Money for Nothing and Cheques from Centre Link

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Governments around the world are in trouble. They face unhappy voters at every turn. It’s when voters are unhappy that they tend to care. That is supposed to be good for democracy.

But who knows what sort of hair brained schemes the voting public might come up with once empowered? Telling people what clothes they can wear seems quite popular at the moment. So then you wonder whether politicians will stand up and do the right thing in the face of adverse political pressure. Will the mob rule?

That’s what constitutions are for, by the way. When popular opinion goes haywire, there are certain things the majority can’t do. But politicians and the judiciary have watered down their constitutions in the name of practicality, necessity and their careers.

There were poor to be supported, refugees to be saved, gunmen to be kept at bay, criminals to be cared for, consumers to be protected, rich to be made more equal and houses to be made affordable. Constitutional barriers are mere inconveniences to these lofty goals.

Now we face the consequences.

High taxes are the main one. Low employment rates are another. Who works when you get your money for nothing and your cheques for free from Centre Link?

Wait a minute. Low employment in Australia? Yup, “Australia’s employment rate – the percentage of the population with a job – ranks only 20th of the 27 rich OECD countries for prime-age workers” reports Tim Colebatch at The Age. The details are very much worth a read. Never again do we wish to receive an email from subscribers about Australia’s lofty employment numbers. They aren’t fair dinkum.

Back to the global sphere. It’s going to take an impressive set of politicians to educate the masses on the consequences of many years of free lunches. One woman who people can look to for guidance is Maggie. Janet Albrechtsen at the Australian is a fan:

Actually, let’s be blunt. It’s not at all clear that political leaders today, most of them men, have Thatcher’s balls when it comes to transforming their sclerotic economies.

John McDonnell, a leadership contender for the British Labour Party, was asked [what he would do if he could time travel]. The former unionist said he would “go back to the 1980s and assassinate Thatcher”.

Strangely enough, Margaret Thatcher probably wouldn’t object to Janet’s description. And she would probably measure her success by her death threats.

But Australia isn’t exactly stuck in the middle of an economic crisis, so why worry? GDP stats indicate the private sector is doing just fine. And house prices barely sneezed as the US was deciding on flower arrangements for its funeral in 2008.

It hardly seems necessary to point out that the Aussie stock market did in fact plunge. And the battles raging around the world are ideological ones. It isn’t likely that Australia will remain a lone bastion of Keynesianism if the world figures out how stupid that is. So change is in the air.

Where do we turn? If a rather annoyed public opinion does control politics, where will it take its political leaders?

That’s where Janet Albrechtsen’s second and recent article comes into play: Hey, big spenders, hands off our money. The sub-heading a slightly confused “Julia Gillard can learn much from the principles of Hayek and Friedman.”

We won’t get into the Hayek vs Friedman story. Aside from that, Janet probably didn’t read the “Why I am not a Conservative” chapter in Hayek’s The Constitution of Liberty, nor Friedman’s Free To Choose. But the remaining article itself is excellent.

Labor in the 21st century is committed to a deluded philosophy where a big spending government believes it can spend our money better than we can. It can’t, of course. … there is no sign that a Gillard government will free itself from the costly fantasy that took hold under Kevin Rudd about the omnipotence of big spending government brimming with expensive and grand designs.

One example was the Green Loans Program.

Patricia Faulkner, a former head of the Victorian Department of Human Services, with support from KPMG, found: 96 per cent of procurements reviewed were done without open competition, evidence of contract splitting to avoid authorisation by senior management, repeated breaches of the Financial Management Act and Regulations, non-compliance with Commonwealth Procurement Guidelines, unaddressed conflicts of interest, lack of documentation, poor contract management, lack of commercial terms (advance payments were often made), huge cost escalations (an original contract for $49,588 skyrocketed to $462,000, while another for $770,000 ended up costing $3.4m), weak budget controls, delays in implementing an audit process and the absence of a quality assurance program.

(Perhaps the longest sentence ever written?)

Ahh, stimulus.

The Working (to be) Poor

The Age’s article titled “Sea of Debt” sounded good from the beginning. It got worse. Geoff Strong went on a bit of a tangent with a so called Stacey:

Stacey, 52, never imagined it could be like this. On the face of it, her unremarkable expectations should allow her at least a small slice of the Australian dream.

But, as for increasing numbers of Australians, her tilt at the dream is being undermined by the relentless rise of staples such as electricity, gas, water and the telephone, which are eroding an already overstretched budget. In the future these pressures are likely to worsen as energy prices rise following government attempts to generate more environmentally friendly electricity, which tends to be more expensive.

We go on to read about how “the registration on her 1995 Toyota Camry has sometimes gone unpaid and she has only allowed herself a one-week holiday in Hobart in two years. Her weekly outing is ten-pin bowling with friends.” And she doesn’t even celebrate Christmas.

This is a sad story indeed. Then Geoff Strong drops the bombshell: Stacey has a “full-time permanent job with the state government pays $55,000 a year”.

So if life is that difficult for an Aussie on that income, this country really is in trouble. But perhaps there is more to the story. Find out yourself here. (Hint: Her house was refinanced several times in a suburb with “the third-highest price rise for houses in Melbourne” in 2008.)

But if “unremarkable expectations should allow [a person] at least a small slice of the Australian dream,” then communism would work. Sadly it’s not about expectations. It’s about reality. And changing your expectations to conform with reality is a rather basic skill, one would have thought. To console Stacy and Australians in the same position, the Greeks are having trouble with it too.

Hedgies in High Places

When your editor was young, he got stuck in a hedge maze in London while experiencing some severe hay-fever. Wherever we turned, there was another hedge. It wasn’t pretty.

Now, it’s the same thing all over again. Last week, we discovered a former hedge fund manager at the helm of Europe’s bailout fund. This week Obama nominated a hedge fund managed from Citigroup to be his budget director. Apparently the favoured candidates were too busy fighting among themselves to see this coming. Surprisingly enough, the new guy’s connections (read employment) to a bailed out firm are up for discussion at his confirmation hearings.

But it will take someone as bright as a Hedgie to do the jobs these two have been tasked with. Dan Denning pointed out the inherent flaw in the European bailout plan in his latest edition of the Australian Wealth Gameplan: “The absurdity is that a bankrupt government cannot be expected to bail out a bankrupt bank when the bank was bankrupted by the bad government debt in the first place.”

And as for the American budget outlook, it seems Obama’s Debt Commission is talking the talk. If the issue is left unchecked, it “will destroy the country from within”. But America has already check mated itself:

“We can’t grow our way out of this,” [co-Chairman] Bowles said. “We could have decades of double-digit growth and not grow our way out of this enormous debt problem. We can’t tax our way out… We’ve got to cut spending or increase revenues or do some combination of that.”

The ‘flations

The ‘flations are back in the news. Like some sort of dysfunctional family in a reality TV series, the central bankers are all over the place.

Australia’s Glen ‘flation is expected to continue his rate rises. Jean-Claude ‘flation has been busy doubling Spanish bank’s debt to the ECB. Minutes from the Federal Reserve, home of ‘flation family Chief Ben ‘flation, indicated the “Committee would need to consider whether further policy stimulus might become appropriate”.

One thing that has been confusing is the central banker’s definition of inflation. Supposedly it’s rising prices. But, based on Stacey’s anecdotal evidence of rising energy prices, it seems much of inflation comes from increased costs to the businesses providing goods and services. (Climate change policy perhaps?)

A central bank’s interest rate raising won’t affect the cost of energy favourably. Nor the price of un-poisoned tomatoes if they become rarer. Yet the CPI’s (or similar price indexes’) moves supposedly dictate monetary policy. What if the central bank is merely interfering in supply and demand changes when it makes policy decisions on perfectly appropriate price changes? That might cause something like a global financial crisis or something, mightn’t it?

Despite their differing behaviour, all the ‘flations have one thing in common. A dislike of the US dollar. Most central banks are either questioning, berating or dumping dollars. But only Ben ‘flation is capable of showing true disdain for the Greenbacks. In an ultimate display of his apathy for them, he simply creates more.

And when the great inflation begins, the ‘flations will blame the free market again. But, to paraphrase investigators into South Korea’s missing ship, it was either the Dear Leader, Ben ‘flation, or it was the Martians.

Perhaps we are being too harsh on Ben Bernanke. Let’s go to former White House Budget Director David Stockman for a fair and balanced view:

Federal Reserve Chairman Ben Bernanke “is a math teacher, he’s not a central banker. He is so caught up in his equations that I think he’s extremely dangerous – the worst Fed chairman we’ve ever had.”

Bankers Get a Reprieve in Switzerland – Surprise!

Naming bank capital requirements after a Swiss city turned out to be an indication of what was to come. And it wasn’t “works like clockwork” nor was it efficiency. It was secrecy and snobbery. And the banks came out on top. Closely followed by the ratings agencies. Now the circus continues:

“European banks, rattled by investor uncertainty about their ability to withstand a sovereign-debt crisis, are poised to win a reprieve in Basel, Switzerland, this week as regulators from 27 countries shape new capital rules.”

This bit got Dan Denning all fired up on Wednesday.

“Representatives from the U.S. and the U.K., who have sought to rein in risk-taking, are willing to compromise on how capital is defined to reach an agreement at a committee meeting that begins tomorrow, the people said.”

Dan’s reply:

“You know the world’s banking system is well and truly stuffed when bankers can’t even agree amongst each other on what capital is.”

Degraded Downgraders Downgrading the Degenerating Debts for Deutschland

Another week, another downgrade from our steadfast bastions of financial wisdom – ratings agencies. Portugal falls victim this time. As the German’s see it, countries can’t change their Kuhflecken, let alone leopard spots. That’s why Infowars reports ze Germans are preparing a European bankruptcy framework. Supposedly with a provision for giving up state sovereignty! They are at it again…

The United Shambles of America

In order of absurdity (not sure if rising or falling though):

  • The FDIC closed four more banks over the weekend, bringing the annual total to 90.
  • Washington closed state offices.
  • California may cut 200,000 workers’ pay to the minimum wage.
  • Minnesota is delaying tax refunds for a second year.
  • Illinois let $5 billion of bills go unpaid.
  • “Delaware saved $29,000 by eliminating flowers at the state psychiatric hospital and health department.”
  • Springfield Police Charged One-Armed Man With Unarmed Robbery

Investment Advice

For anyone who has a basic understanding of finance, the following quotes from David Potts at The Age are worth a giggle:

“Take the most oft-quoted valuation of the market, the price-earnings (P/E) ratio, which shows how long it will take to get your investment back. The lower it is, the faster the investment will pay off and so the better the stock.”

The P/E ratio measures a company’s earnings, not the investors return. You don’t get the money back.

“From what little I remember of maths, a bigger denominator gives a smaller figure. But take the forecasts of “E” next year and something is drastically wrong. Analysts are forecasting earnings per share will rise an average 25 per cent over the financial year, which lowers the P/E to just below 12.”

Something is drastically right if people have figured out that analysts aren’t particularly good at forecasts. But they can probably do their math. Unlike some:

“Our most reputable forecasters, the Treasury and the Reserve Bank, are gung-ho about the next 12 months.”

Reputable? After missing the financial crisis, making a complete mess of stimulus policies (see above), and now this “significant mistake” of $7.5 billion … reputable!? What a joke.

“Banks, the mainstay of the market, need credit to be growing much faster.”

Banks decide how much credit grows by their lending practices. They can’t really need something to happen when they are the ones doing it…

Until next week,

Nickolai Hubble.
The Daily Reckoning Week in Review

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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Comments

  1. Mr Hubble, it is not becoming for someone in your position to make light of “Stacey’s” position. Yes she earns $55k but this is not enough for anyone raising kids these days let alone a single mum with a mortgage. My heart goes out to her, she has destroyed her own future in a nid to help her kids have a better future. She, like 100,000 of aussies have fallen into the property Ponzi with the best intentions but with little understanding of the driving forces behind the price increases,

    If you sat Stacey down and asked her why she borrowed beyond her means she would give you a mixture of 2 answer, “i didn’t have a choice” this would be because prices grew so quickly and “property always goes uop so i would be richer” assuming that the very unique market trends of the last 5 years would imprint on the future forever.

    What you fail to acknowledge Nickolai is that the silent pain experienced by the majority will leave ripple effects for generations to come.

    In short ,our nation becomes more bitter, more uninspired, more violent ad less engaged for the sake of aset speculation.
    .
    It is not a joke that country is going to hell in a debt ladened hand basket

    Reply
  2. “When your editor was young, he got stuck in a hedge maze in London while experiencing some severe hay-fever. Wherever we turned, there was another hedge. It wasn’t pretty.”

    Wonderful analogy. Not much has changed, then… . :)

    Rory Robertson’s article in today’s ‘Australian’ is an inspired piece of analysis. If you’re still lost in space, Hubble, read it to get your bearings. Good luck with your navigational issues!~ ;)

    Reply
  3. Realist, read the ‘Stacy’ article properly.
    She is not a single mom, she is 52 and her children are adult and supporting themselves. As she is 52, she probably has not been supporting them for quite some time. I understand the sacrifice a single parent makes, but when their children are adult and the parent is no longer supporting them, I don’t think you can use that as an excuse for their poor financial position.

    Further, if you’re going to ask Stacy why she borrowed so much, and expect her reply to be “property also goes up [in value]”, one could argue she should better inform herself before making such, apparently detrimental, decisions.

    Reply

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