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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Comments

  1. 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.

    Reply
  2. 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 6 people in the other parties are?

    Will these stats upset me?

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  3. “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.

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  4. 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 got rich off the past 40 years, deserves to starve.

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  5. 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.

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  6. “…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! ;)

    Biker Pete
    May 12, 2010
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  7. You can run Biker! But ya canna hide!

    Look out Mad Max – here we come!

    Reply
  8. “…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

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  9. 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 set you up… what your seeing now is the next generations turn to see the older generation (unprepared ones) take a hit and be able to take advantage of this volatility to better their financial circumstance…
    What? It was only allowed to happen for you because your so smart and sophisticated and can’t possibily happen again for the next generation… the economy can only stabilise and continue to move up with no correction?
    No Share Market correction, no property decline and all those foolish goldbugs whom thought gold was set for record highs… yep none of that is going to happen Biker Pete is the man.. We bears… and gold bulls.. looks like we were fools after all…..

    Stillgotshoeson
    May 12, 2010
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  10. 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 or sweet FA!~ :)

    Biker Pete
    May 13, 2010
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  11. “Well, our motto always was “Screw the rich!” Shoes.”

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

    Biker Pete
    May 13, 2010
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  12. Very funny, fellas. (But thanks for the stars and thumbs-ups, anyway!~ :) )

    Biker Pete
    May 13, 2010
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  13. “…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
    7. Property bubble bust, US, UK
    8. GFC
    9. Soveriegn debt crisis
    10. Potential Asian bust coming
    11. Unaffordable property in AUS
    12. Sharemarket collapse

    AND ALL WITHIN ABOUT 10 YEARS!!!!

    The world has never before been so poorly managed and its only going to get worse.

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  14. 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.

    Biker Pete
    May 13, 2010
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  15. 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! :)

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  16. 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 here at TDR.
    is it alright to mention the environment? and the nuclear bumbrella that still hovers though, despite heightened awareness in the 80’s (I was learning bushwalking and dreaming of Mad Max), the threat still exists.
    ce la change or something?
    and a thought for the poor chinese paying super profits for the fat Aussies… lest they forget when the tide turns. or could they recycle their ghost cities into more sustainable villages ? could they recycle ours?

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  17. 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 hippies was celebrating laziness and sex (after a good scrub in the river).

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  18. 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.

    Jennifer
    May 13, 2010
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  19. 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????””

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  20. “…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. :)

    Biker Pete
    May 13, 2010
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  21. Yes Biker a 600K roof over my head that cost them 85K

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  22. 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 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. Helped make us comfortable, in fact. :)

    Biker Pete
    May 13, 2010
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  23. 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.

    Biker Pete
    May 13, 2010
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  24. 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.

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  25. 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, and the need to set goals. Best of all perhaps, they taught their kids to count their blessings, starting with good health… and freedom.

    It saddens me to see you blame everyone else for your dependence on your parents’ patience and generosity. You have sufficient capital to purchase a good home, yet you continue to squawk from the nest, not just sitting in your own excrement, but broadcasting it.

    Draw comfort from the gold stars and thumbs-up you earn for bleating, cobber. You choose your own path, as the Shoeless One says… .

    Biker Pete
    May 13, 2010
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  26. 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 they can’t fly after all).

    BP, I dont know those (guys – ahh(re-reading) cultists), but I am sceptical of all, inluding myself. the only thing stopping me from cashing in – albeit modestly – on the (housing) game is the idea of if there is a great crash, and things get back to real and hard, what use is it living in a city of dinosaurs. and in my neck of the woods the gentrification has hardly begun, but prices, including MO’s are beyond the pale in terms of the inherent value. too much wealth around I reckon, money for mostly nothing (capitalist cancer) and a lot of silly misconecptions (no such thing as sustainanility and who so much as grows their own carrots nowadays). fat point taken, if you want to sell fags with those calories, go to china. mandatory liptosuction anyone?

    Steve, take heart (perhaps) the times are (really, probably) a changing in a big (millenial) way. hopefully for the better, though things can get nasty (like almost 100 years ago). I for one hope for a (housing) crash for the “aspirants” to get a fairer go. But (if I may and if Im not wrong) get a heart and a sense of proportion, everyone bags everyone in Oziland. not least BP. reflect on the benefit of political stability.

    careful with the personal attacks fellas *, according to dan’s latest flyer, 60,000 read this stuff. maybe they’re in it for the money, rather than reading all day. off to the vegie patch, as soon as I get this old age thing worked out.

    Peace and gold!

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  27. 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

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

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  29. “Rudd is … looking like being our wurst.”

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

    Biker Pete
    May 16, 2010
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  30. 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 and post-Cold War, 1991-2007.

    James Scullin Labor PM, October 22, 1929 – January 6, 1932; Gough Whitlam Labor PM, December 5, 1972 – November 11, 1975. Kevin Rudd Labor PM, December 3, 2007 – present.

    Dow Jones Industrial Average peaks: September 3, 1929; January 11, 1973 and October 9, 2007.

    The nominal high in the American blue-chip sharemarket, index the Dow Jones Industrial Average, peaked six weeks before the Labor took office in 1929; the Dow peaked five weeks after Labor took office in 1972; and the Dow peaked eight weeks before the Rudd Labor government took office in 2007.

    (Labor was defeated in a massive landside in 1931; Whitlam won a double-dissolution election in 1974 (hence two terms over three years), but was defeated in the 1975 election that followed his dismissal – a massive Labor landslide defeat).

    The Great Depression of the 1930s and the Great Stagflation of the 1970s were the economic backgrounds behind Labor being in office for just over 2 years and just under three years respectfully. The Great Recession/GFC the economic background for a one-term Rudd Labor Government?

    The end of the Gold Standard was sealed by the Great Depression; the end of the Bretton Woods quasi-gold standard was sealed by the Great Stagflation and the end of the American Dollar Standard – dubbed Bretton Woods II – will be sealed by the coming Great Depression.

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  31. Hey John now look up private debt to GDP.

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  32. 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?

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  33. “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.

    Biker Pete
    May 17, 2010
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  34. 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.

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  35. 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.

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  36. 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.

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

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  38. 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.

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  39. 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.

    Biker Pete
    May 17, 2010
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  40. What 5% deposit?

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  41. 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.

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  42. 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.

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  43. 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.

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  44. “What 5% deposit?”

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

    Biker Pete
    May 18, 2010
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  45. 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.”

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  46. 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 appears to have capitalised on that overreaction, if its market share claims can be believed. ANZ is now moving to recapture lost ground… which might help explain its 5% requirement and it’s one-year teaser ‘fixed rate’.

    I’m not discounting your explanation of the latter here. We just think there’s more to this recent development than meets the eye… .

    Biker Pete
    May 18, 2010
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  47. 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 marketeers ,untethered free markets only create monopolies, ponzi schemes, financilization and asset bubbles.

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  48. 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.

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

    Biker Pete
    May 18, 2010
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  50. Think you may have missed my point BP. I’m not fussed what individuals do, an individuals mistakes have limited impact. My point was bank risk. I’m not a fan of this modern movement to privatise the profits and socialise the losses should large financial institutions make a wrong call on their risk profiles.

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  51. Steve’s quote of the day

    “Steve p!ssed himself when he read this”

    http://www.news.com.au/money/property/theres-no-housing-bubble-here-rba/story-e6frfmd0-1225868280859

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  52. “Steve pissed…”
    “Steven, how many times have I told you to lift the lid first?!” yelled mum, from the kitchen.
    “Uhhh, sorry mum…” bubbled Steve.
    “Next time I’ll pee in the handbasin!~” he chuckled, happily… . :)

    Biker Pete
    May 18, 2010
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  53. Roy: “…this modern movement to privatise the profits and socialise the losses should large financial institutions make a wrong call on their risk profiles… ”

    Don’t think we’ll see this in Oz, Roy. Agree that it’s a dead cert in the NH.
    I’m all for Aussie bank shareholders bearing any losses, God Bless Them! ;)

    Biker Pete
    May 18, 2010
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  54. Pay no mind to that biker fool, Steve. I thought your response to that news item was thoughtful and showed wisdom beyond your age. One question: You don’t really plan to stay at home until your late thirties, do you? (The rest of your comments were very appropriate.)

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  55. Biker Pete
    It already happened in Australia in proportion to the size of the problem. Did you not read the news about Macquarie bank hypothetically lobbied the ASIC to ban short selling and the private banks where able to source funding on the back of Government guarantees.

    I am for a national bank for public interests, which by its presence will keep a lid on excessive private bank profits.

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  56. “I am for a national bank for public interests, which by its presence will keep a lid on excessive private bank profits.”

    Agreed on that, Nirvan. The Commonwealth Bank actually served that purpose, perhaps before you were born.

    No, I can’t recall any Australian bank actually being bailed out by the Australian government. The recent guarantees effectively stopped a ‘run on the banks’ which hypothetically could take out _any bank_, anywhere. State governments have bailed out Credit Societies at times.

    Personally, I think Rudd’s actions to protect Steve’s a$$ets were a good move. Imagine if he’d been forced to _buy property_ in Sydney two years ago… and then watched it crash by 40%… . :)

    Biker Pete
    May 19, 2010
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  57. yep .. before i was born and so i may have a solid half a century to see if they reinstate one.

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  58. Gidday Nirvan
    I dont believe it is possible to have a stable system of any kind as evidenced by history. I like the free end of the spectrum but since in its “unfettered” form human nature always extends to deviousness, theft, unfair advantage etc etc its impossible in my view to have a stable free market. History rotates us through brief periods of anarchy but it cant be maintained.
    Governments eventually fail because they too are humans and exhibit the same failings. I believe the best one can hope for is to live through a (transitory) period of small government which supports private enterprise.

    Would you see central banks such as the Federal Reserve as a cause of bubbles such as the US subprime through cheap credit etc?

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  59. The best form of governance would be one run by an intelligent, benevolent dictator. Not perfect but far better than all the others.

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  60. “The best form of governance would be one run by an intelligent, benevolent dictator.”

    I’d still get him/her to put any promises in writing… ;)

    Biker Pete
    May 19, 2010
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  61. Bp, history is littered with govt banks going bust, Savings bank of SA springs to mind. It doesn’t matter who owns the bank what matters is how they manage and recognise risk. This old dog has seen it time and time again and bank valuation is the main driver of my concern. When banks move from valuation by yield to valuation by latest market price for mortgaged assets, sooner or later they come unstuck. The above mentioned bank only got themselves in trouble from changing to market valuation by latest price instead of the time tested yield valuation (commercial RE). Every bank is currently using market price valuation for housing if history is a guide they to will regret the change. Ask your valuer how he determines “value”, he isn’t a valuer anymore he is just a historical sales price collector and basis calculator. Most people including those who manage risk have forgotten that price and value are two different things. There is an old saying asset value is driven by income price is driven by emotion, I think it holds true even today.

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  62. Roy, we saw the novel situation in WA, during the last three years, where couples intending to build, sued valuers; after banks failed to give them full appraisal on blocks they’d bought. These folk no longer had the equity they believed they had, when they approached banks to progress the next stage… . (That was a great time to be buying blocks, I can tell you! :) )

    A valuer I know well tells me he _under-appraises_ everything he looks at these days, in self-defence!

    Banks have failed? Hard to believe that a business could go bust! Not sure I believe such a thing could ever happen in Australia, Roy.

    I think it’s worth reflecting on the fact that banks perceive houses as safer than businesses these days. Disgraceful, I know, but intervention being what it is, I think it’s a good call. ;)

    Biker Pete
    May 19, 2010
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  63. for those soveriegn debt doom mongers…

    The UK has never defaulted. UK debt is called Gilts – Gilt edged securities…. because of how highly they are considered. When there is a flight to quality UK gilts are one of these sought after instruments.

    There are six others…New Zealand, Australia, Thailand, Denmark, Canada and the USA

    Most are too young to be considered alongside the UK.

    During the Napaoleonic wars the UK ran larger debts/income ratios than now… still no default… here is a graph back to 1691…..

    http://www.bondvigilantes.co.uk/blog/UserFiles/Image/020210.jpg

    Unless you understand how important it is to the Uk Treasury to maintain this record you will not really understand how little chance there is of default.

    I’d like to think that Australia has the same plans and will never default on its debt either.

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  64. Prozak, if the UK or Australia runs up huge debts and won’t default, they only have two options, print money (causing inflation and upsetting bond holders) or tax the bajeesus out of the country.

    Both being democracies now, Tax may not be very popular…

    So, if either the UK or Australia run up huge debts, it’s inflation time? Is that a logical conclusion from your point?

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  65. Sambo
    Do you see inflation happening in the US with all that money spending? I dont see spending in a deflationary environment causes Inflation. Ofcourse when the economy picks we shall see inflation pick up and one big factor is going to be Oil. Oil is just waiting to hit back to 150 plus dollars a barrel on any sign of economic recovery. This going to be an on and off recession until we have some structural improvements , for one , technology should catch up to help with the demand of burgeoning middle class in Asia. For the last two decades money was wasted on non productive assets and that needs to change.

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  66. Sambo,

    The relationship between debt and the broader national debt (currency + bonds) and inflation is not so straight forward.

    No amount of increase in national debt is inflationary if you have investors willing to hold it.

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  67. Hi Prozac and Nirvan, I follow your points how increased money supply can cause zero price inflation if this money is kept out of circulation. However at some point I think governments will either make sure new money does find its way into consumption/prices or else insufficient tax revenue will necessitate downsizing of government(unlikely to be popular). Once they finish taxing the miners what other choice is there?
    I see inflation occuring in different places and associated with proximity to gov spending eg property prices increasing in cities but stagnate or down in outlying areas. Or wages appreciating in gov sectors while farmers paying hands,pickers etc $18/hr for very hard work and complaining its too high because they themselves clear half that per hour in the years where they actually do make a profit. These people are slaves in a relative sense.

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  68. Lachlan,

    Money supply is just a part of the puzzle. Anyone who uses pure money supply figures to tell you what us happening with inflation is delusional or an idiot.

    These are the same people that call QE printing money…. and tell you hyperinflation is imminent.

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  69. Great points Nirvan, Prozak and Lachlan.

    I don’t necessarily disagree with any of you in fact. I think the thing that is missing is a timeline.

    In a deflating economy I do not think inflation will be a factor at all. But, when things start to recover somewhat, or if money printing is accelerated, then we will see inflation.

    And inflation, contrary to the name, does not always imply increased values. It can imply increased costs, rather than increased profits or increased asset values.

    For example, if the cost of living goes sky-high, consumer items won’t go up in price, because no-one can buy them. If wages don’t inflate, how will people have spare cash to buy assets? Although of course that is looking at the little man, not the big-league investors.

    My general point there is that inflation will not be consistent (at first). The extra costs of inflation will make more money printing required…and desired. Causing more inflation. Causing more money printing. On and on we go…

    Nothing is set in stone of course. But that’s what I think will happen. Deflation, followed by engineered ‘soft landings’ (bulldust), followed by mild inflation, followed by strong inflation.

    Then again, have any of us considered the impact of imported inflation? It is probably affecting us right now. Can a country like Australia avoid imported inflation? I doubt it, our pollies are best mates with China and the US who will export most of it.

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  70. Yes I agree QE wont necessarily cause anything Prozak. My understanding is that QE could only be hyperinflationary according to the way these new credit reserves are applied. So speculation on hyperinflationary outcomes are speculations on what the future actions of govs and CBs will be and not based on anything which has been done to date.

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  71. I think we should get used to QE. Unless something radical changes then its goning be around for some time to gobble up the deflation. By the end (if we get there) the world will look a bit different. A product of near total central planning. I cant see how it or anything is sustainable but I understand many believe.

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  72. interesting discussion folks…..

    The reason QE itself is not inflationary is because it is simply swapping one form of national debt for another.

    National Debt = Currency + Bonds.

    Currency = zero coupon Bond.

    QE has simply swapped a zero coupon bond for a normal bond…. As long as the BoE (for example) keeps the gilts they bought out of ciculation there has been no increase in National Debt.

    So QE’s net impact was to provide a more liquid form of national debt that may bring forward some inflation slightly.. but not change the total amount of national debt supply and therefore no impact on the total inflation caused.

    National Debt, like many other things has a basic supply/demand curve. As supply increases the price will decrease causing debasement of government paper and causing inflation

    At some unknown point in the future there could be an oversupply (or change in sentiment) and investors will simultaneously get rid of government paper and buy hard assets…. this will be high inflation and/or hyperinflationary.

    If this tipping point is never reached then inflation wont be a problem.

    Don’t underestimate the governements ability to create Demand for government paper. Who is to say there wont be new capital rules that tell banks they need to increase their gilt (or bond) holdings to at least 10% of their assets – instantly creating a £200B demand for gilts from just one bank (RBS)

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  73. I keep musing on the possibility of a revenge of the CPI basket. Supply and demand in the grains market wouldn’t have you think that way with Ukraine pumping it out and inventory high and oil down which takes out biofuel / corn. But I do notice soft commodities ticking up where others dive during risk events. I am thinking of a possibility where the displacement of the public nanny state and private services dependent on feeding downstream off asset inflation eminating from forced deficit cuts will be devastating leaving value prized again in daily bread. There is plenty of upside in production possibility though unless acts of god or anarchy take hold. I am staying invested but it is still speculative.

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  74. I was waiting to ask Justin this Ross but why has sugar plunged in a big way?

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  75. And by the way.. if the shunning of governement paper does happen don’t kid yourself thinking that investors will be picky about which asset class their cash pours into…

    People on here wont like to hear this but good quality property outside of Australia will outperform gold in the next decade…… i’d put money on it… in fact I just did this week…….

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  76. Lachlan, my girlfriend is back in Brazil right now but she always points to the interplay between methanol / oil. Cars are built locally dual use (VW being biggest so the technology could go global easily) so they switch back and forward taking the cheapest. Harvest stocks out of India very high and the drought broke big time in Brazil to buttross the next season. Unless the US switches from corn to sugar ethanol after a political deal with Cuba there won’t be any long term rise except in exceptional seasonal circumstances IMHO. Agriculture globally has massive productivity increase potential and that is the big risk that has water access and soil salinity as the countervailing force.

    prozac, yep I agree but I tend toward the ghetto end as the safest bet. If you’ve read the APRA/BIS stuff recently they are backing your line on the political push to bonds. Doesn’t do much to generate tax receipts though and that is the archilles heel.

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  77. I did mean ethanol ..

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  78. “…the drought broke big time in Brazil to buttross the next season… ”

    Heavens! You meant Ida, I hope, Ross?

    Reply
  79. I see her at the post office occasionally John, but won’t tuch dat…

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  80. Thanks Ross. DR needs a soft commodities writer. Apart from investment angle we’re all directly affected by food cost. Water costs driving up food prices seems likley to me…but I’m not sure why I’m writing this at 1.17am :(
    The plummeting AUD woke me up :( :(

    Reply
  81. Lachlan, I was up on skype to Brazil late last night too and was told that ethanol has dropped 23% at the pump in the past two weeks. I have little depth in my knowledge of sugar, but perhaps I should have put a few bits and pieces I have picked up into your discussion. In Brazil, the big issue on sugar is mechanisation versus employment. It used to be that mechanisation was banned completely and that is just how big the social issue is. Now growers can mechanise on alternate years with manual labor. The Brazilans now report that they have some interesting productivity developments being shared with our Queensland farmers. Our guys nearly got wiped when the Soviet Union collapsed and the Cubans couldn’t get their subsidised price anymore so they had to go productivity (that’s also when CSR went hard over into the building materials sector under Tony Berg). So what I am saying is that there is a massive amount of productivity available in the pipeline so I wouldn’t be bullish on long term price except on the basis that fiat money may be displaced by a harder version of a trade weighted backed currency which would in turn lift the status of staples (which has me selling those same thoughts I mentioned earlier). Sorry for the goldbugs in the implication from that but those are my thoughts.

    Reply

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