Debt Not a Problem After All

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These pig-headed would-be fascist bureaucratic monsters are trying to bore us to death and get us to settle for some watered down version of a resource rent tax. It’s a tax that would reduce investment in Australia’s mining industry, lead to lower employment, lower export volumes, and put taxpayers on the hook for failed mining projects.

By the way, you’d think miners would love to flog off losses on taxpayers. It’s worked so well for bankers. So why haven’t the miners embraced it?

Well, for starters, most miners (the ones you want to invest in) don’t go into business to make losses. But more importantly what self-respecting entrepreneur or company would get in bed with the Australian government on a deal that theoretically promised to pay for losses later?

After all, as this legislation shows, this is a government that is willing to change the rules in mid-stream. Fickle. Temperamental. Impulsive. Vindictive.

In this case, the impulsiveness takes the form of the retro-active taxation of projects that were made with an entirely different set of assumptions by the companies and their shareholders. What’s to prevent the government from telling the miners at some point in the future, “Sorry, we know we promised to offset your losses, but we don’t have the money! We already spent it! Suckers!”

Ever since our plane landed in Melbourne early Wednesday morning we have been channeling the energy from all those wide open Western spaces we flew over in America. It’s turning into aggravation over how much time we have to spend dealing with plundering and arrogant politicians. Granted, these are the duly elected representatives of the people. But they seem to be behaving in a pretty high-handed fashion.

Something about big sky and open space reminds you that countries like Australia and America were built and made great by risk-taking settlers and entrepreneurs and explorers. Not by grasping, lecturing, hectoring, scolding, smarmy and dreadfully boring career politicians.

Another by the way…why hasn’t the government revealed some of the basic assumptions of its tax scheme, like what it expects commodity prices to be?

One answer: its $9 billion RSPT cash haul for next year is probably based on the assumption of high commodity prices. If the government is basing its projections on an analysis of the mining industry done by the Treasury, that analysis probably also figures high but gently declining commodity prices.

You can bet it doesn’t figure crashing commodity prices from a blown up Chinese real estate bubble. Because that could never happen again..like it did in 2008 (by the blowing up of the American real estate bubble).

Frankly, we’d be surprised if there was a lot of thought put into a scenario where commodity prices fall. Why? After all, if the world is coming off a 20-year credit boom and is now reducing leverage and debt, you’d expect lower economic growth and lower demand for the key commodities which Australia exports and which the government wants to tax.

You’d expect that if you had two brain cells to rub together and weren’t running for public office. But if you’re trying to cover a huge hole in your budget because you spent the nation’s accumulated $20 billion budget surplus in an act of blind devotion to a failed orthodoxy (Keynesian stimulus), you don’t do much thinking.

You act first and make excuses later! And you spend more of other people’s money to buy votes. And when you don’t have the money, you find ways to take it from people that do (the miners).

In any event, we wish nothing but abject failure and embarrassment for the government in its mining policy. A wholesale repudiation of the plan (and the leadership of the government) might begin to restore some of Australia’s credibility on foreign capital markets. And as a bonus, we wouldn’t have to endure being lectured to and bored to death by the Prime Minister.

Yet why so cranky Daily Reckoning?

Stocks are up eight days in a row. Gold is rising. Though it looks like Spain is the next Greece (only bigger), stock markets are again embracing risk and turning their back on the possibility that widespread asset deflation is inevitable. Is it time to hold your nose and buy?

With central banks determined to keep interest rates low, doesn’t money have to go somewhere? And if not bonds, why not stocks? Gee. That doesn’t sound like speculation at all, does it?

-Back here in Australia, we hadn’t realised that RBA Governor Ric Battellino had once and for all settled all those pesky but mostly irrelevant concerns about the level of debt in Australia. Thank goodness he did!

We were beginning to think that having your banks borrow overseas to fund a house price boom was a case of inflating an asset class with other people’s money and putting lots of your own people in debt to keep an entire industry of bankers, real estate agents, and real estate spruikers happy, stylishly-dressed, and no-doubt well coiffed.

But that’s not what’s going on at all. According to Battelino, Australia has borrowed mostly to buy assets, and that makes people richer. What’s more, even though debt levels have grown relative to GDP and income, low interest rates make the debt serviceable. Battelino says that financial deregulation and “the structural decline in interest rates” contributed most to the house price boom.

Phew. That is SUCH a relief to know. Global deregulation and a worldwide credit boom drove down the cost of capital for Australian home buyers. Even though prices are way ahead of income growth, houses are affordable because credit is still cheap.

What’s that? What happens if the cost of capital rises and credit becomes harder to come by? Oh…well that would never happen. Ever.

Or would it? If one of the consequences of deregulation was a worldwide credit boom, doesn’t it follow that in a worldwide credit bust, credit is going to be less available to households, including Australian households? And doesn’t it follow that houses inflated by capital inflows into Australia would be deflated by a dearth of new capital or buyers?

Both probably follow. But Battelino persists. He says, “This structural decline in interest rates has facilitated the increase in household debt ratios because it reduced debt-servicing costs. Households have therefore found that they can now service more debt than used to be the case.”

They can as long as they have jobs and rates stay low. In a real China bust, unemployment in Australia is going to rise. And then? And then, in a true China-bust, the cost of capital is going to rise too as bad credits are written down globally and balance sheets are de-levered and banks get back to prudent lending.

We realise there is a very real debate about whether long-term interest rates can rise when central banks are determined to keep short-term rates low. But we’ll leave that one for next week. Until then…enjoy your weekend.

Dan Denning
for The Daily Reckoning Australia

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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87 Comments on "Debt Not a Problem After All"

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brc
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You are not alone in your well-placed dislike of the current administration. I didn’t care when they wallied about doing token gestures to their support base, didn’t really even care when they faffed about with industrial relations, even though it’s a stone age policy. When they grabbed the first crisis to come along to plunder the surplus, drive us into debt and then lecture everyone how clever they were, I started to get upset. Now that they’ve wasted most of that money on unproductive trash, and are now raiding productive industries to cover up for their foolishness, I’m just about… Read more »
Lawrence
Guest

1. Changing the rules – that’s not even an argument. Rules have to change to reflect changes in the world. The question should be whether it is a change for the better.
2. Flog off losses to the taxpayers – inevitably, when a company goes down, taxpayers end up footing the bill. The question is whether (current above trend) gains are fairly distributed to all Australians.

Realist
Guest
To put your mind at ease, the all mighty Australia economy is a shining example of how the world ha take stock of the perils that threw the US into this economical quagmire. On the weekend an article was printed in the back pages of our state newspaper showing that homes 43km out of the city sold on average for around AUD$500,000 (US$420,000) the average 2 bedroom apartment price is around AUD$460,000 (us$390,000). This is with a median annual income of $53,000 (US$45,000) One of our senior reserve bank members went on public record to state that although our median… Read more »
Biker
Guest
“I feel like i am in a sphere or a parallel universe…” Indeed you are. As Plato noted, a couple of thousand years ago, the world of your experience, which you take to be real, is only a shadow world. The real world is the world of Ideas. In our unreal world, men trade a week of their labour for a single ounce of heavy metal, whose practical use is limited; or for printed notes whose combustion in the cave would provide but a minute’s light or heat. Madness!- But now, as then, the Cave, the shelter itself, is real.… Read more »
Jon Bain
Guest

the housing economy seems to be in a world of its own

eyes wide shut
Guest
You are not alone Realist. I’ve had very similar experiences myself. Last year I did a brief search and also found that the median house price/median income ratio in Ausralia was running at around 8 or 9 to 1. At that time I found that in the US housing market before the crash their ratio was at about 6/1. I despair at the way Government has introduced poilicies to push up house prices – in particular, the huge first time vendor’s grant (sometimes referred to as the first time buyer’s grant, and the lunacy of opening up the Ausstralian housing… Read more »
shaun
Guest
I’m with you realist. there may be fewer of us living in that parallel universe as you nicely put it, and that generates the perplexity. To me your instincts are spot-on, and from the way you write, you know that too. To put it another way, there are a lot of people doing it tough out there in the ‘burbs, you can see it, it is obvious. And you put the hammer down, on any front (peak oil, climate change, global debt) and they’ll start to squeal. And it is “Hammertime”…great tune, loved it… I am responding to this cliff,… Read more »
shaun
Guest

Perfect Eyes Wide Shut, the best summary of aussie politics I’ve read!! I mean, just look at our current Prime Minister. One of the coldest fish I’ve ever seen. It is a hierachy of exploitation and property investors are often just aping the politicians. Completely and utterly selfish. But don’t despair man; “…keep as cool as you can, It riles them to perceive, You believe to outwit them”. Moody Blues, Seventh Sojourn.

Realist
Guest
EYES WIDE SHUT – I know biker will see these comments as mere fodder from an intellectual simpleton and in some ways it will be seen as paranoia but your remarks of “powerful people” ring true for me. I sat and read the state paper today and sure enough they had a precursor article for the auction day ahead, tips and advice and supporting statistics that the market is still “very stable”. They then had the usual real estate lift out reinforcing the same ideals, i then turn on the national news to have a head line report of a… Read more »
Ned S
Guest

Let’s hope the population bubble deflates slowly rather than popping per se maybe Lachlan? :) :

http://www.smh.com.au/business/population-fall-poses-immense-new-challenges-20100618-yms8.html

Ned S
Guest
“gains are fairly distributed to all Australians” – I always have a few quiet reservations when I read such statements (at least to the point where I’d like to know a bit more maybe) – As in, if the author has ever purchased a coffee latte, or worn a pair of jeans that cost more than $50, or a car that costs more than $5,000; And ALSO figures he is a bit needy and deserving; I’ve got a few reservations about just where he might be coming from when making such a statement? Could all be PERFECTLY reasonable and above… Read more »
shaun
Guest
wow, I am with you guys completely. This hierachy of exploitation is based on power. And how it works is through the manipulation of the interests of those lower in the food chain. So rightly you are seeing the massive propaganda, it is a huge interconnected web of s@#$, you know what, but it is impolite to say so on this forum. I don’t know if the powers at be are entirely conscious of what they are doing. I don’t think they could be that smart or unkind, and maybe their behaviour has a historical element to it of conditioning.… Read more »
Ned S
Guest
“let the poor pay for it” – The genuinely poor genuinely can’t pay to have their own toothaches fixed. And by and large, the genuinely rich can cope with the fact that the genuinely poor’s toothaches remain unfixed – Which is quite possibly why the middle class is encouraged to think that it exists? :) Neg gearing – It seems to me to have both pros and cons potentially; Depending on whether a guv and the people who elect said guv, specifically wish at that time to pay for housing the nation’s tenant population collectively, or if they’d prefer to… Read more »
Biker
Guest
“I know biker will see these comments as mere fodder from an intellectual simpleton…” Not at all. You make some good points. Whether they’re appropriate on an investment site is questionable. Since when did ‘fairness’ or social consciousness play a major role in investment? When Ruddy Kevin yabbers on about these issues we all recoil with horror… . And yes, there is conspiracy in _most_ business dealings. I’m daily conspired agains by those who want to sell me a new car; to flog me a new health plan; to sell me shiny stuff. These conspirators play on my fears, saturate… Read more »
shaun
Guest
Again, such enviable expression. And excuse me if I am being a too forthright or appearing to point the finger. My intention is just to figure out what is happening inside and out of me and then try and capitalise on that, which is true investment I would think. I think that is the arguement as I understand it Ned, as you expressed above, for negative gearing. And then you have all these (hopefully) unintended consequences flowing from it, where government ‘good’ or ‘righteousness’ actually ends up counter-productive, harming the tenanted population, who are now even less able to get… Read more »
Ned S
Guest
“I’m just uneasy about neg gearing and a whole pile of other stuff to do with economics” – I certainly agree with that. One of the one’s that I struggle with a bit is CGT – Like what could possibly sound reasonable about taxing a bloke on profit he made on an investment? Unless the investment HAD been propped up along the way by the tax payer generally using something like neg gearing perhaps. Otherwise it just boils down to a case of guv saying Well, you earned some loot as a wage slave and paid the tax on it,… Read more »
Ned S
Guest

PS: My one and only real personal experience with neg gearing was probably a bit less positive than some – I bought a neg geared investment property and then took a job overseas and realised rather quickly in hindsight that neg gearing didn’t seem to have especially huge benefits if a bloke had no Oz income to be negatively geared against! :)

Ned S
Guest

But yeh, the guv will still want their CGT on any profit I might happen make if I ever should feel inclined to sell. So they can dole it out to the more needy and deserving than me to buy their votes … Such is life (In Oz; At this time)! :)

Ned S
Guest
I like where I live; I fit in reasonably well; The neighbours are a nice average mix of working class and welfare dependant Aussies – The sorts of people I relate to reasonably readily. But Jeez, some of them do verge on the bludger category – Ned, can ya loan me $50? (or $200; or even $2k to keep me outta jai!) – Well, I could mate – But what’s wrong with asking ya mum? – She lives just down the road. Answer: I did – But she won’t give it to me ’cause I NEVER pay her back! Gotta… Read more »
Biker
Guest
Negative gearing? A few of ours are negatively geared. They tend to be the bigger homes we built when the market was peaking… and rents were going ballistic. Let the missus overdesign and upspec them. The plan was to be either neutrally-or-positively geared. Didn’t happen because Rudd’s FHOG took 200,000 tenants out of the pool and rents plateaued!~ These tenants are now subsidised by us… and the government, through negative-gearing. The FHOGs are gone. Around us rents are going sky-high again. And, as we know, those who buy shares are treated more generously tax-wise than those who provide rental homes.… Read more »
Ned S
Guest
“Capital Gains Tax? It applies to all investments: shares, property, bullion, interest from money in the bank. Where’s the beef?” No beef from this quarter as such Biker – Providing neg gearing is allowed to apply to all such same! (With the fact that I stuffed up on my one venture into it being presented as a potential object lesson to those who mightn’t be especially aware of the value of concerning themselves with the various tax related pros and cons re investments.) “His Sermon on the Mount speaks volumes to those who would plunge into the perils and pitfalls… Read more »
Ned S
Guest

“I look forward to many years of subsidising accomodation costs for those who don’t feel inclined to purchase” – I see it as my Christian beholden duty in fact! :) ; Given that guvs aim to destroy me cash holdings with inflation and the likes of Goldman Sachs are always gunna pinch me money off me if I venture into other asset classes … :)

Biker
Guest

“I look forward to many years of subsidising accomodation costs for those who don’t feel inclined to purchase.”

You’re a man of sterling, nay _golden_ qualities, Ned. :)

Steve
Guest

Negative gearing? A few of ours are negatively geared!

Thats ok Biker I am very happy to have my taxes pay to make you such a humble man more richer, would you like me to buy you a round too?

Biker
Guest

“Again, such enviable expression.”

It’s termed ‘eloquence’, my son.

At the other end of the continuum we have bottom-speak, such as “Your talking out of your stinkhole again biker” {Cerebral dwarf who was invited to leave school at 14, votes for a Prime Miniature he now _despises_; and has predicted a 60% crash in property… for years… happy soul!~ ;) }

Biker
Guest

“…more richer…”

Says it all.

Another one… .

Ned S
Guest

Must admit I did feel a certain vague affinity with a statement I once heard that went along the lines “Charity begins at home!” … Or somesuch? :)

Biker
Guest
Charity? Hmmm… . I see it more as an agreement between three parties: an owner, a tenant and a government (of any colour) to ensure that voters have affordable accommodation. I lived for over a year in Vancouver at a time when ordinary houses were $700K… and rents three times those here. Those same homes start at around $2mil+ now. The message to me, at the time was: “_You_ cannot afford to live here!” No use bitching about it. It was true. Yet the bleating here shows a significant number of city-livers haven’t got that very simple message. Their perception… Read more »
Biker Pete
Guest

I see I’m being censored again, Ned!~ :)

Biker Pete
Guest

OK… got it… I’m not being censured… I AM being censored. I referred to Taylor & Uren’s new book, ‘Sh*tstorm’ without using the asterisk.

Is it true this would cost me $100 in QLD, Ned? ;) I guess DRA will eventually print my post, given that the book may well help rewrite this period of history… .

Ned S
Guest

Nevermind Biker. – I found I couldn’t gain access for many months. But never felt that I was particularly impoverished by the experience personally?

It’s just a convenience to be able to keep abreast on one site of what is the very worst imaginable stuff that could ever happen to the world if it ever should all happen simultaneously perhaps? :)

Biker
Guest

Still giggling at your last comment, Ned. :)

I’m blocked frequently. To beat it, I go into ‘Tools’ and then click ‘Clear Recent History’. Once in, I tick ‘Cookies’ and hit ‘Clear Now’.

Quicker than you can shout “Snow White and the Cerebral Dwarves’ the poisoned cookie crumbles. I can then rapidly access DRA. Now I’m not so paranoid that I think DRA is ‘conspiring’ against me(!) After all, my views are, at best, ineffectual, mostly quite flawed and easily rebuffed…. .

Ned S
Guest

Never heard of that particular publisher’s book Biker? Nor have I kept up to date on Ms Bligh’s fines on four letter words for revenue raising purposes over this way. (Although I DO recall that me Mum used to make me put $1 in the pot when I erred re such as a kid when me weekly pocket money was about 30c – If that specific historical financial info should be of any huge potential use to anyone? :) )

Biker
Guest

Meanwhile, I see that China is _indeed_ in deep excr*ment, Ned:

“China’s exports jumped 48.5 per cent in May from a year earlier, the biggest gain in more than six years, according to customs bureau data June 10. Exports exceeded imports by $US19.5 billion, from $US1.68 billion in April and a deficit of $US7.24 billion in March that was the first in six years.”

A prediction I read today claims we should expect another 25 years of this.
A third item predicts unemployment of 3% in WA by late 2011.

We’re in deep man*re, Ned!~

Biker
Guest

‘Sh*tstorm’ (Lenore Taylor & David Uren) available next week: $34.99.

Ned S
Guest

“After all, my views are, at best, ineffectual, mostly quite flawed and easily rebuffed” – No question Biker!!! :) After all, who was that fool, cum tool, cum stool even maybe(?), who once opined something along the lines that the somewhat nebulous concept generally referred to as “wisdom” could just possibly be related in some vague way to having developed some vague awareness there just could be some vague things one doesn’t fully (or even even vaguely maybe?) understand? Or somesuch! :) :) :)

Ned S
Guest

I have NO idea what’s happening Biker! :)

Just repeat the mantra Ned!!! – 60% property; 40% cash; With NO stock exposure EVER! And if THAT doesn’t work out, then be prepared to flee your country’s high taxing guv QUICKLY!!! :)

Biker
Guest
A few more years on the clock and you’ll never have to worry about tax again, Ned. ;) The BFI had an interesting column this week. I don’t usually bothing reading his pap, but my wife occasionally passes an article across the cafe table to me, if she finds he’s written something she agrees with. This one, “Such is Life in Crisis”, looked at the BB generation retiring with just two (women) to five (men) years of survival income. His theme, Zero Based Planning was interesting, although we couldn’t help thinking that ‘zero planning’ might actually be the real issue… Read more »
Ned S
Guest
“A few more years on the clock and you’ll never have to worry about tax again” – Must admit that is most likely true Biker? … Ta! As at some point it just could begin to start sounding unreasonable for our guv to begin trying to tax their SFR’s especially heavily. Although there are definitely times when that get’s easy to lose sight of when one’s predominant past life experiences re tax by and large centred on ways to try and step around ways of mitigating the disinclination to pay a marginal rate of 48% + the medicare levy. “Such… Read more »
Biker
Guest

Will _this_ work, I wonder?

http://www.perthnow.com.au/money/bank-exit-fee-rip-offs-face-the-firing-line/story-e6frg2uc-1225881655204

We don’t need it (we play our two banks against each other) but it may help a shipload of Aussie families…. . ;)

Ned S
Guest

Banks – Wouldn’t seem that hard to me??? – Just sign every loans officer and those supporting them and their bosses up on contracts that say they are all personally responsible forever for all loans they make that fail; Whilst they get a reasonable % income pa from those they sign up that don’t fail? How onerous could that sound amongst those who reckon they are highly skilled in assessing risk an reward and reckon they should be paid in accordance with their outstanding skill levels???

Witching hour is well and truly past … Snooze time! :)

shaun
Guest
Good to see you can laugh at yourselves. A whole pile of info above which I have only had time to glance through as yet. Just a few points; I don’t see this as an investment site. To me it is more of an economic truth site. i have no desire to invest as I am happy with my life and I don’t need more at the moment. Love my wife, love my three kids, love my quality of life. I’m just interested in finding out what is going on, shouldn’t be a problem with that. I worked in canada… Read more »
Biker
Guest

Which province are you from, Shaun? We crossed Canada E – W last year.

In my view, our two nations survived the sh*tstorm better than most, largely for the same reasons…

Apart from ‘sucking the juice out of life’ do you have any plans for when the ‘system goes down’? I’ve always wondered what happens to the fella on the corner of the street with the sign ‘The World Ends Tomorrow’, the following week. :)

Biker
Guest

Most likely their unions would veto that one, Ned.

Personal responsibility for one’s actions in the public sphere? I doubt it!~ ;)

gutfeeling
Guest

Hi Realist:

“I wonder whether this is the same trodden path the rest of the world tread before they fell off the cliff or are we incredibly unique ???”

– I wonder about this too.

Biker
Guest

Comment by gutfeeling on 19 June 2010: “What errors exactly? Were the errors in some or all of the articles i.e. am I to disregard all the articles or just some of them?”

– I wonder about this too.

shaun
Guest
Hi Biker, good on you for travelling across Canada with your wife. i think she is Canadian. Good for you, a canadians hard-drive is usually more politely conditioned than the average aussie’s. Got to admire aussies assertiveness, but the delivery usually leaves something to be desired!! I am not canadian but a kiwi originally. i can get work there and manage taxation somewhat. hypocrite thinks Biker. It is in my interest to work outside of aussie. The Sh*tstorm hasn’t started and I don’t think Canada is similar to Aussie other than they both supply commodities. In the canadian constitution they… Read more »
Biker
Guest
“…hypocrite thinks Biker.” (?) A little difficult to follow your thinking here. You’ve got the health one right. The partnership and family, too… but from that point I’m afraid you’ve lost me. I believe Canada and Australia will both ride it out far better than most western nations. Either country suits me, but having lived over two years in BC, I contend Aussie weather eclipses anything in Canada. Yes, Australia has some issues, none a really big deal for me. If Aussies want to overconsume, that’s their choice. If they choose to rent, it’s no big deal. Frankly, how they… Read more »
Don
Guest

” Ned, can ya loan me $50? (or $200; or even $2k to keep me outta jail!)”

Sometimes, $50 is a small price to pay to get some people out of your hair. Then you just pipe up with “mate, have you got that $50 I lent you? I really really need it right now!” and *poof* they disappear faster than David Copperfield :)

Stillgotshoeson
Guest

Where my empathy is just a little strained is when I become aware that the bears have the sh*tstorm as the _central part_ of their financial planning

It is not a central part of my plan, it is however something I feel is going to happen and therefore am planning how I can best survive and profit from it.

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