Austerity or stimulus - the fateful choice
Date: Friday, November 04, 2011
Author: Henry Thornton
Robert Skidelsky, biographer of Keynes, has warned: 'The world economy is on the edge of a precipice. The best we can hope for now is a managed retreat from the wilder shores of globalisation. The alternative is the collapse of the euro, protectionism – and even war'.
'The resulting damage over the past four years has been huge. The world economy contracted by 6 per cent between 2007 and 2009, and recovered 4 per cent. It is 10 per cent poorer than it would have been, had growth continued at the rate of 2007, and the pain is not yet over. Today, we are in the first stages of a second banking crisis. It may already be too late to avoid a "double dip", but it may still be possible to avoid a triple dip. For this we need a robust intellectual analysis of what is required to ensure durable recovery, and the collective political will to implement it'.
'Economics is in a mess'. There are two explanations of the painful recession we are all experiencing - American profligacy (printing money, overlending and overborrowing) and Chinese frugality (saving too much). The old debates between Hayek and Keynes are being played out in modern garb.
In reality, says Skidelsky, 'there are elements of truth in both explanations'. The policy debate is between austerity and stimulus.
'According to Meghnad Desai, writing in the Financial Times of 15 September, "The long recession is a Hayekian phenomenon and not a Keynesian one . . . The need is to deleverage, not to spend." The private and public sectors alike need to increase their saving, even though this will reduce aggregate demand in the short run. Letting assets find their proper value will bring genuine demand at realistic prices and punish those who have taken wrong decisions.
'There will be more pain in the short term, but the Keynesian alternative of stimulus delays the adjustment, unfairly forcing taxpayers to pay the price of rescuing those who took too much risk. The boom was the illusion; the slump is the opportunity to liquidate the malinvestments'.
Skidelsky reaches back to the nineteen thirties in refutation: '... Keynesians argue that, even if the Hayekian diagnosis is right, the remedy of austerity is wrong. It derives, they say, from the medieval medical practice of bleeding a sick person to purge the rottenness from his blood - a species of cure that frequently led to the death of the patient. Lionel Robbins, retracting his opposition to Keynesian stimulus policies in the 1930s, wrote:
'Assuming that the original diagnosis of excessive financial ease and mistaken real investment was correct - which is certainly not a settled matter - to treat what developed subsequently [by austerity policies] was as unsuitable as denying blankets and stimulants to a drunk who has fallen into an icy pond on the ground that his original trouble was overheating.
'(Compare this with the German finance minister, Wolfgang Schäuble: "You can't cure an alcoholic by giving him alcohol.") The point is this: if both the government and the private sector are trying to increase their saving at the same time, you don't just liquidate the bad investments, you kill the economy as well, by reducing national income until everyone is too poor to save.
'That is why I have been arguing in the UK that when private enterprise is asleep, for lack of effective demand, the state must step in to stimulate the moribund investment machine back into lively activity'.
Robert Skidelsky at the end of the day is a Keynesian. 'With austerity in the ascendant, the world recovery is petering out. Europe is on the edge of a precipice, in a feedback loop from bank insolvency to an explosion of sovereign debt to a second round of bank insolvency. The United States is in little better shape, with its fiscal policy paralysed and the markets expecting a Japanese-style stagnation'.
Readers from the IPA will stop reading at this point, but although I am more of a Hayekian, I urge other readers to continue. Skidelsky reminds us of the downward spiral of protectionism and war that followed the austerity of the 1930s.
'We know what happened in the 1930s: the world economy broke up. The conventional wisdom is that this is impossible today under any circumstances. The cliché has it that economic integration is irreversible; that the revolution in information and communications is ineluctably turning the world into a "global village". However, this benign prospect ignores the possibility of great crises and collapses. People were saying exactly the same thing in 1914. Historically, globalisation has come in waves, which recede under the impact of crisis and catastrophe as economic life retreats to the relatively safe haven of national jurisdictions'.
His warning is stark. 'If China and Germany insist on being 21st-century mercantilists - exporting more than they import - the rest of the world will start to protect itself against them. Germany's policy will lead to the breakdown of the eurozone, China's to the breakdown of the world trading and payments system.
'The two scenarios - Co-ordination and Disintegration - have in common that they presuppose more reliance by countries or groups of countries on domestic sources of growth, and less on foreign trade. That is what we mean when we talk of a more balanced world economy. The sole question is whether the retreat from the wilder shores of globalisation will be orderly or disorderly: whether we drift into the bloc economics of the 1930s, or whether we have the wisdom to build a managed and modified form of globalisation, free from the illusion that everything can be left safely to the markets.
'And here's the point - a disorderly, acrimonious retreat from globalisation is bound to overshoot the mark, reviving the economics and the politics of the 1930s; but leading, in an era of nuclear proliferation, to consequences that are even more terrifying. So we must resolutely work for the best, without illusion, and with only modest hope'.
The coming global crunch
Date: Tuesday, February 26, 2013
Author: Henry Thornton
Earlier this month I justified radical action to reform the Australian economy by what I described as the 'coming global crunch'.
One of my friendlier critics suggested I should devote all of the paper to discussing the crunch and save the remedy for next month.
I agreed with him but had run out of time. What I did say was as follows: 'Monetary policy in the major nations is unsustainably easy. The immediate effect of this includes the global stock market boom, which Australians who own shares are celebrating. But there is no easy or painless way out of a combination of near-zero interest rates and ‘quantitative easing’. Exiting from this unsustainable monetary policy will be costly and disruptive, and likely to bring on a major recession with a large drop of commodity prices'.
Now I wish I had had the energy to follow my critic's advice, but at least I can claim powerful support from four US economists, one a former 'right-hand man' to Ben Bernanke, and from my favourite European journo, Ambrose Evans-Pritchard. His paper is linked here and is leaned upon for this blog.
The paper Evans-Pritchard leans upon is available here. It will repay careful reading. It was embargoed until late on 22 February, but one imagines the authors will welcome publicity now.
Evans-Pritchard says: 'A new paper for the US Monetary Policy Forum and published by the Fed warns that the institution's capital base could be wiped out "several times" once borrowing costs start to rise in earnest.
'A mere whiff of inflation or more likely stagflation would cause a bond market rout, leaving the Fed nursing escalating losses on its $2.9 trillion holdings. This portfolio is rising by $85bn each month under QE3. The longer it goes on, the greater the risk. Exit will become much harder by 2014'.
The four amigos say the the Fed is acutely vulnerable because it has stretched the average maturity of its bond holdings to 11 years and, the longer the date, the bigger the losses when yields rise.
Trouble could start by mid-decade and then compound at an alarming pace, with yields spiking up to double-digit rates by the late 2020s. By then Fed will be forced to finance spending to avert the greater evil of default."Sovereign risk remains alive and well in the U.S, and could intensify. Feedback effects of higher rates can lead to a more dramatic deterioration in long-run debt sustainability in the US than is captured in official estimates." The amigos say ECB's purchase of Club Med bond amounts to "monetisation" of public debt in countries shut out of global markets. ] "We see at least a risk that the eurozone is on a path to become more like Argentina (which of course is why German central bankers are most concerned). The provinces overspend and are always bailed out by the central government. The result is a permanent fiscal imbalance for the central government, which then results in monetization of the debt by the central bank and high inflation".
In America, the Fed would face huge pressure to hold onto its bonds rather than crystalize losses as yields rise -- in other words, to recoil from unwinding QE at the proper moment. The authors argue that it would be tantamount to throwing in the towel on inflation, the start of debt monetisation, or "fiscal dominance". Markets would be merciless. Bond vigilantes would soon price in a very different world.
Investors, including Henry, have been thinking about the implications of this for some time, as US bond yields rise in fits and starts from the low 1s to almost 2 (These numbers refer to yields on ten year bonds.). 'Scott Minerd from Guggenheim Partners thinks the Fed is already trapped and may have to talk up gold to $10,000 an ounce to ensure that its own bullion reserves cover mounting liabilities'.
Evans-Pritchard says: 'What is new is that these worries are surfacing openly in Fed circles. The Mishkin paper almost certainly reflects a strand of thinking at Constitution Avenue, so there may be more than meets the eye in last week's Fed minutes, which rattled bourses across the world with hints of early exit from QE'.
China is saving and investing at rates never before seen. Germany's saving rate is high and rising. China and Germany have trade surplusses and almost all other major nations have trade deficits.
This situation is untenable and likely to produce a rising tide of protectionism, as in the 1930s.
Near-zero interest rates and 'quantitative easing' staved off the depression the world faced in 2008. 'The lesson of the 1930s is that the creditors are powerless. Prof Pettis [another recent author] argues that China and Germany risk a nasty surprise'.
Evans-Ptitchard concludes: 'America's shale revolution and manufacturing revival may be enough to head off a US-China clash just in time. But Europe has no recovery strategy beyond demand compression. It is a formula for youth job wastage, a demented policy when youth [is] a scarce resource. The region is doomed to decline until the boil of monetary union is lanced.
'Some will take the Mishkin paper as an admission that QE was a misguided venture. That would be a false conclusion. The West faced a 1931 moment in late 2008. The first round of QE forestalled financial collapse. The second and third rounds of QE have had a diminishing potency, while the risks have risen. It is a shifting calculus.
'The four years of QE have given us a contained depression and prevented the global strategic order from unravelling. That is not a bad outcome, but the time gained has largely been wasted because few wish to face the awful truth that globalisation itself -- in its current deformed structure -- is the root cause of the whole disaster.
'It will be harder from now on if central banks conclude that their arsenal is spent. We can only pray that their help will not be needed'.
Experimenting with global monetary policy
Date: Monday, February 25, 2013
Author: Henry Thornton
'FOR four years rich-world central banks have done their best to rejuvenate economies with conventional and unconventional monetary policy. Now, with short-term interest rates still stuck near zero and their balance-sheets stuffed with government bonds, the central banks of America, Britain and Japan are experimenting with a shift in approach: coupling monetary action with commitments designed to alter the public’s expectations of interest rates, inflation and the economy. The sense of change is reinforced by the prospect of new leaders at the Japanese and British central banks, and the increasing prominence of several doves at America’s'.
'Exploring more doveish strategies' is the subject, and in practice this means tolerating higher inflation, at least temporarily, in pursuit of higher output and job creation.
This means a 'significant shift' given the primacy central banks have in recent decades given to low inflation.
Targeting nominal GDP, or temporarily allowing inflation to rise above the target range, or even restoring the requirement for monetary policy to focus on both unemployment and inflation, are the remedies being canvassed.
But this experiment has already failed.
The US Federal Reserve in the 1920s faced a booming economy and rising share prices. US monetary policy could not both restrain the boom and prevent what became a massive share price bubble whose eventual bursting was an important reason for the onset and severity of the economic downturn we all call the Great Depression. Milton Friedman and Anna J. Schwartz say in their monumental book A Monetary History of the United States 1867 to 1960: ‘... there is no doubt that the desire to curb the stock market boom was a major if not dominating factor in Reserve actions during 1928 and 1929. ... But they did exert steady deflationary pressure on the economy. ... that episode ... exemplifies the difficulties raised by seeking to make monetary policy serve two masters’. (pp 290 – 291).
Friedman and Schwartz say, curiously given Friedman’s general support of steady, non-inflationary monetary policy, that the US Fed could have broken the market boom with a short sharp shock and then eased monetary policy before it damaged economic conditions generally. But an alternative would have been for the Fed to increase margin requirements on borrowing to buy equities until the market boom was punctured. Two objectives – economic conditions generally, and avoidance of a market bubble – and two instruments – monetary policy and margin policy.
The labor markets of rich nations should be improved by policies that focus on making companies more competitive and by making it more rewarding for companies to hire workers.
Monetary policy cannot serve two masters.
The trouble with monetary policy seeking to do two things with one instrument is that it's attempt confuses people about real solutions to the multiplicity of economic problems.
In any case, current global monetary policy is like 'pushing on a string', ie impotent, and this is telling us something important. Continued monetary ease is more likely to boost asset prices than fix the economic problems of developed nations.
And a third problem that exiting from current hyper-easy monetary policy will be hard, with a major risk of a global crunch.
The Economist says, in conclusion: 'There is also a question-mark over what this wave of central-bank experimentation can achieve: since bond yields are already so low, the marginal return to coaxing them even lower may be scant. For now, though, buoyant stockmarkets are giving the activists the thumbs-up'.
Saturday Sanity Break, 23 February 2013
Date: Saturday, February 23, 2013
Author: Henry Thornton
It's the numbers stupid.
This is the engaging message from 'business elder' Don Argus.
He concludes a thorough study of the economic numbers as follows: 'History has taught us that there are two ways to increase gross domestic product: you can increase your population or workforce participation, and you can increase productivity.
'We must continue to offer incentives for business to provide opportunities for our own youth, but we should also be encouraging young, educated immigrants who are willing to work, which will assist productivity growth in outputs generated through efficiency, rather than adding more inputs.
'If we fail to pursue sensible tax, spending and microeconomic reform to remain competitive then we will have missed the opportunity to prosper from the development of the Asian region'.
This is a 'must read' for our political masters, including 'Finance Minister of the year' Wayne 'Swannie' Swan, but they will probably snort with derision - 'Argie was the man who conned us with the MRRT!' may be their excuse.
Our Dear Leaders, of course, have more on their minds than a 'business elder's' economic analysis.
The new is full of Gillard's last stand, Rudd's possible return to the lodge, Shorten's key role, and much, much more. We are looking at the demise of a once-great political party, or a split into 'Union Labor' and 'Rationalist Labor'.
Paul Kelly, as usual, has the most incisive analysis.
'WITH polls showing a potential election wipe-out, the Labor Party remains in denial about the causes of its malaise. It suffers not just a crisis of leadership but a crisis of identity as a political institution'.
And in conclusion: 'Sooner or later Labor must confront two epic reforms.
'First, it needs to reduce union guaranteed voting power within the party from 50 per cent to no more than 20 per cent to match union coverage in the workforce.
'It also needs to empower democracy in the election of the leader whereby the caucus has half the votes and an electoral college of the rank and file has the other half, a proposal advocated by Rudd backer Chris Bowen last year.
'In short, the Gillard-Rudd agony is conspicuous for a debate that overlooks the underlying crisis facing the Labor Party'.
The Australian test team is already facing humiliation on a dusty track like that around Uluru, spinning like a top from the eighth over after the Indian 'quicks' had been cheerfully hit around the ground.
One suspects the three-and-two-half Aussie 'quicks' (I include Watson, who is on notice to bowl or be overlooked as a top 6 batter) will face a similar fate, and then our one-and-two-half spinners (the halflings being Warner and Clark) will labor mightily despite the increasing wear and tear on the dusty excuse for a cricket wicket at Chennai.
Still, the argument that India faces a pitch in Perth that favours chin music, so in India the Australians face ankle biters, is hard to overlook.
Footy's horrible start to the season with (largely unsupported) drugs'n'shit allegations got worse as the mighty AFL said Melbourne was NOT GULITY of tanking but nevertheless had to cop a half-million fine and have the men most responsible for its non-tanking tactics, now working elsewhere, suspended from duty. Excuse me, Mr Demetreiou (please excuse sir if this is dud spelling), but this does not look like natural justice to me.
Then we learn that the Australia's 6 by 50 metre swimming team indulged in some foolish, indeed offensive, hankypanky (or intended hankypanky) in Munchester. What is Aussie sport coming to?
'Tony Abbott is the cause of all this' Ms Gillard was heard to mutter as she went to face her cabinet.
Scam of the week
Henry this week received the following message.
'We have communicate with a company whom are customers of ours in your state regards merging, we like to merge with the company to increased revenue, market share, and cross-selling opportunities. We would like to retain you to help us in the process to review proposed transactions for acquisitions or purchase of businesses and creation of contracts for acquisition (merger), if you are interested
'Please advice us on your initial retainer fee and agreement and we shall forward you the company information and letter of intent.
'Wang Lee CEO/CFO Japan General Appliance Co.,Ltd. 11th Fl., TT-1 Bldg. 14-8, Nihonbashi Ningyo-cho 1-chome, Chuo-ku, Tokyo'.
Readers are invited to send examples of similar scams, or suspected scams. Should we collect enough we shall run a weekly scam ,and perhaps award 'Scam of the year' to the most beguiling.
Big mining or big Mac - how competitive is Australian industry?
Date: Friday, February 22, 2013
Author: Henry Thornton
The big market correction in New York overnight will be causing shivers to run up spines from Cairo to Southern Tasmania. As well as shares, the prices of a range of commodities, including gold, fell also, so there are many unhappy investors and mining Chairmen and CEOs out there today.
All this is caused, so we are told, by the US Fed merely having a conversation about how to exit from the easiest monetary policy in living memory.
Equity market participents, of course, spend a disproportionate amount of their lives speculating about the future, so this anticipatory selling pressure should come as no surprise, except perhaps for timing. Given Ben Bernanke's promise not to raise interest rates until the US rate of unemployment is 6.5 %, there would appear to be time on the side of bull market investors.
I remain moderately confident that the current sell-off is not The END of the market rally, though not sufficiently confident to bet the house on continued equity revival.
In the endless search for hints and clues about the impenetrable future, Henry discovered that the mighty RBA's research unit has issued a discussion paper about the mining boom's effects on the rest of the economy.
The second part of the abstract says: 'We estimate that the resource economy accounted for around 18 per cent of gross value added (GVA) in 2011/12, which is double its share of the economy in 2003/04. Of this, the resource extraction sector – which we define to include the mining industry and resource-specific manufacturing – directly accounted for 11½ per cent of GVA. The remaining 6½ per cent of GVA can be attributed to the value added of industries that provide inputs to resource extraction and investment, such as business services, construction, transport and manufacturing. This ‘resource-related’ activity is significantly more labour intensive than resource extraction, accounting for an estimated 6¾ per cent of total employment in 2011/12, compared with 3¼ per cent for the resource extraction sector'.
This is translated into English (just joking, Glenn) by the anonymous editorialist for The Australian. 'THE archetype of the greedy miner and his bulging pockets has become so established in political folklore that this week's RBA report into the resource industry reads like the script for an episode of MythBusters.
'Putting the farce of the mining tax to one side, the rewards of the mining boom are being spread more widely than is commonly imagined. Rising exports are estimated to have created 500,000 jobs right across the economy, including business services, transport, warehousing and construction. There has even been a spin-off for manufacturing, the very sector we were assured would struggle against a high dollar. All up, the multiple sectors of the resource economy accounted for almost a fifth of national gross added value last financial year, twice the contribution they were making eight years ago'
There you have it, Henry. Stop fretting about the loss of competitiveness due to an excessive currency value and remember that what doesn't kill you makes you stronger.
However, we hasten to add, we would not like to be identified with 'dollar-shop Keynesians, who appear from nowhere at the first hint of a downturn', or 'mining-hating Greens' or even as a friend of the Treasurer - all people lambasted by the anonymous editorialist.
We do however agree with the editorialist's powerful final sentance: 'We'll say it one more time for the hard of hearing: private enterprise creates jobs and wealth; governments spend it'.
For those of an inquiring mind, there is a lovely game that can be played by readers of the Economist. This venerable mag in 1986 developed the 'Big Mac' index which compares prices of the famed hamburgers throughout the world.
This data it converts into measures of over- or under-valuations of currencies.
The map (available here) is interactive. One can place one's cursor on a country and find information about the state of its currency valuation. Australia is colored light blue, so (according to the map's key) we know our currency is between 10 and 25 % overvalued.
In 2011, Australia's Big Macs were almost 25 % overvalued. The good news is that this is overvaluation is now nearer 12 %.
It is important to recall that the estimates are relative to the US Big Mac, which might be called the gold standard of burgers.
If the USA dollar is overvalued relative to the booming Asian economies, as the price of a Chinese Big Mac says it is (by almost 40 %), Australia is an additional 12 % overvalued.
Enjoy your Big Burger, today, gentle readers, and I'll have fries and a coke with mine.
The mining tax - arrogance or ignorance?
Date: Thursday, February 21, 2013
Author: Louis Hissink
One of the more frustrating issues we in the mining industry face is the unfounded belief that we make super profits which need to further taxed, and which resulted in the existing MRRT. Of course we now know that the government anticipated $2 billion in revenue only to discover that the tax generated about $126 million and which caused much mirth in some parts of the financial press, apart from the accusatory statements flying out from former prime ministers and the incumbents.
Countering the belief that the industry makes super profits only needs pointing to the appalling rates of return you get when you invest some money in a blue chip mining stock for which BHP-Billiton last year, 2012, according to the Fat Prophet website, was 3.6%. This means that if you invest $100 in BHP-Billiton shares, you will earn 3.6% interest. Bank interest for $10,000 plus is currently 3% for on call deposits, and slightly higher for term deposits, say 4.5%. Australian government bonds and yields for 24 October 2012 range from approximately 2.5% To 3.3%. Coupon rates vary from 2.75% to 6.5%. The RB official cash rate is 3.0%.
So I was startled to read a commentator's comments in one of the recent Catallaxy File posts about what other commentators thought a super profit was in the commentary thread of "Ross Gittins'column "Abbott must share the blame for the tax stuff-up" in the SMH.
I commented on Gittins' article in SMH where he blamed Abbott for the mining tax failure. I simply asked “Could someone explain to me what “above-normal profits” means?”
I received the following response, showing the absolute arrogance (or is it ignorance?) of these people:
“Money in the bank earns 6%. So an business investor is usually happy with something like a 10% return on investment and above. Someone who has the interests of Australia at heart would argue that a company making over double that in profit whilst extracting a resource out of Australia’s soil (or oceans etc), is in a position to have a super profits tax applied. That is they will still be making a great return on investment during that super profit period, but some portion goes back to compensate the owners of the land/ resources (ie the Australian people).
For example BHP returned a 26% return on investment last year. There is very clearly room here for extra compensation that will in no way hurt the miner. These numbers are representative only, but the concept is correct ie a tax on a mining super profit is a fair and reasonable idea and should be done. (properly this time!)
If it had been implemented correctly it is a way for Australia to save for it’s future. The alternative is to leave this super profit to billionaires and mostly OS investors. Simple choice really. BHP returned 26% last year (internationally”
I particularly liked “someone who has the interests of Australia at heart”. As opposed to….? Catallaxy Files Source
You can see straight away that the anonymous commentator who replied to the Cat's question basically hasn't a clue what he/she is talking about. No one can invest their $100 in the stock market and expect a 26% rate of return from buying BHP-Billiton shares! Of course the return on equity is around 23% +/- but this is not the real-life return an investor gets for their investment. And it is clear that anonymous has to be familiar with BHP-Billiton's return on equity, but to then confuse that number with the dividend rate which is the real life interest your investment will return at current prices, is a very real worry.
We assume the dividend rate for the BHP-Billiton share is equivalent to the interest rate for bank term deposits or government bonds, if that investor had instead invested his $100 in those pieces of paper instead of BHP-Billiton shares.
So why do our politicians and their economic advisors carp about mining super profits? The biggest mining company on the planet last year returned 3.6% per share. Henry's readers might also consider that the ramifications of the various superannuation funds who might have invested in BHP-Billiton shares, and who may have been looking forward to getting their dividend payment of 3.6% but if the MRRT had been well designed, might have received perhaps half of that dividend, say 1.8%. And if so would have been pilloried by the carping classes for appalling poor investment performance. Who would actually waste their investment buying mining shares when a better rate of return could be obtained by purchasing guvmint bonds. I hope that none of the Keynesians in Treasury think along these lines, because if they do, then we are really in some very deep doo doo.
So let's ask our readers for input - what do you think above normal profits means? Contact Henry here.
(Incidentally I wouldn’t call it arrogance but crass economic stupidity).
And on the questions you asked yesterday, about capital gains and losses, and effective tax rates for miners, here goes.
First, it's interesting to learn that a super-profit could be defined as any profit greater than the risk free rate. Perhaps our readers could define the risk-free rate for us? (H/T Sinclair Davidson).
Which raises the issue of investment risk - how many of us would invest in treasuries or blue-chip stocks if the potential for losing all of our capital exists? After all, investing in a mining stock can, and frequently does, mean a significant loss of capital. Expect to lose your principal in a bank term deposit? Government bond?
On capital gains and losses, our readers should be aware that prior to finding a mine, mineral exploration has to be done and years ago, whilst studying postgraduate, I learnt that there was a rule-of-thumb that exploration success rate seemed to hinge on the number 13 - spend $13 million before finding a mine, or spend capital over 13 years before finding a winner. The whole idea is to repay the invested capital from the mine profits and that's why mining companies look for high rates of return. That's why the return on equity is what it is, to balance the initial losses when a mine is found. Of course if you don't find a mine you have lost the lot.
How many of our readers would be prepared to start up a business and never ever make a profit, and go bankrupt? Remember it's all the same principle whether you borrow from the bank or the individual investors, both the banks and individuals expect a very high rate of return for the funds to cover the frequent catastrophic losses mineral exploration produces. That's why banks generally never lend money for mineral exploration projects, they only lend when you have finished a bankable feasibility study and shown the bank that your business plan will generate a cash-flow to pay back the loan. Same for the shareholders.
On effective tax rates. This rate is defined as net tax paid as a percentage of taxable income and Sinclair Davidson plotted this number from 2000 to 2010 (see first link above). It seems to hover around 28% (visually). Now that rate is an average so some will be above and some will be below, and most will be clustered around the mean rate. For 2012 BHP published its results and stated that its underlying EBIT decreased by 15 per cent to US$27.2 billion and payments to governments included US$12.1 billion in company taxes, royalties and indirect taxes. This makes the effective tax rate for BHP-Billiton at 44.5%, significantly above the mean of 28% for Australian miners.
So how our politicians come up with the idea we in the mining industry are not paying our fair share of tax is puzzling - are they that stupid or are their economic advisors stupid. If not, then they are clearly misusing the numbers to support a political point, and we should not be too surprised because the same tactic is being used in the Climate Debate and the creation of the CO2 tax. But it's more likely that our politicians and their camp followers don't understand the economics; they are Keynesians after all.
Louis Hissink Henry's Wandering Geologist
Currency wars - a verdict from Moscow
Date: Monday, February 18, 2013
Author: Henry Thornton
The Russians know a thing or two about warfare. They were nearly conquered by Sweden (Sweden!) in the late 1780s, they drove back Napoleon in 1812 and they ended Germany's push for world domination at Stalingrad during World War II.
The most successful wars, however, have been on their own citizens - especially political dissidents and uppity billionaires.
Now they have hosted a G20 meeting that has grappled with the so-called 'currency wars'. (Here and here are two of Henry's earlier forays into this murky business.
Australia's own Wayne Swan - 'Comrade Swannie' in Moscow - has been nodding wisely and interjecting comments about his brilliant leadership back home.
A report from the Russion front says: 'Japan dodges G20 censure over yen'. Japan has suffered defeat before, notably in August 1945, but on this occasion was let off with a warning.
Meanwhile back home, in Moscow on the Molongo, Labor has suffered a massive new slump in the opinion polls. (Comrade Swan was heard to mutter 'bloody democracy' as he ascended to the front of the plane for his return home.) Prime minister Julia 'Red' Gillard is now contemplating her future as a smiling Comrade Kevin marshals his rapidly growing forces. As he stacks on the weight, Comrade Kevin looks increasingly like the young comrade Kim running North Korea.
He also makes a profoundly important point. It is that 'When [the Bretton Woods system] finally broke down in 1971, nothing really replaced it. For over 50 years, national governments have been freewheeling with their monetary affairs, unbound by any formal link with gold or the volume of economic activity'.
Regular readers will know that Henry has been an advocate of a modern version of the gold standard to provide a global anchor for a non-inflationary monetary system. It seems at least one of Australia's most promising journos understands the issue.
Those interested to delve further into this matter may find this Blog of interest.
'Mining levy debacle puts Wayne Swan's future in doubt', by Dennis Shanahan.
'Wayne Swan may be Treasurer but he's certainly no treasure', by 'contributing economics editor' Judith Sloan.
'PM in check, now Shorten must move', by Peter van Onselen.
Here is an extract: 'By their own key performance indicators, Gillard and Swan have failed. They rolled Rudd to fix the mining tax, slow asylum-seeker arrivals and solve carbon-pricing worries. Instead, they have served up a politically painful mining tax that doesn't collect revenue, failed to stem the flow of boats and delivered a carbon tax they pledged would not be enacted before the election (and that now looks set to be repealed by an incoming Abbott government).
'Throw in the broken surplus commitment, and rewarding Gillard (and Swan in particular) with staying in power would be to reward mediocrity.
'A significant benefit of changing prime minister is that doing so would also elicit a change of deputy PM and treasurer.
'Even if Shorten can't (or won't) see the obvious electoral benefits of switching to Rudd, surely he can see how doing so is in his personal interests. ...' Read on here.
And what about the Perth accountant who told Swannie that his mining tax sums were holelessly wrong, in effect a whistle blower, who was persecuted by Swan, aided and abetted by Treasury?
This is a long-standing tradition, and it has strength and a weakness. The strength is that it keeps Labor people loyal but the weakness is that it foster nepotism in all its guises, and means that the best that Australia has to offer is widely under-utilised while Labor is in office..
As an occasional writer for Quadrant, I was upset to hear that its grant from the Australia Council has been 'slashed'.
Expansionary global monetary policy has boosted share prices. Now it is the turn of art.
The Wall Street Journal reports: 'London auction house Christie's International sold $127.7 million worth of contemporary art on Wednesday, thanks to an influx of newcomers eager for trophy art alongside veteran buyers who were willing to mop up the rest. Among the works buoyed by first-time bidders were a $14.6 million Jean-Michel Basquiat and an $11.9 million Peter Doig".
Ms Gillard and Mr Swan will find that this continued class warfare in the name of 'equality' (but in reality a desperate grab for revenue) will turn out to be the final nail in their political coffins.
'Go for it, Swannie. It will be galling to see you ride off into political limbo with your sack of pension money untouched, but a relief overall'.
The much derided mining tax is in the news again, mainly because it has so far delivered diddley squat, and its masters, the aforementioned Gillard'n'Swan, are looking increasingly like desperados swimming naked.
'A spokeswoman for Mr Swan said there was nothing unusual in Dr Parkinson's admission that Treasury did not know what values the mining companies would be using for their assets in calculating the tax.
"Treasury does not have access to the full financial details of individual taxpayers, but bases its forecasts on the best available data," she said.
'Broking analysts and mining companies suspected, from the beginning, that companies' ability to put a market value on their assets would have a big impact.
'A week after the tax was agreed, the then Coalition industry spokesman Ian Macfarlane suggested no tax would be paid: "The companies involved in the negotiations will be paying no more tax than they are now. We're starting to think the whole thing is a sham".'
David Uren has delved into the history of 'fiscal consolidation' which until the recent budget surplus promise was junked was Swannie's proudest boast.
'Even on the most recent and now obsolete published budget numbers, Swan relied much more on revenue growth than on spending restraint than did the consolidations of his predecessors. Had Swan achieved the return to surplus this year, it would, indeed, have been the fastest improvement since the "horror budget" of the Menzies government, under treasurer Artie Fadden, in 1951.
'From the peak 2009-10 deficit to surplus in three years would have been a consolidation equivalent to 4.3 per cent of GDP.
'This would have compared with Mr Costello's budget turnaround of 4.1 per cent of GDP across four years following the Coalition's election in 1996. He took the budget from a $6bn deficit to a $13bn surplus.
'The Hawke government, which gained power in 1983 as a two-year recession was abating, ran a big deficit of 3.3 per cent of GDP in its first year, but under treasurer Paul Keating devoted the next five years to returning the budget to surplus. ' 'That was a turnaround of 4.8 per cent of GDP.
'The consolidations achieved by Costello and Keating were striking for their spending restraint. During Keating's five tight budgets, spending fell as a share of GDP by 3.5 percentage points, while revenue rose by only 1.3 points'.
This is about a Treasurer who talks big but delivers ... just more spending.
The good news for the Coalition is that it is Labor which now has a big unfunded hole in their budget - Gonski and NDIS, even assuming there are no fresh revenue shortfalls yet to emerge.
'The world has 50-60 active tax havens, mostly clustered in the Caribbean, parts of the United States (such as Delaware), Europe, South-East Asia and the Indian and Pacific oceans. They serve as domicile for more than 2m paper companies, thousands of banks, funds and insurers and at least half of all registered ships above 100 tonnes. The amount of money booked in those havens is unknowable, and so is the proportion that is illicit. The data gaps are “daunting”, says Gian Maria Milesi-Ferretti of the IMF. The Boston Consulting Group reckons that on paper roughly $8 trillion of private financial wealth out of a global total of $123 trillion sits offshore, but this excludes property, yachts and other fixed assets'.
Household, business confidence surges, rates on hold?
Date: Wednesday, February 13, 2013
Author: Henry Thornton
Roy Morgan Research reports that Business Confidence in Australia in January 2013 increased to 122.5, up 7.7 points from 114.8 in December 2012 and is now at the highest level since April 2011.
This increase in confidence is due largely to the fact that more businesses now consider that economic conditions in Australia over the next twelve months will improve. These findings are from the latest Roy Morgan Research ‘Business Confidence’ survey of over 2,700 businesses in January 2013.
Although most Industries showed improved confidence in January, it was mining that increased the most and so returning it to the position as the most confident industry. Western Australia has obviously benefited by this and is now clearly the most confident state. A number of key sectors all remain below the average confidence level and as such pose a major problem for economic recovery. The Agricultural sector has the lowest confidence rating, followed by Construction, Manufacturing and Retail.
And the equivalent survey of households reports a corresponding increase in virtually all catagories, and overall.
The weekly Roy Morgan Consumer Confidence Rating shows Consumer Confidence rising to 121.4pts (up 2.9 pts since February 2/3, 2013) after the RBA left Australian interest rates unchanged at a record low of 3%. Consumer Confidence is now 5.7pts higher than at the same time a year ago, February 11/12, 2012 — 115.7.
The rise in Consumer Confidence has been driven by an increase in confidence about buying major household items and increasing confidence about personal finances over both the last and the next 12 months.
Now a much larger majority of 60% (up 6%) of Australians say now is a ‘good time to buy’ major household items compared to just 16% (unchanged) that say now is a ‘bad time to buy’.
Gary Morgan said: “Roy Morgan Consumer Confidence has risen to 121.4 (up 2.9pts) after the Reserve Bank of Australia left interest rates unchanged at a record low of 3%. Driving the rise were strong increases in Australians saying ‘now is a good time to buy’ major household items (60%, up 6%) and also that families are ‘better off financially’ than this time last year (34%, up 6%).
“Interestingly, a clear difference emerged between supporters of the two major parties when it came to looking at the next 12 months as increasing numbers of ALP supporters expect to be ‘better off financially’ in 12 months time (42%, up 4%) and the Australian economy to perform better over the next 12 months (42%, up 6%) while L-NP supporters became less confident on both counts with 37% (down 1%) expecting to be ‘worse off financially’ in 12 months time and 27% (down 1%) expecting ‘bad times’ for the Australian economy over the next 12 months.
“Despite the decision by the RBA to leave interest rates unchanged, the latest Roy Morgan January unemployment figure released last week showed Australian unemployment at 10.9% (1,327,000) and under-employment at 8.8% (1,068,000). This is a record high total of 2.4 million Australians (19.7%) looking for work or looking for more work.
“The high, and growing, level of unemployment and under-employment in the Australian economy means the RBA needs to re-commence making interest rate cuts as soon as possible to stimulate the Australian economy while the Government must look seriously at undertaking workplace reforms to encourage employers to begin hiring again.”
Henry adds: 'The rise in the overall unemployment and underemployment measure is somewhat at odds with the general rise in the various indicators of household confidence'.
Those who saw the Four Corners program earlier this week will wonder if Australia, like the USA, is developing an underclass whose views are not polled as they either out hustling for jobs when the interviewer knocks, or living in friends or relatives' spare rooms, or (God forbid) in cars and vans.
These missing workers are largely ignored by the government, and go unmentioned by the Reserve Bank. So it is a fair bet that improved business and household confidence will keep interest rates on hold. If these trends persist, that brave bloke who said the next move in rates might be up may be on a winner. He should have a bet with Westpac's Bill Evans before it is too late.
Australia`s reviving housing boom
Date: Monday, February 11, 2013
Author: Henry Thornton
After a serious correction, Australia's housing market is showing new signs of life. Falling interest rates, improved affordability and growing population are all factors stressed by experts, as will be reviving confidence of businesses and households at some stage.
Over the past year, the best performing house price performance in Australia's major capital cities have been Sydney (3.4 per cent), Canberra (2.7 per cent), Perth (2.7 per cent) and Brisbane (2.3 per cent). The only laggard amongst the eight conurbations was Melbourne, where prices were basically flat (minus 0.4 per cent).
The good people in nab's economic unit are predicting continued modest per annum recovery as follows: Perth the strongest, 5 % in 2014; Sydney next at 3.7 %; Brisbane 3.5 %; and Adelaide and Melbourne lagging at 2.0 %. National average, a still modest 3.0 %.
In Great Crises of Capitalism, we boldly suggested that the housing boom of the 2010s would revive after the GFC-induced correction, and that the decade of the 2010s might be like the decade of the 1880s.
Here is an extract.
A new factor of great significance is the China boom. While this was interrupted for a short time during the global financial crisis, China is again growing at double digit rates and Australia’s terms of trade are again at record levels. In many ways, the past three decades are reminiscent of the thirty years from 1850 to 1880. With good policy, sizeable overseas borrowing and a lot of luck, Australia is again seen as a ‘miracle economy’. To continue the analogy, this is another time in which Sydney is in decline while Melbourne is booming. Australia generally, led by Melbourne, is experiencing a property boom. This is (so far!) by no means as mad at that of the 1880s, but sufficiently strong that respected international commentators claim Australia’s house prices are up to 40 % above fair market value.
Slightly lower estimates emerge from a thorough study by three Goldman Sachs economists published in September 2010. Depending on the valuation model they see Australia’s overvaluation at either 35 % or 24 %, with the latter estimate their preferred measure. They do conclude, however, that ‘We see an acute housing shortage developing in coming years’, which provides an obvious possibility of further overvaluation to come.
If one equates 1980 with 1850, 2010 is the modern equivalent of 1880. If this analogy holds, modern Australia is now entering the last, maddest decade of a forty-year boom, and Marvellous Melbourne is already growing quickly, working well (despite infrastructure bottlenecks) and playing hard.
The above comments were sent to the printer in late 2010, and the temporary correction in house prices has been stronger than implied there.
Also, Melbourne is now lagging the recovery of housing prices. But there was a small correction in the early 1880s before the last, maddest near-decade of housing and land price boom, and only time will tell how the rest of the 2010s evolves.
The following table summarises the situation in the 1880s compared with the 2000, plus the situation in Australia in the 1890s. Readers are invited to replace the question marks in the column on the far right.