Budget Fail

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There is something really distasteful and perverse about the amount of attention the Australian press dedicates to analysing the government’s annual budget. It’s obscene in some undefined way, and offensive at some visceral level we can’t quite define.

Maybe it’s the implication that state tax and spending policies have such a huge sway in our everyday lives that we have to pay attention to them whether we like or not. Maybe it’s how seriously the politicians take themselves while exhibiting a comprehensive level of stupidity about markets.

Either way, the whole thing makes us want to gag. Literally, the gorge is rising in our throat just thinking about having to analyse it. So we won’t. You can read that everywhere else anyway. But we will confine ourselves to two things you should know about yesterday’s fiction announced in Canberra.

First is that it projects a return to surplus in 2012 and 2013 – three years earlier than last year’s budget – based on a tax it hasn’t passed and assumptions about wage and employment growth that haven’t happened and probably won’t, if we’re right about what’s going on in China.. And lest we forget with yesterday’s fiscal triumphalism, the so-called improvement in next year’s figure is STILL at $40.8 billion deficit. That’s a fail.

The current Prime Minister, Kevin Rudd, took the airwaves to explain why the deficit was necessary in the first place. “Remember,” he intoned, “the job of government when the private economy is under stress is to expand the role of government so that we keep people in jobs.”

Gag. With policy makers like this, who needs morons? It’s odd that so many people still celebrate a return to deficits and wasteful government spending as a policy triumph during the GFC. You could only really say this if it wasn’t your money that was being wasted.

Keeping people in jobs might help you win elections. But the government ultimately reduces the productivity of the economy and the growth of the work force when it consumes a larger share of private capital. The Prime Minister’s position is textbook sanctimonious Keynesianism, so we wouldn’t expect anything less from someone who believes in government more than he believes in markets.

At least he’s consistent. But it does show, in our opinion, how little he understands about wealth creation and how little he respects wealth creators. To be fair, he IS proving to be a first class wealth-confiscator/redistributor.

But the real blind-side in the budget forecasts and the second big point is what Wayne Swan calls the “commodity boom II”. That’s the projected scenario where GDP grows faster than expected over the next three years and terms of trade drive return to 60-year highs and produce huge growth in national income and where the resource rent tax captures a “fair share” of rising resource prices for the government to parcel out like a haughty but benevolent Auntie on Christmas Day.

Good luck with that. Obviously our position on the durability of the China-driven resource boom is now a matter of public record. If you haven’t seen the “Exit the Dragon” report yet, you can read it here. But yesterday’s budget simply highlighted how much the Australian political establishment is counting on China to deliver good times and delay tough decisions about domestic spending and the realistic services Australians can expect from their government in the coming years.

As an investor and a free person, you don’t have the luxury of counting on China to solve all your personal retirement problems. So we’d suggest taking a closer look at them now and deciding if you can afford to base your retirement plans on forecasts that assume there is no credit bubble in China. If there IS a credit bubble in China, then the government’s forecasts and its projects are exactly what you’d expect: rubbish.

So is there a credit bubble in China?

“China’s Bubble Risk Adds Tightening Pressure Amid Debt Crisis,” reports Bloomberg . China’s accelerating inflation and surging house prices are adding pressure on policy makers to raise interest rates and allow yuan gains even as their concerns over Europe’s debt woes persist.

Property prices rose at a record pace in April, consumer prices climbed at the fastest rate in 18 months and new lending exceeded the forecasts of all 24 economists surveyed, figures showed yesterday.”

If you believe – all things being equal – that stock markets lead the economy, please note that the Shanghai Composite index is down 21% from its highs last November. It was down 1.9% yesterday. So is the stock market telling that China’s policy makers are going to tighten credit to pop the speculative bubble in real estate?

You know what we think. But tomorrow, we’ll answer some specific reader mail about why we could be wrong. Stay tuned.

Meanwhile, the euphoria from the ECB bailout announced over the weekend was short lived. The euro fell and gold rose to a record high in U.S. dollar terms as investors contemplated just what it means to print money and buy government bonds from banks. It means, most likely, a whole lot of inflation and an effective devaluation of the euro.

Nassim Taleb – whose second edition of “The Black Swan” we just got in the mail – says, “The crisis came from debt and you don’t escape it with more deb. We’re in a situation where we had a patient who we discovered had cancer a year and a half ago and all we’ve been giving the patient is painkillers. The tumor is getting worse because we are transforming private debt into public debt and public debt is not manageable.”

Investors increasingly understand this. The only ones that don’t seem to understand it are government officials. Tucked behind the walls of their sovereign castles, they seem oblivious to the precariousness of their financial plans and, indeed, the whole funding model of the fiscal welfare state. It’s failing and they’re fiddling.

Writing in Newsweek, U.S. economist Robert Samuelsson says, “The welfare state’s death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession.”

“By allowing deficits to balloon, they risk a financial crisis as investors one day — no one knows when — doubt governments’ ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.”

He was speaking of Europe, of course. But he might as well have been speaking of the U.S., the U.K. and Japan as well. Here in Australia, we predict there will be no surplus in three years. As the global cost of capital rises, Australia’s net foreign debt will increase, as will the cost of paying interest on it. And having banked too much on China and unintentionally sabotaging resource investment by an attempted looting of resource profits, the government will find itself with a lot less revenue than it expected.

And then just you wait until it will be compulsory for you to buy government bonds with your super annuation. It will be disguised as an “income security” measure. But by increasing your compulsory super contribution from 9% to 12%, the government is really only guaranteeing that it can confiscate more of your money to pay for future deficits, without your consent of course, and all for your own good.

But that’s for later! For now, investors still have time to position themselves for these trends and do something about it. Better hurry. If the last few days are any indication, it’s getting harder and harder to fool the bond market about the real state of sovereign debt crisis. It’s not good. And it didn’t get much better on the weekend.

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.
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83 Comments on "Budget Fail"

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Graham
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I found myself thinking yesterday (briefly) about keeping people in jobs. We live in a surplus economy, which means that more gets produced than gets consumed, and the remainder gets thrown out. I wonder if an entire economy could be sustained by having one sector that takes the raw materials and makes them into things that people don’t need, and another sector that takes the things that people don’t need and recycles them back into raw materials to make more things that people don’t need.
It made my head hurt.

MadJak
Guest
I read the following in a blog comment the other day. I cannot confirm it’s veracity, but it sure wouldn’t suprise me: of the top 6 people in our current government, they have a combined total of 181 years in employment. If you take out time working in the public sector, this number comes down to 13 years in total. No this is not a typo. If you then take out time spent as a union lawyer, it comes to 2 years. That’s 4 months each. Now, if this is true, I wonder what the stats are for the top… Read more »
Don
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“And then just you wait until it will be compulsory for you to buy government bonds with your super annuation. It will be disguised as an “income security” measure. But by increasing your compulsory super contribution from 9% to 12%, the government is really only guaranteeing that it can confiscate more of your money to pay for future deficits, without your consent of course, and all for your own good.”

No news to me Dan.

Geo
Guest
Everyone, everywhere I go for financial information is very much against this new resource tax. I wonder if this is because most people talking economics are older than me ( I’m 28). The way I see it, resources are limited, so one day or another, they ARE all getting dug out of the ground. If this new tax, and China going POP, contribute to another crash sooner, then good. I’m young and cashed up enough not to care, and this way there will still be something left for people my age to get rich off. Frankly, any Boomer who hasn’t… Read more »
Steve
Guest

As far as I am concerned the dirt in the ground belongs to the Australian people so therefore the tax is us selling what we own to these big companies thats why I support it.

Biker Pete
Guest

“…any Boomer who hasn’t got rich off the past 40 years, deserves to starve”

Love our younger generation! Your curse won’t apply to me, but your level of compassion gives me a nice cosy reassurance that we who will be ‘comfortable’ in our old age certainly did the right thing investing continuously for the last few decades. :)

Don: “…just you wait until it will be compulsory for you to buy government bonds with your superannuation.”

Not me, Don. I’m pulling it all out, ASAP! Won’t let these greedy little DHs get their unwashed hands on it! ;)

Don
Guest

You can run Biker! But ya canna hide!

Look out Mad Max – here we come!

Steve
Guest

“…any Boomer who hasn’t got rich off the past 40 years, deserves to starve”

I actually disagree I think that any boomer who has got rich over the last 40 years deserves to starve

Stillgotshoeson
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Comment by Biker Pete on 12 May 2010: Love our younger generation! Your curse won’t apply to me, but your level of compassion gives me a nice cosy reassurance that we who will be ‘comfortable’ in our old age certainly did the right thing investing continuously for the last few decades. :) You wrote in an earlier post about being able to take advantage of the market crash in 1987 BP… Back then you would have been around my age now, so the people your age now then “lost” and you were able to use that volatile period to help… Read more »
Biker Pete
Guest
Well, our motto always was “Screw the rich!” Shoes. We bought property _only_ the rich could afford to buy from us. It worked for a coupla decades. Now we watch the young’ns battle it out. “Screw the poor!” screams GEO. “No, screw the rich!” yells Steve. (Now that’s a far more enlightened view, with which I agree. The rich can at least afford it… .) It’ll all come out in the wash, fellas. But, being a low-risk kinda bloke ;) these daze, I _am_ pulling my $uper. Like DRA I agree we’ll look after our a$$et$ better than any institution… Read more »
Biker Pete
Guest

“Well, our motto always was “Screw the rich!” Shoes.”

Well then, BP, I figure you’re screwed! :)

Biker Pete
Guest

Very funny, fellas. (But thanks for the stars and thumbs-ups, anyway!~ :) )

GB
Guest
“…any Boomer who hasn’t got rich off the past 40 years, deserves to starve” I dont have an opinion on whether boomers should starve or not but i do have an opinion on boomers and why they should stop laying it on thick to GEN Y (I am GEN X) The boomers are in charge of the world right now, they are the politicians, business leaders etc… so lets look at what has happened with them in charge 1. Asian Financial Crisis 2. Iraq War 3. Afghan War 4. Pirates in Somalia 5. Terrorism in top gear 6. Tech bust… Read more »
Biker Pete
Guest

And that’s what all the _sixities_ protests were about. Today’s BBs, as young adults, protesting about how the previous generation screwed it all up.

“…its only going to get worse…”

Yes, on this we can agree.

Don
Guest

Quite a list there but I think people are a little hard on the boomers. When I was growing up, until the late 80’s there was the threat of nuclear annhiliation hanging over us. I will take that list in exchange for the elimination of that one thing – good job boomers! :)

peterg
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the boomers?… they all got stoned and drifted away… for the Yonky Dollar. at least the boomers made some inroads into the neo-fascist drivle that preceeded them. fell for their own drivvle though. (come together, right now, over $$$) I am no-GEN and anyone who tries to cook his mother a 4 year old duck for Mothers day deserves to starve, and his mother too. All come out in the washing? all come out on the internet perhaps, but those battles are being fought now. The revolution will not be televised, and the crash will not be understood, except perhaps… Read more »
Ross
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There is nothing more dangerous than a hypocrite. The US Democratic Party are a living testament to that. Every peace love and understanding aquarius loving type I ever knew became worse than Ghengis Khan when they got a dollar in their hand or could nick or intimidate one from one of their bretheren. Land speculators in the city had nothing on the commune cum subdividing hippies. Bellingen NSW is just as nasty as the US Ozarks with old hippies being nastier toward young ferals than the dairy farmers ever were toward them. The only good thing about hanging out with… Read more »
Jennifer
Guest

I think it is ridiculous to blame “boomers”. Come on! We are just people doing our best, and for your information, not all of us are rich – how ridiculous. The people who should be getting the blame for what is taking place in the world is the corrupt illuminati and the secret societies running the world of finance etc. Do some research. We should be supporting each other in these times of trouble, not blaming each other. We love Gen Y and X – they are our offspring, so stop the nonsense.

Steve
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Steve’s quote of the day “”Baby boomers who comment on blogs who say to young Australians things like this: “maybe if you didn’t spend all your money on Plasmas, ipods, overseas holidays maybe you would be able to afford a home” really need a reality check and need to go back to school and do maths. Plasma = $1500 Ipod = $200 Overseas holiday= $5000 Total $6 700 Compared to average Sydney house price of over $600 000 1% of the value of a roof over your head Do I really need to say anymore????””
Biker Pete
Guest

“…a thought for the poor chinese paying super profits for the fat Aussies…”

Ninety million obese people in China, 89peterg. ;)

Steve: “Do I really need to say anymore????”

Well, you might say _thanks_ to mum and dad, who still supply a $600K roof over your head, Steve. :)

Steve
Guest

Yes Biker a 600K roof over my head that cost them 85K

Biker Pete
Guest
Steve: ” a 600K roof over my head that cost them 85K” HaHa… my kinda people!~ (Ethically, of course, they’ll sell it for $85K, won’t they? Wouldn’t want to rip off successive generations, would they?!) Haven’t got a flatscreen. Our ’89 Panasonic still works fine. I think what amuses me most is our tenants’ propensity for the latest model cars. It’s not the $60K+ initial cost, so much; as the annual interest on that sum. These little chunks chew up capital like crazy…! Now 1% may seem a tiny sum, too, but back when I was your age, we were… Read more »
Biker Pete
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89peterg: “…… they all got stoned and drifted away… for the Yonky Dollar….”

Wasn’t that Ma Sheela, the Baghwan and AfroBoy, down your way, Pete? All scuttled off to Oregan… .
Strange how the daze pass. Hippie Valley is now Yuppy Valley I believe.

Steve
Guest

Biker Pete:

“Now 1% may seem a tiny sum, too, but back when I was your age, we were told that ‘if we looked after our pennies, the pounds would look after themselves… .’ Silly belief to drum into kids, I know, but it has always worked for us. ”

You know I actually try to look at things in the real world as FACTS and not try to sugar coat them into silly jingles or catchphrases and live in a fairyland like you expect us young ones to, but you wouldn’t live in when you were our age Biker.

Biker Pete
Guest
Ah, mate, when I was your age, I was stuck right out-in-the-middle-of-Oz. You’d last a week out there, son! “…silly jingles or catchphrases… (?) Really, Steve, “Look after your pennies and the pounds will look after themselves…” was commonly taught to _all_ children. In these days of instant-scratch-and-win-gratification, it must seem extraordinary to a young fella who has had it all handed to him on a plate (and still does, I suspect! :) ) but that’s how my generation was raised. I’m eternally grateful for parents who taught me the value of money, the pleasure of hard work and achievement,… Read more »
peterg
Guest
gheez Ross, was I glorifying hippies somewhere? I doubt it, but I do take the best in (the ideas of) people, even earstwhile dreamers. on the ground, where I aint much, I prefer the consideration goodmonkey/badmonkey theories. we are hard wired to a large degree, for better or worse. and yes, jennifer, the elites are the greatest bad apes (or aliens) we have, and divide and conquer has always been the exploiter’s best weapon. its the expositions of the corruption of power that gives me greatest hope these days. I like to see them pigs on the run (they discover… Read more »
Bertie
Guest

Rudd is a tragedy for Australia. I would love it if he were the best prime minister ever but alas he is not, he’s looking like being our wurst.
Truly a tragedy

Lachlan
Guest

I think he’s trying to catch Whitlams record Bertie.

Biker Pete
Guest

“Rudd is … looking like being our wurst.”

You mean he’s the _Prime Sausage,_ Eccles?!~

watcher7
Guest
A headline on the News website this Sunday read: “Five reasons Tony Abbott could topple Kevin Rudd”. This is of interest in relation to the rhymes: “1930s, 1970s and Today – Contraction, Expansion and Contraction?” and “James Scullin, Gough Whitlam and Kevin Rudd”. Is history about to rhyme or, history repeats until it doesn’t. Below is some information that was contained in a post to this site after Kevin Rudd’s election in 2007: The Australian Labor party defeated Conservative parties and came to power just as the American post-war booms were about to go bust – post-WW1, 1921-1929; post-WW2, 1949-1973… Read more »
John
Guest
roy
Guest

Hey John now look up private debt to GDP.

John
Guest

Yes, very interesting once you get away from that noisy NSW academic, Roy:

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

It shows Greece ‘better off’ than Australia in terms of private debt!
Interesting on other sites to see Australia so highly ranked against much of the world in terms of standard of living, too.

Where would you rather live?

Biker Pete
Guest

“Yes, very interesting once you get away from that noisy NSW academic…”

Did you see this item, John? http://www.businessspectator.com.au/bs.nsf/Article/Steve-Keen-house-prices-debt-Rismark-pd20100421-4PRSU?OpenDocument
I was surprised to see the ANZ making it a lot easier to get a housing loan.

roy
Guest

Hi John, of course Australia is a great place to live anyway I’m a bit long in the tooth to go anywhere else.
No I don’t need any noisy academic to follow. After spending most of my working life inside banks and govt SMA’s I’m comfortable forming my own views.

I take it from your comments you see no risk with our appetite for capital inflows and the current level of private debt?. That’s great but we will have to agree to disagree.

John
Guest

Not sure I know enough about personal debt to comment, Roy. I was surprised to see how well Australia was doing, compared to the rest of the world, but that list of countries by public debt may need updating.

The banks don’t seem too worried about private debt, but then they’re the ones making the most out of it, I guess. Just as well our banks are better regulated than those in Europe and America.

Nirvan
Guest

John
Public debts dont matter unless you are stuck within the EMU or running a currency board or maintaining a currency peg. Sovereign governments can print away their debts.
Private debt however is real because that needs to paid off and thats what happens in a balance sheet recession, people are more willing to pay off debt than take more. This squeezes aggregate demand , recession sets in and we see deflation in asset prices. At the moment the private debt levels in Australia both private and corporate is at record levels of 165% of GDP.

Don
Guest

Private debt is but fleeting. Public debt is forever :)

Lachlan
Guest

Is not the truth that public debt causes private poverty through inflation esp in a a climate of decreasing private productivity (for whatever reason). I thought productivity from government was funded by tax receipts or monetisation therefore it can only be a downward spiral to Zimbabwe. Or is there some way around that? I cant see it.

Biker Pete
Guest

I thought private debt was pretty low in Zimbabwe, Lachlan!

I see the ANZ is now offering housing loans for just 5% down… and offering borrowers fixed rates well below variable rates.

Agree we’re going to see increased inflation, but interest rates may still cool a little, with sharemarkets so jittery.

Steve
Guest

What 5% deposit?

roy
Guest

Private debt is but fleeting. Public debt is forever

Didn’t Australia pay down its public debt over the last 20 years?.

The data says your statement is actually back to front.

Maybe you meant Australias public debt has been fleeting but private debt has just been increasing.

Lachlan
Guest

One point is that governments always eventually swell to a size that necessitates borrowing beyond the capacity to repay (sovereigns always eventually default). Maybe the Libs have a tendency toward surplus but Labor care not for surplus or private sector growth (taken from their actions rather than their word).
Anyhow Im not sure what Peter Costellos next move was going to be after maxing out private debt. Spending cuts? hmmmmmm.

Lachlan
Guest

And from the UK…
Liam Byrne the former Chief Secretary to the Treasury, last week wrote a letter to his successor- the Liberal Democrat, David Lawes-stating: “I’m afraid to tell you there’s no money left”
What a classic.

Biker Pete
Guest

“What 5% deposit?”

True, you’re the only bloke in Oz with over $30K, Steve!~ :)

roy
Guest

Gm, BP, yes its not surprising lenders are trying to stoke demand for housing, seems like there might be a shortage looming.

“The number of home loans taken out in March fell 3.4 percent to 48,620, seasonally adjusted, the lowest since March 2001.
Notably, demand for loans to build new homes also dropped a hefty 7.3 percent, the biggest fall in nearly eight years.”

Biker Pete
Guest
Thanks for your comments, Roy. As a continual ‘builder’, who has invested for a long time, falling construction figures can only reflect that housing shortages will increase in high-demand locations. Already it appears that’s happening, _if_ you can believe recent figures for the areas in which we invest: 26.4% last year; projected 21.5% this year. Frankly, I don’t believe either. A figure of 47.9% over two years seems ludicrous, even in a top beach suburb. My understanding is that the ANZ overreacted when the GFC loomed. Of the three big banks, its withdrawal of credit was the most extreme. Westpac… Read more »
Nirvan
Guest
W:r:t Liam Byrne , yes its a classic. Because of all the people he should know that UK can spend without borrowing. If they actually directed the money to things that supported jobs rather than blowing up asset bubbles and bailouts , the UK wouldnt be in the rort that it is now in. The latest is that the new Government is to cut spending and increases taxes , and that is definitely not going to help spur private demand. We shall see the UK cuts its deficit only to see the tax receipts plunge again. For all those free… Read more »
roy
Guest

Yes BP our banks “all in” approach to the housing market is fascinating.

I hope the cards fall in such a way that their bet pays off. I suppose my fear is silly after all their loan positions are as safe as houses.

Biker Pete
Guest

Good as gold. Sane as shares. Better than money in the bank!~ :)

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