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News + Views, October 2016

October 28, 2016

The coming crisis - domestic, Banana Republic #2. 10 October

 

 

 

The Oz reports today: 'Australia’s foreign debt has hit “extreme” levels that match the worst in the world, according to a startling warning from ratings agency Standard & Poor’s that will intensify the dispute over budget repair after years of political deadlock on major savings.

 

'The global S&P executive who signs off on Australia’s ­credit rating has rung the alarm over the nation’s debt, suggesting the Turnbull government will need to find substantial new savings to avoid losing its ­coveted AAA rating.

 

'As federal parliament ­resumes today to debate key budget bills this week, the ratings agency’s outlook ramps up the pressure on all sides of politics to avert a credit downgrade that would increase lending costs across the economy.

 

'John Chambers, the chairman of the firm’s sovereign ­ratings committee, suggested the federal government risked losing the AAA rating if it continued to miss its fiscal targets'.

 

Australia's politicians seem utterly unable to address this problem. If they continue with the current budget impasse, before log the $A will crash, capital inflow will dry up and severe recession will do the work of gutless politicians.

 

Paul Keating and the Labor cabinet headed off threatened 'Banana Republic' in 1986.  note however, that despite the budgetary reprieve , severe recession was staved off, not eliminated.

 

Severe recession now seems inevitable. The sooner the better really.  The longer current policy settings continue, the bigger the eventual bust. 

 

President Obama reflects, October 13

 

President Obama is proud of what he has achieved but recognises that much remains to be done. In an article in this week's The Economist he writes: 'Fully restoring faith in an economy in which hard-working Americans can get ahead requires four major structural challenges: boosting productivity growth, combating rising inequality, ensuring that everyone who wants a job can get one and building a resilient economy that's primed for growth'.

 

Surely any honest leader in any western economy would agree with President Obama's statement of the major matters that must be attended to if his or her nation is to grow strongly and with greater fairness. Australia's government, despite facing similar economic challenges to the USA  keeps telling us we've never had it so good, and all we ('the punters' in Canberran argot) need to do is spend up big and the good times will continue to roll. This despite the large and rapidly growing private and government debt which is sure to bring on a severe crisis before too long.

 

Of course, Australia's government is clinging on with a one seat majority in the lower house and a mostly hostile Senate.  But imagine if the Australian Prime Minister  had a maximum of only two four year terms to lead a government, with Malcolm Turnbull in his second such term?  And suppose when this term is up, Mr Turnbull had the goodness of spirit to leave an honest assessment of what his government had achieved and the (much larger) agenda that remained to be achieve. If he did not, or gilded the lily excessively, then posterity would be a harsh judge

 

US recession risk, October 20

 


'The risk of a US recession next year is rising fast. The Federal Reserve has no margin for error' warns Ambrose Evans-Pritchard.

 

'Liquidity is suddenly drying up. Early warning indicators from US 'flow of funds' data point to an incipient squeeze, the long-feared capitulation after five successive quarters of declining corporate profits.

 

'Yet the Fed is methodically draining money through 'reverse repos' regardless. It has set the course for a rise in interest rates in December and seems to be on automatic pilot'.

And in conclusion: 'Stanley Fischer, the Fed's vice-chairman, conceded in a grim speech this week that the Fed has now run out of ammunition and that this "could therefore lead to longer and deeper recessions when the economy is hit by negative shocks".

 

'His prescription is to try sneak in a few rate hikes while it is still possible to create a buffer. Market monetarists say this is profoundly ill-advised, and may instead bring about exactly what he fears'

 

And in conclusion:.

 

'A President Hillary Clinton could and certainly would flood the economy with fiscal stimulus if need be. Yet this takes time. There are few 'shovel-ready' projects, and Washington is a fractious place. She may face a hostile House. The monetary crunch would have crystallized long before anything fiscal could be done.

 

'The world will not end if premature tightening pushes the US into recession next year. But why court fate?' 

 

Read the full presentation here, including useful links to other contributions, notably from Stanley Fisher, Vice-Chair of the US Fed.

 

http://www.telegraph.co.uk/business/2016/10/19/fed-risks-repeating-lehman-blunder-as-us-recession-storm-gathers/

 

Welfare and other rorts, October 28

 

Welfare recipients are given more than some people earn, and pay income tax to boot. There has been no penalty for welfare recipients who do not accept available jobs, like picking fruit. Fake schools and childminding centres have been given millions when students get no degrees and children are not minded.  Who knows what other rorts are nestling in the welcome arms of the welfare bureaucracy?

 

The good news is that the government is exposing these rorts and presumably will tighten up the system.  But what about rich folks' rorts, like negative gearing?  Many people own double digit numbers of houses, with mortgage payments in excess of income being an offset to non-related income.  Negative gearers accumulate ever more houses and indeed wealth by realising low taxed capital gains when they sell houses from their highly subsidised  housing portfolios.  Yet the Turnbull government defends this system while proposing to tax incomes of self-managed superannuation funds in excess of $1.6, an amount barely able to generate a modest income in current times of low returns.  And it gets worse. If asset values fall, as they are guaranteed to do when global interest rates rise, so that $1.6 M becomes, say, $0.8 M, incomes on the tax-free part of peoples superannuation will be slashed.

 

Meanwhile, fat cats in the public service and long-serving pollies get massive tax free pensions - often $0.75 M per annum,  based on antique defined benefit schemes. If our government is able materially (and retrospectively) to change the rules of self-managed superannuation funds, as they have proposed, why not do the same for recipients of defined benefit schemes in the official system?  The answer is simple. Those making the decisions about pollie and official pension policy are deeply and hopelessly conflicted and are totally unable to decide to cut their own inflated retirement incomes.

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