Growing or Sweeping


The best thought of the week will remain unsourced, because your editor lost the link. But here it is paraphrased: “The world is experiencing a two speed economy. Half is growing because they should, and half is busy with their brooms, brushing problems under the carpet.”

Economist Nouriel Roubini lifts the carpet on Bloomberg TV: “Banks are insolvent, households are insolvent, local governments are insolvent and now sovereigns are insolvent.”

That about sums things up nicely. But let’s dig deeper.


First-home buyers’ loans share shrinks to six-year low” was the headline on The Age website earlier this week. “The share is just over half its peak of 28.5 per cent in May 2009.” What a surprise. Who could have seen this coming? Perhaps those who knew that first homebuyer grants merely bring forward demand. And that future demand thus has to fall.

But rather than gloat, let’s laugh:

”You can almost say first-time buyers are finding it quite difficult to get into the market,” said JP Morgan chief economist Stephen Walters.”

Hahaha!    “Almost”!

Then Mr. Walters gets serious:

It means activity is coming from churners – those selling and buying and selling and buying again. It’s probably a negative for house price growth overall. If first-time buyers aren’t there and investors are starting to pull back a little bit, it implies a bit of softness for house prices.”

Uh oh. All those first time homebuyers who were lulled into the market by the government will be the first to feel the pain, as their loans haven’t been paid down at all. They have less equity. Plus, if they sell out, they will have to realise the loss. Perhaps they should sue the government for that loss?

Government is not the solution

Nobody can solve problems with more, or different, government, no matter how skilful a politician or policy advisor you are. It’s just too complex. Only the free market can solve problems. And predicting what the market will do is pretty darn difficult. The point is that only less government is a solution.

But when you get government meddling, things become a bit more predictable. If the governments want to make housing more affordable, house prices will rise. If the government wants to help the poor by introducing a minimum wage, the poor will lose their job. If the government wants to avoid a recession, it will cause a depression. These are all inescapable. No matter what means are used for the ends.

And yet, despite the inherent failure in government policies, those who criticise whatever politician happens to be in office always suggest a different policy solution. As though they could do a better job than the Premier or Prime Minister. It sickens your editor to his toes.

Even the famed housing bubble prognosticator, Steve Keen, is guilty of faith in government policy. He has suggested laws limiting lending amounts relative to the property’s rental income. It sounds good. But it will just cause another unintended consequence.

Why not just leave lending alone?

Hope, Hopeful, Hopeless

To add to Obama’s long list of achievements, you can add the following: Lower approval ratings than George W Bush. That is quite an accomplishment considering Bush is one of two presidents in the past 50 years to have higher disapproval ratings than approval. Still, it’s not difficult to understand why Obama is in political strife.

And we’re not just talking about political blunders like the wishy washy “pay freeze” you may have heard about. This is a politician’s version of a pay freeze, which means that regular pay increases continue. Only cost of living adjustments aren’t going to be made. (Going by the core CPI, they would probably be minor anyway.)

And we’re not just talking about the complete bungle of healthcare legislation that Obama championed … before having to hand out 222 waivers. Recently to the likes of, the International Brotherhood of Trade Unions Health and Welfare Fund, the Social Service Employees Union and a bunch of different United Food and Commercial Workers Unions. (From memory, these are the types of organisations that wanted the healthcare change.)

No, we’re talking about the real economy. Perhaps Obama’s most troubling issue.


The chart shows how long it took for employment to recover from the various recessions of the past 70 years. The issue here is that the recessions, in terms of jobs, seem to be getting worse over time. The last four recessions feature the only four which are above average in terms of the time it takes to return to peak employment. And each one of them is worse than the last. And this is exactly the period referred to as the “Great Moderation”. Ha!

This should not surprise those who think intervention worsens a crisis, as well as causing them. The idea of monetary and fiscal policy is largely to soften recessions. In the process of doing so, they set the scene for the next bubble, as well as drawing out the recession the unemployed are experiencing. None of these things are good. A severe, rapid recession cleans out the economy’s malinvestments, which lays the groundwork for the better investments to flourish and employ people faster.

You don’t cure a hangover by drinking just a little more.

As an aside from all this, the broadest measure of unemployment (U6) is currently higher than it was at the end of the last recession.  So don’t think that things are getting better.

Even for governments, things aren’t improving. California in particular can testify to that. Its fiscal headache is turning into a tumour. Even Arnold Schwarzenegger can’t deny it any longer.

Schwarzenegger on Monday unveiled a plan that relies largely on cuts to health care and social services for the poor. About $7.4 billion of his proposal would come from cuts, include reducing cash assistance to needy families by 15.7 percent in April, then eliminating the entire welfare-to-work program in July.

Remember that add California ran on TV a few months ago? “When can you start” was the punch line. Maybe Arnie wants a replacement.

How the Euro will fall

Last week we rather briefly insinuated that the conditions of modern Europe carry some similarities to post WW1 Europe. Here is some more on that note, although its pre WW1 this time around. The Austrians are back in the mix:

Austrian Finance Minister Josef Proell objected, telling reporters in Brussels that “countries committed to economic discipline that do the hard work and maintain stability” shouldn’t be forced to subsidize the fiscally weak.

What a Grinch!

So what could trigger the onslaught in bond markets instead of battlefields? Germans will only pay for the fiscal irresponsibility of others for so long. Sadly, as soon as they stop, this will trigger the crisis that countries would have had years ago without German backing. This means it will not be difficult to paint the Germans as the wrongdoers.

Sure enough, that has already begun. A New York Times Opinion piece, which it seems no one will put their name to (for good reason) includes this:

The worst offender has been Angela Merkel, the German chancellor who is showing herself, once again, to be a captive of opinion polls rather than the bold leader of Europe’s biggest economy.”

The Curious Capitalist website echoes the sentiment: “Germany has been at the centre of Europe’s mishandling of the euro crisis from the very beginning. Germany is expected to take the lead on policy in the Eurozone, and when dealing with the debt crisis, that leadership has sometimes been lacking. The misplaced reluctance of Chancellor Angela Merkel to support floundering Greece earlier this year allowed the contagion genie out of the bottle and spread the crisis to other weak Eurozone states.

And the NY Times is back with a piece by Roger Cohen: “But how shallow, paltry and mean-spirited has this German reaction to the euro crisis been!” And all this is after the Germans have funded bailouts, and before they have actually abandoned the Eurozone’s delinquents.

No doubt the Germans know they could easily end up mightily unpopular if they do what is sensible and leave the rest of Europe to sort itself out. Angela Merkel, the German Chancellor, has it well figured out. She is likely to tag along with Europe’s requests for some time in order to make it look like she tried. In reality, she probably knows the efforts are doomed. That’s why she hasn’t committed her nation to the bailouts like a good politician should.

Kenneth Rogoff, who is quite the expert on these matters, has been working on the odds of debt restructuring for the PIIGS. “Greece will be very lucky to avoid restructuring, Ireland, Portugal — they’re just in denial, saying it can’t happen. They really haven’t drawn clear lines, they haven’t really said what they wanted to do, they haven’t really made choices.

Here is the interesting part of his quote, as reported by Bloomberg: “Europe has “no credibility” in ruling out debt restructurings.” He is spot on. It’s not their decision. It’s the decision of the markets. That’s what governments of the world overlooked when they borrowed so freely to fund their welfare states. It comes at a cost. Now that pound of flesh is coming due

But, like Shylock, the bond holders have got themselves in a pickle. The more they demand, the worse it will get for them when the inevitable restructuring occurs.

Kibbutz goes Capitalist

Believe it or not, collectivism isn’t an inherently horrific concept to true free market believers. They just don’t want to be part of it. So, if someone were to create a voluntary collectivist system, you wouldn’t find any opposition here. As long as people have to explicitly opt in, and can subsequently opt out, it isn’t really a problem. The problem is that collectivism inherently fails from within – whether voluntary or not. It needs violence and compulsion to work, which is its ironic undoing.

For those of you wondering why on earth anyone would be stupid enough to opt into a voluntary collectivism, you possess a little more foresight than your peers.

Anyway, consider the world of the Kibbutz. Not that your editor knows much about them. But according to Ynetnews, Kibbutzes are an attempt at voluntary socialism. They were quite popular and didn’t do too badly. Until people figured out that there was various things inherently wrong.

Let’s take aside the DR’s usual beat of finances and ignore the fact that “Kibbutzim groaned under billions of dollars of debt that burgeoned during hyperinflation in the 1980s, driving some to the brink of bankruptcy and forcing most to jettison parts of the communal life.” Funding collectivism, as politicians around the world are finding out, is too expensive.

Instead, consider this simple observation from a recent Kibbutzee: “I am not built to be so communal.” Yes, indeed. Humans are all different. They are individuals. Attempting to treat them as identical robots simply does not work. You cannot collect them in a group and refer to them as such. They are not “workers” as socialists call them. They are all different people.

The surprise in all this is that people are apparently returning to Kibbutzes. Why? The subheading reveals they now “embrace decidedly capitalist ways”.

As soon as Hulda privatized, that was the thing that made me go back … I understood I could preserve my quality of life materially and benefit from the community life as well.

And there you have it. Bring in some capitalism and even collectivism seems a little more bearable.

Economics 101

The US government is copping flack left right and centre for its attempts to devalue the dollar and thus grow the economy by encouraging exports. The Germans and Chinese in particular aren’t happy. But instead of justifying it, policy has been to deny any meddling with the value of the dollar.

We will never seek to weaken our currency as a tool to gain competitive advantage or to grow the economy,” Treasury Secretary Tim Geithner claimed.

Former Central Banker Larry Meyer recently added; “the U.S. is not competitively devaluing its currency, that is total garbage.”

But only days later, the same guy comes up with a spectacular contradiction on another TV show:

But let’s keep clear, there is no other policy for monetary policy.  They are following the normal transmission mechanism where they lower rates, that in turn raises equity prices, that lowers the dollar and that is how it stimulates demand.

The host jumps of the unabashed admission: “I like that you at least said … “we lower the dollar, increase exports  and that helps the economy”, so at least you’re acknowledging that that is not just an unintended consequence of QE2, it may be an intended consequence of QE2…

And Meyer continues to contradict his earlier statement: “That’s precisely right. You have a choice. Don’t ease monetary policy and then you don’t affect the dollar. If you want to ease monetary policy, lowering  the dollar is one of the ways it works. That’s transmission mechanism. That’s economics 101 and we need to understand that.

Yes, economics 101, which Larry Meyer didn’t know only days before.

Risk Free!

One of the assumptions of modern finance is that there is a “risk free rate”. It is used in everything from options pricing to corporate finance. The proxy used for this risk free rate has been the US Treasury’s bonds. The risk free rate should be lower than all other rates, as it is “risk free”. But the US treasury’s 30 year bond yields went higher than mortgage rates of the same time period. In other words, people perceived American borrowers to be safer than the US Government!

Delegating climate change

The climate change conference in Cancun has featured record cold temperatures while its delegates signed petitions to ban water. The UK is having to cancel Christmas because of the temperatures it’s facing. Apparently the UK is stuck in a “once in a lifetime” cold snap. Others report that it has only been colder once since records began in 1659. We didn’t know the English live for hundreds of years.

Your editor descends into this European chaos on the 27th December. Perhaps we will be there for the delayed Christmas?

Nick Hubble
For Daily Reckoning Australia

Nick Hubble
Nick Hubble is a feature editor of The Daily Reckoning and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about The Daily Reckoning, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to The Daily Reckoning for free here. If you’re already a Daily Reckoning subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Daily Reckoning emails.

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3 Comments on "Growing or Sweeping"

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5 years 10 months ago
A fed Bear is a dead bear. Feeding the Serbian bear with $20 billion grant aid from the West, and with $20 billion in weapons from Russia East, ended in 10 years war with 500000 innocent civilian dead, through execution, torture, raping, kidnapping and forcefully displacing millions of Croatian, Bosnian, and Kosovars. Shame on EU, shame on Russia. The actions of Serbian beast ended in dismembering of Yugoslavia, and creation of many independent states, sworn enemies to Serbia. If you go to Croatia they say don’t forget VUKOVAR, don’t forget Srebenica in Bosnia, Vojvodina in Hungary, “Western Outlands” in Bulgaria,… Read more »
Sunshine Coast real estate
5 years 10 months ago

This should not surprise those who think intervention worsens a crisis, as well as causing them. The idea of monetary and fiscal policy is largely to soften recessions. In the process of doing so, they set the scene for the next bubble, as well as drawing out the recession the unemployed are experiencing. None of these things are good. A severe, rapid recession cleans out the economy’s malinvestments, which lays the groundwork for the better investments to flourish and employ people faster……………..

Anon for this one
Anon for this one
5 years 10 months ago
What would cause a worldwide recession or depression if we didn’t screw around with the currency in the aim of optimising local performance? “Feeding Greece with grant aids, the West is creating another beast.” (This is from memory, no fact checking, so be kind…) The Cro’s and Serbs were killing each other LONG before they were forced together. Sure, they received some external aid from Russia. The biggest problems were internal. Fresh after the second world war where the Cro’s Ustase ‘mopped up’ light resistance in the Serbian territories as Hitlers troops moved forwards. What ensured was full on Ethnic… Read more »
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