a million. Such a trade-off would encourage ordinary Australians to save and invest outside of the housing market – a reform that only the spivs of the real estate industry could argue with. If stamp duty Is to be retained, then all sums collected should be earmarked by law for public utilities such as water, sewerage, electricity and transport (ANYTHING but arts festivals, the film industry, public fireworks displays, Olympic/Commonwealth sport or grand prix motor races).
A tax act that was limited to 200 or 300 pages is achievable. After all, our Lord needed only 10 sentences to get the essentials across.
Ed: Hear, hear to this splendid contribution Tiresias. Henry totally agrees with you and your aims for simpler taxes would fit beautifully with my aims for a tax and spending system modelled on that in place in 1971.
The old lady of Threadneedle Street
And here is a dramatic announcement - the governor of the Bank of Canada is to become the new boss of the venerable Bank of England. Read on here.
Slower growth `new normal`
Date: Monday, November 26, 2012
Author: Henry Thornton
The global outlook remains gloomy, although pundits keep hailing each latest upward twitch as heralding a return to the old normal of virtually continuous growth. The pundits may be wrong, which will create vast confusion and loss of confidence as reality breaks in.
Professor Robert Gordon of Northwestern University has been pondering this matter for some time, and recently presented a paper than anticipates a forthcoming book.
The abstract begins: 'This paper raises basic questions about the process of economic growth. It questions the assumption, nearly universal since Solow’s seminal contributions of the 1950s, that economic growth is a continuous process that will persist forever. There was virtually no growth before 1750, and thus there is no guarantee that growth will continue indefinitely. Rather, the paper suggests that the rapid progress made over the past 250 years could well turn out to be a unique episode in human history'. Read on here.
Professor Gordon says that six different but serious 'headwinds' are facing the US economy.
These are: (1) changing and unfavorable demographics; (2) rising education costs and poor secondary school performanc; (3) growing economic inequality; (4) increased competition due to globalization; (5) energy and environmental costs and challenges; and (6) high levels of consumer and government debt.
These factors were all evident before the global crisis of 2007/2008. Pondering that experience one might add a seventh factor: 'wild speculation by bankers with missing morality and lost ability to assess and make proper allowance for risk'.
From colonial times to the present, economic growth has been powered by three separate industrial revolutions: (1) the introduction of steam engines and railroads; (2) the inception and widespread use of electricity and the combustion engine; and (3) the invention of computers, the web and mobile communications generally.
The third of these revolutions may turn out to have a weaker effect on growth that the earlier ones. Gordon ends his abstract as follows: 'A provocative “exercise in subtraction” suggests that future growth in consumption per capita for the bottom 99 percent of the income distribution could fall below 0.5 percent per year for an extended period of decades'.
Australia's growth may stay higher for longer because of our trade relations with China, India and the other quickly developing nations of Asia.
However, if the US economy is permanantly on a lower growth trajectory, a new psychology of limited growth is likely to take hold in developed nation culture, which will affect us all.
Furthermore, Australia's relative success, built on mining shovels rather than sheeps' backs, will further entrench mediocrity amoung leaders.
Twenty years ago, Australia's leading historian, Geoffrey Blainey, wrote in the Fourth edition of The Rush That Never Ended: 'In the short term, nothing did more for the standard of living of the average Australian than the chains of mineral discoveries. Unfortunately they quietly bred an economic complacency, a sense that Australia was so richly endowed that all kind of blunders, delusions and extravagances could be afforded. The idea that Australia was the Lucky Country was to become, in the public mind and in many political and intellectual circles, a source of acute damage in the 1980s. Australians of the cities failed to grasp the important fact, that would have been obvious to most of their grandparents, that the resurgence of mining probably owed more to intelligence, effort and risk-taking than to natural endowments and unnatural luck'.
Has anything changed? As we sit here today, mining projects are being downsized or cancelled on a regular basis. Costs, including regulatory and industrial relations costs, are rising inexorably, and 'sovereign risk' is being applied to Australia for the first time in decades. New sources of supply are being introduced by nations that are hungrier and whose governments are more welcoming to mining ventures.
Australia may need to adapt to the new normal of limited growth. As the famous piece of graffeti on a wall in Sydney's Kings Cross put it: 'Avoid the rush. Mutate now'. Or persuade our leaders that economic growth is better than stagnation.
Saturday Sanity Break, 24 November 2012
Date: Saturday, November 24, 2012
Author: Henry Thornton
There is no doubt the Rudd/Gillard/Swan governments have greatly worsened Australia's fiscal position, but this has been a long-term, bipartisan affair.
'Budget monster out of control' as the lead on the Inquirer page is appropriately sombre, and it is going to take hurculean efforts by the next government to fix things. Below is a suggestion about how the next government should proceed.
But first, some analysis. Tom Dusevic's graph, drawn from budget papers, but curiously not available Online, provides ta very useful historical overview. Read on here.
Since the heady days of Billy McMahon, as shares of Australia's national production, outlays have risen by 6 % and receipts by almost 4 %. That the current situation is not worse is because of John Howard's great big new goods and services tax (itself partly offset by some modest reduction of income tax creep) but with net receipts greatly offset by new spending initiatives.
So here is Henry's advice to the next government. When you sit down to consider fiscal reform, get Treasury to compare, as ratios to GDP, the various catagories of government outlays and receipts. Ask yourselves why each catagory of spending has risen so far, and whether on available evidence there are verifiable reasons for the increases (I suspect there will be no catagories where spending has fallen except defence!)
Then repeat the exercise with catagories of receipts, and see what conclusions leap immediately to mind.
Then publish the results and invite discussion. If handled well, such a national dialogue might lead to real fiscal reform and prepare Australia to participate with real zest in the Asian century.
Idiocy on asyum seekers
I get the idea that if we make things horrible enough, the flood of asylum seekers will dry up.
But making things more unpleasent by degrees is doomed to failure, and I doubt that Australian's lach the mongrel to do what might be necessary, short of an invasion. For genuine refugees even five years on Manus Island will be no deterrent. People seeking better opportunities here should be able to be sorted quickly and returned.
Allowing asylum seekers to live in the community is sensible and humane. But not allowing them to work is just stupid. We might as well get some contribution to Australia from them, instead of paying them an insufficent dole to sit around and forment trouble.
A lot of angry young men + insufficent resources to live reasonably well + no ability to work = Fill in the answer as you see fit. But Henry thinks the answer is 'TROUBLE'.
JUST IMAGINE ... though Henry cannot verify the numbers, YOU WILL GET THE POINT.
If you had bought $1,000.00 of Qantas shares one year ago, you would have $49.00 today.
If you bought $1,000.00 AIG shares one year ago,you would have $33.00 today!
If you bought $1,000.00 worth of Lehman Brothers shares one year ago,you would have $0.00 today!
BUT.... if you purchased $1,000.00 worth of beer one year ago,drank all the beer, then returned the aluminium cans for recycling.... YOU WOULD HAVE RECEIVED $214.00!!!
BASED ON THE ABOVE, THE BEST CURRENT INVESTMENT PLAN IS TO DRINK HEAVILY AND RECYCLE!
AND, DID YOU KNOW...
A recent study found that the average Aussie walks 900 MILES A YEAR!!!
Another study found that Aussies drink, on average, 22 GALLONS OF ALCOHOL A YEAR!!!
THAT MEANS THAT, ON AVERAGE, AUSSIES GET ..... 41 MILES TO THE GALLON.
MAKES YOU PROUD TO BE AN AUSSIE" DOESN'T IT?
IMAGE OF THE WEEK
Courtesy The Oz
Economic roundup - 23 November 2012
Date: Friday, November 23, 2012
Author: Henry Thornton
Finally, some unambiguous good news - Australia's batsmen are flaying the South Efrican bowlers. Their's is/was the number one team in the world, and their number one bowler went off hurt, and their number two bowler got hit for 5 fours in an over. Gor Blimey, comrades, what a hoot.
The unambiguous bad news is that the asylum-and-better-future seekers are coming in ever larger number.
So there is another policy backflip - they will be incarcerated on the Australian mainland (and Tasmania) and released into the community with a low welfare payment and no right to work.
Here is the equation. A lot of angry young men + insufficent resources to live reasonably well + no ability to work = Fill in the answer as you see fit. But Henry thinks the answer is 'TROUBLE'.
The retailers are moaning again, hoping to persuade the RBA to cut rates again - but see below. As someone said to Henry this week 'We all need to learn to live with lower growth', and the big retailers need to accept this sensible piece of advice.
It has been a big week for the RBA.
It's gov'nor, Glenn Stevens, spoke to CEDA, slightly short of Mount Olympus but mevertheless exciting.
Gov'nor Glenn, was back in 'glass half full' mode now that he's over the hurdle of having to say, ever so gently, that there are serious risks facing us all.
In this latest speech he reviews: the terms of trade, which are still high and expected to remain high; mining investment as a ratio to GDP, is currently forecast to peak at 8 or 9 %, more than twice the two most recent peaks; household saving, which has recovered from a low of zero % of household income to about half of the ratios achieved in the 1960s and 1970s; and productivity, has shown a tiny upward movement, with more good news likely to follow.
It RBA also released the minutes of its most recent board meeting.
The final two paragraphs of the minutes are as follows: 'Members noted that the staff's forecast was for underlying inflation to remain close to 2½ per cent over the next two years, apart from the temporary effect of the carbon price. With the disinflationary effect of the earlier exchange rate appreciation on tradable prices waning, this forecast was predicated on the assumption of ongoing productivity growth and some moderation in the growth of wages to contain domestic cost pressures.
'The Board's decision at the October meeting to reduce the cash rate had pushed borrowing interest rates a little lower relative to their average levels. The effects of the earlier reductions in the cash rate were, meanwhile, continuing to work their way through the economy, and members expected that further effects of these changes were yet to be observed. Members considered that further easing may be appropriate in the period ahead. However, at this meeting, with prices data for the September quarter slightly higher than expected and recent information on the world economy slightly more positive, the Board judged that the stance of monetary policy was appropriate for the time being'.
China may be stabilising (albeit at lower levels of activity than earlier assumed) and the US economy is showing improved performance, 'However, 'While significant uncertainty remained over the extent and effect of fiscal consolidation from early 2013, members noted that a positive resolution of this matter could result in better growth prospects'. This is a glass half full sort of comment, in which the glass contains some fine wine of the Grange range.) More here.
Will interest rates rise after the December board meeting? On the latest indications, this is likely to be contingent on particular news items. As guv'nor Stevens explained in his latest speech: 'As of the most recent meeting, as the minutes released earlier today show, the Board felt that further easing might be required over time. The Board was also conscious[good news that], though, that a significant easing of policy had already been put in place, the effects of which were still coming through and would be for a while. In addition, the latest inflation data, while not a major problem, were a bit on the high side, and the gloom internationally had lifted just a little. So it seemed prudent to sit still for the moment. ['Now, children, be still for a moment!'] Looking ahead, the question we will be asking is whether the current settings will appropriately foster conditions that will be consistent with our objectives – sustainable growth and inflation at 2–3 per cent'.
So your guess is as good as mine, gentle readers. All I know is that a lot of people are doing it tough out there, and next week it will be the turn of a lot of banking staff to feel the pain.
The first question is what would happen to the US and global economies?
Markets would be severely dislocated - equity prices would fall, reversing the jump when it looked like President Obama might avoid a cliff-jump.
US bond yields would almost certainly rise, reversing recent tendency to fall, as US would no longer be seen as a 'safe haven' for footloose money. Bond yields in genuine 'safe haven' nations such as Germany and Australia would probably fall further. The changes to relative yields, and falls in equity prices, would rapidly escalate if the crisis were prolonged.
The US economy would be headed for a severe recession. The fear of this outcome might jolt Congress and the President into mindsets necessary to reach agreement on policies to solve the chronic US deficit-and-debt merry-go-round. If so, there would be no great worries for the rest of us.
If the arms of US governence remain locked in a wrestle that offers no solution, at least the long term debt problem of the USA would be less serious, and US businesses and households might understand their destiny is in their hands, not those of incompetent politicians.
An upsurge of private saving and debt reduction by households could be expected, plus even stronger than normal efforts to find paying jobs. The latter reaction might be quite strong, as officials would have to announce cuts to welfare payments even bigger than those mandated by cliff-falling economics.
US business, however, would be doing its own deleveraging and de-hiring, adding to the general recessionary forces and fear of unemployment.
The US economy would fall quickly into serious recession. How long it would last is uncertain. We have great faith in the inherent dynamism of the US economy, but it would be in uncharted waters, at least by the standards of the past century. The Great Depression of the 1930s is perhaps the best example, and it was long and it was brutal.
Partly this was due to the tightening of US monetary policy at just the wrong time, but we are confident that Chairman Bernanke would avoid this mistake.
Indeed, the US Fed would presumably increase the pace of money printing.
Tiresias comments: I do not doubt that Bernanke would “increase the pace of money printing”, but there must be some limit to the Fed’s love affair with the printing press? Surely a further increase in the money supply would push the US towards the a kind of FX doomsday and hyperinflation? In any case, the US economy has had too many asset bubbles for its own good. Whatever happens, much of the phony wealth created by the asset bubbles and the grotesquely swollen money supply will have to be destroyed to make way for new wealth linked to actual output and productivity. The purpose of a crash (its only redeeming virtue) is that it acts like a bushfire that burns up the rubbish and releases nutrients for new growth. By avoiding/frustrating the business cycle gov’ts have allowed the flammable stuff to build up to system-threatening proportions.
Sensible prediction is almost impossible, but we feel that the rate of unemployment in the USA would almost certainly reach 20 %. The ugly riots seen recently in the streets of Athens and Madrid would be repeated across the USA, but with automatic assult rifles and worse in the hands of the rioters.
Once recovery began, we'd we watching out for signs of inflation. Frankly, however, we would not be too worried about this. A surge of inflation would further erode the real value of US bonds, and thus make easier the task of eliminating official US debt.
Our Chinese friends, who disproportionately own US bonds, would be mighty mad. As you said yourself, relations would be strained for a long time, perhaps not the 50 years of your (blind) prediction, but long enough to put considerable downward pressure on the US dollar, and offsetting upward pressure on the Euro and the Australian dollar. China's growth would slow further, perhaps to a 'mere' 5 % per annum.
The rise of the Euro would worsen the Eurozone crisis. So would the reduction of US imports from Eurozone nations. Both factors would worsen the Eurozone recession. In fact 'deep depression' would be the summary for the heavily indebted nations of southern Europe, and who knows the political implications of that?
In Australia, the further fall of Chinese demand for commodities would mean another round of price cuts for exports of coal and iron ore, and indeed all of Australian exports. The Australian dollar would presumably fall, providing some relief for the non-resource industries, but 'recession' rather than the current 'slower growth' would be the general expectation. The government would presumably not urge Treasury to tighten fiscal policy further, so the promise of 'return to surplus' would need to be dropped, perhaps for several years.
We would, however, expect the Reserve Bank to cut interest rates further. If pressure on the banks reappeared, almost certain, we would expect the government to again guarantee bank deposits and the overseas borrowings of Australian banks.
The global outlook absent sensible resolution of the US budget crisis is so horrific that one assumes that even the Tea Party Republicans will allow the President and the Speaker reach a civilised accomodation. But perhaps the Tea Party fanatics would prefer a collapse of the US economy and heavily armed protesters rioting in the streets. If this is the case, watch out, gentle readers, it will not be pretty. So why did Henry say: 'The benefit of a 'short sharp shock' for America now would be to capture everyone's attention and drive home a point made by Mr. Obama in his magnificent acceptance speech. The answer to America's woes lies with households and businesses. The challenge is to abandon the creeping sense of entitlement and the reliance on bailouts on both a large and a small scale, and to reemphasise the need for innovation and entrepreneurial go-getting as the core values in American business'.
Provided the initial effects of the USA going over the fiscal cliff were as described, there would be time for everyone to get their acts together. Please reread the start of the penultimate paragraph. But until America gets its own house in order, continued caution in investment policies is recommended.
Tiresias comments:Finally, I suspect that readers would be interested in some tips about how to protect themselves or even profit. My bet is (as always) stick to fuel (especially natural gas), minerals, food, timber and pharmaceuticals. The more daring (that is the young and very ambitious) will put aside cash for the coming fire-sales (especially if civil order breaks down – remember the old saying, “when there is blood on the street, buy real estate!!!”)
I cannot speak for others, or advise people whose personal situation I do not know. However, I can say the Thornton family wealth, such as it is, is long real estate, plenty of cash, some gold (in a safe-deposit box), only solid Australian shares (mainly resource companies and banks) and shares in leading global companies.
If the global economy turns out to be as bad as it could be, I'll wish I had been even more cautious, but there will be some money available for bargain hunting.
Iceland - who cares? USA - there`s a challenge.
Date: Tuesday, November 20, 2012
Author: Tiresias of Canberra
Please thank Mrs T for your blog on Iceland, but Iceland is just a North Atlantic version of Nauru … filthy rich one minute, poor and bankrupt the next.
Writing off debt is as old as credit itself – hence the Biblical Jubilees and the “seisachtheia” (literally ‘shaking-off’) of Solon in Athens. But this needs to be balanced by geo-political factors. If the US writes off debt owed to foreigners one way or another, then we would be left with hundreds of millions of thrifty and very angry Chinese all wondering where the sacrifices of a generation have gone. Chinese-American co-operation would be a non-starter for about 50 years, at the very minimum.
The US might take a leaf out of Japan’s book. After WW2 the Japanese econocrats conned Macarthur into believing that the old Japanese plutocracy had been the prime constituency behind Japanese militarism (they weren’t, but that’s another story). The Occupation Gov’t forced the zaibatsu owners and major bankers into buying non-negotiable treasury bonds which soon became worthless during a contrived period of hyperinflation. This euthanased the old upper classes pretty effectively and the bureaucrats have been running Japan ever since.
Hyper-inflation would inevitably ruin the retiring baby boomers, the first truly mass rentier class in history. The last thing the US really needs is a newly pauperised class of tens of millions of angry voters ... or their children , who were counting on cashing in on inheriting the family home as windfall that would make good stagnant real wages. But this might be the only way out.
A Wall Street melt-down would not necessarily cripple US capitalism (which is going gang-busters, the majority of the leading companies fund growth via retained earnings and have little or no need for the share or bond market) but it would ruin small and medium investors and ensure that it would take decades for the vital, jobs-rich, corporate start-ups to recover.
The task for Obama is to convince his constituents that soaking the rich (or apparent rich) is no substitute for a sustainable, productive, economy in the long run. And also to convince Romney’s constituents that the generation-long experiment of government without taxation and mass debt-bondage in lieu of stagnant real wages is no longer viable. There is no evidence so far that Obama understands either challenge.
The real task for the rest of the world is to stop taking the US for granted. The US cannot function as the consumer of last resort. Neither can the US simply adjust to globalisation by yielding more and more market share of its manufacturing.
What we in Oz really need is advice from our leaders on what they will do in the event of the US going over the cliff, either in terms of fiscal or monetary policy. I’d like to know if Australian depositors will be shielded and how and at what cost. The current silence is deafening.
Ed: We invite Treasury and the RBA to respond, or other readers for that matter. Contact Henry here.
Escape from debt-fuelled economic crash
Date: Monday, November 19, 2012
Author: Henry Thornton
Mrs Thornton has an ongoing interest in economics, more's the pity.
Somehow in a recent car trip she got onto the subject of the US recovery, the so-called 'fiscal cliff' and Henry's view that it may be best to allow the USA to go over the cliff. (This iconoclastic view has since been echoed by Judith Sloan and possibly by a raddled Alan Greenspan who was wittering on about policy failures, including his own, on a talk show viewed only partly during the weekend.)
Mrs T reminded Henry that our son, Bert, was against the bailouts of US banks (and car makers) at the time.
'No bailouts, full scale depression', was Henry's reiterated neanderthal grunt.
'What about Iceland?, Mrs T responded, 'I hear it's doing not so badly'.
I agreed Iceland was a special case but stuck to my guns at the time.
This morning I decided to check up on the progress of this tiny, icey nation whose Prime Minister famously told the people to learn to go fishing again. (This suggestion is a rare example of a leader who told his nation the facts of life, but for his pains he was booted out and is being prosecuted.)
'Few countries blew up more spectacularly than Iceland in the 2008 financial crisis. The local stock market plunged 90 percent; unemployment rose ninefold; inflation shot to more than 18 percent; the country’s biggest banks all failed.
'Since then, Iceland has turned in a pretty impressive performance. It has repaid International Monetary Fund rescue loans ahead of schedule. Growth this year will be about 2.5 percent, better than most developed economies. Unemployment has fallen by half. In February, Fitch Ratings restored the country’s investment-grade status, approvingly citing its “unorthodox crisis policy response.”
'You can say that again. Iceland’s approach was the polar opposite of the U.S. and Europe, which rescued their banks and did little to aid indebted homeowners. Although lessons drawn from Iceland, with just 320,000 people and an economy based on fishing, aluminum production and tourism, might not be readily transferable to bigger countries, its rebound suggests there’s more than one way to recover from a financial meltdown'.
The government offered homeowners with negative equity debt write-offs of amounts above 110 % of the property value. Homeowners were provided with means-tested help to reduce mortgage-interest expenses. Then the Supreme court decreed that debts in foreign currencies were illegal - another effective write-off as repayments could be made in greatly devalued krona.
Iceland also reduced government spending and increased revenue by raising taxes and cutting deductions that mainly benefited the well-off. A deficit that reached 13.5 percent of gross domestic product in 2009 fell to 2.3 percent last year. The IMF predicts Iceland will have a primary surplus (excluding interest on debt) of 1.5 percent this year.
'As for the banking industry, Iceland never had an option to adopt the too-big-to-fail policy that led governments in the U.S. and Europe to prop up their banks. Assets held by Iceland’s three largest lenders had swelled to nine times the size of the economy. After they defaulted on $85 billion in debt, the government seized control of them.
'Initial plans to repay foreign creditors, mostly U.K. and Dutch depositors, collapsed in 2009 as street protests led to the demise of the government. Repayment of obligations to overseas creditors was either postponed or written off, leaving the reconstituted banks with much smaller domestic operations. Twice, Icelanders rejected national referendums on repaying foreign depositors, who are pressing their claims in European courts'.
And in conclusion: 'Devaluation of the kind Iceland suffered is never fun. Reneging on debts leaves a legacy of violated trust. But it still looks better than recession with no obvious way out'.
Much food for thought, gentle readers. As we have been saying like a broken record, currency depreciation and debt reduction (by refusing to pay if the burden is too great) is the only civilised solution to the sort of mess the USA and the 'southern' Eurozone nations have landed themselves in.
And on the weakening Australian economy, a nice summary here.