Policy Makers and the Depression

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In today’s essay section you’ll find plans, plans, and more plans from some of your 50,000 fellow Aussie DR readers. Last Friday we asked you to send in your plan for the coming hyperinflationary recession/deflationary depression. We’re hedging our bets on which it will be because we don’t yet how much more aggressive (or effective) monetary and fiscal policy is going to be.

If governments wised up and ceased pumping trillions of new money and credit to back-stop assets with unsupportable values, you’d get a severe and painful deflation. The flow of money and credit would contract and the general price level would fall-most severely for those assets that benefitted the most from the credit.

The upside of a severe and painful depression is that the much needed adjust in the economy would finally happen. The flow of credit to productive enterprise and real risk-taking (value creating) activities could resume. Or, if you like, new “production possibility frontiers” would open (like terraforming the great red centre of Australia so that its climate is habitable, or reengineering the national energy grid to be less centralised and more resilient.

But history suggests policy makers will not allow the supply of money and credit to contract, or for the mistakes of the last bubble to be liquidated. That would mean someone has to take the losses. And if that happened right now, you’d have a lot of insolvent banks and foreclosed homeowners (especially in America, but perhaps later this year and next in Australia).

In fact, history shows that policy makers will do the exact opposite, pouring good money after bad into a market sorely in need of a return to the mean. Case in point is the way Congress treated the U.S. mortgage market in 2007 and 2008. It has led to the nationalisation of the U.S. mortgage market, where the government now originates nine out of every ten new mortgage loans.

In 2007, the Congress passed the Federal Housing Authority Act. The Act loosened underwriting standards for Federal housing agencies in the U.S. It also allowed them to cut down payments in half (from 3% of a loans value to 1.5%) and loosened regulatory capital requirements. What’s more it raised the maximum value of loans the FHA could insure up to $417,000.

This was important. This was the size limit on loans that Fannie Mae and Freddie Mac could buy in the secondary mortgage market. But in market with inflated home values, with many home owners in desperate need of financing, the GSEs would be unable to step and provide what the private sector would not without a change in the conforming loan values.

The primary goal was to kick-start lending the U.S. mortgage market. It had to be kick-started because the non-bank lenders that sent prices soaring from 2004-2007 were out of the market. Private investors-seeing the bubble for what it was-were no longer funding the market. But that was just the beginning.

Next up was the Economic Stimulus Act of 2008, signed by President Bush on February 13th of that year. One little-discussed feature of that act raised the conforming loan limit for the GSEs from $417,000 to a maximum of $729,000 in some markets. This enabled the GSEs to buy or insure mortgages up to $720,000. This was designed to prevent mortgage activity in places like California, Nevada, and Florida from all but grinding to a halt.

The measure was pushed by folks in Congress who argued that median home values in some parts of the States were much higher than the national median. They argued that if the GSEs were to achieve their new mission of being the primary source of mortgage funds in the U.S., the size of the loans they could buy or insure would have to be raised. So it was, even though the original mission of the GSEs was to make housing more accessible to low-income and marginal buyers and NOT to prop up house prices in the most over-inflated markets.

The result, despite the subtle change of mission, was still pretty impressive. According to Inside Mortgage Finance, the GSE’s originated 73% of all mortgages in the U.S. in 2008. At the height of the mortgage bubble, non-bank lenders were stealing market share from the GSEs.

But as those lenders failed, the GSEs (Fannie and Freddie) once again find themselves as the only pillar holding up mortgage financing in the U.S. In the fourth quarter alone, if you include the FHA and the Department of Veterans Affairs, the government accounted for 92% of mortgage originations.

Did the GSEs massive expansion into the mortgage market keep U.S. house prices from falling even further? And let’s not forget the Fed, which is now buying GSE bonds in a further effort to prop up mortgage activity in the U.S. You can see the massive amount of new resources and capital that have been poured into keeping the market afloat, and by extension, preventing further deterioration on bank balance sheets that are chock-a-block filled with residential and commercial housing.

The bad news for the U.S market is that the provision to expand the conforming loan limit expired in December of 2008. Fortunately, for those interested in perpetuating the misery of the U.S. housing collapse, the American Recovery and Reinvestment Act signed by President Obama in February again raises conforming loan limits for the FHA and the GSEs to $729,750.

It’s enough to make you sick at your stomach. The U.S government is actively preventing an adjustment in U.S. house prices that would bring about a market clearing price and lead the way to a recovery. House prices are falling anyway. So all the government has really achieved is the nationalisation of the mortgage market, putting millions of Americans in mortgage purgatory.

What’s worse, you could credibly argue that the U.S. housing market is worse off today than it was two years ago-even after a 20% fall in national median home prices. More people have been sucked back into mortgages at values that are not sustainable. Look for higher default and foreclosure rates. And for the banks? You don’t even want to know…

As for Congress and Bush and Obama, nice work fellas. Hope you’re proud of yourselves. If you wanted to put a whole generation into massive debt-above and beyond the Federal budget-you couldn’t have come up with a more devious series of laws to do it.

Here in Australia, the government is being coy about how long the First Home Buyers grant will be available to prop up home prices. However, the big story of was consumer prices not house prices. And there were conflicting signs from the Australian Bureau of Statistics and the Reserve Bank about the real rate of consumer price inflation in Australia.

The ABS showed consumer price inflation increasing 0.1% month-over-month and 2.5% from the same time last year. But the RBA’s trimmed mean measure of inflation showed inflation up 4.4% year-over-year. That exceeds the RBA’s goal of between 2-3% inflation per year.

In any event, this should put to rest the “deflation” bogeyman for awhile. And by the way, what is so bad about falling retail prices anyway? Nothing, as far as we can tell. If you’re a consumer, it means your dollar is stretching further and further.

It’s odd that people consider high prices and high wages a sign of a healthy economy. And besides, it’s not the number that matters. It’s what real wages actually are. Real wages are wages adjusted for inflation. If consumer prices are falling and real wages staying the same, consumers benefit with enhanced purchasing power.

The trouble for policy makes is that not all prices move in the same direction. If financial asset prices fall, this is “bad” because the value of shares and property are falling. That’s why we hear the deflation argument in consumer prices used as scare tactic to lower interest rates and prop up financial asset prices (good inflation.

But it does raise an interesting point: some prices can rise while others fall, even during a period where the general price level is rising. For example, the ABS reported that pharmaceuticals were up 13% in the March quarter. Secondary education fees were up 7.6%. Vegetables were up 6% and electricity was up 3.6%.

But some of those everyday higher prices were offset by the 14.1% fall for “deposit and loan facilities” and the 8.1% fall in prices for automotive fuel. Prices for domestic and holiday travel fell by 5.1% and overseas and holiday travel prices fell 4%.

That paints a picture of an economy in which prices for every day real expenses (food and medicine and rent) are rising, while prices for discretionary items (loan and vacations) are falling. So what?

Well, it means that in a hyperinflationary period, you could have plummeting stock and bond prices (in real terms) AND rising food, energy, and other prices (in real terms). So don’t go buy that house just because you think inflation is going to boost house prices. In real terms, a hyperinflation destroys value. It doesn’t add it.

Here’s the thing to remember: all the physical capital stock that gets built in an inflationary boom doesn’t go away. The factories are still. The houses are still there. The capital goods are still there. And the cars are still there. But the value of that capital stock has to fall once the inflationary boom goes bust.

Mind you, not all of the capital stock will be productive in the future. How bad the bust is depends on how much capital was sunk into boom-time investments that don’t produce any return-ever. There are some people, for example, who argue that housing is a wasting asset, a sunk cost, or even the largest generational misallocation of capital ever.

Whether it is or it is not is beside the final point in our notes. What we’re watching for now is whether it’s really possible to sustain the inflationary boom in financial assets and the consumer economy with an even greater amount of credit and debt. We suspect it is not. And that’s what’s scary.

Ever since the early part of this century, governments have been managing the contracting phase of the business cycle with the introduction of more credit. The ripple effects of the monetary expansion have steadily widened over the years, drawing more of the globe into the game. It culminated in the 200-2007 world-wide boom in all asset classes across the planet-the blow off top of 90 years of rising fiat money, if you will.

Once a global inflationary boom has been expanded to include every market everywhere, how do you keep expanding it? Is this what an IMF-backed global currency is about? The ultimate expansion of fiat money worldwide for a global policy of inflation? Is that the final frontier of fiat money? We’ll explore that space tomorrow.

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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Comments

  1. Dan you said:
    “Mind you, not all of the capital stock will be productive in the future.”

    I couldn’t agree more.

    And that is why it irks me when I hear people talking about “recoveries” and “longterm recoveries”. Like the title of the DR article said a few weeks ago, “a recovery to what?”

    A recovery to bring us to the same point we were in 2007? A recovery to a point of unsustainable growth fueled by easy credit?

    As Dan alludes to in this article, if you build 1000 factories to produce widgets that are then bought using credit from a financial bubble, will we ever get to utilise those widget factories again once the financial capacity for the demand is gone? What about 90% of the factories? 80%? 50%?

    So many years spent living beyond our means, how can ANYONE expect, or even want a recovery to that?

    I think it is just a bunch of people who are highly resistant to change who are very very scared. And it just so happens that some of those people have a lot of financial, political and military power.

    Reply
  2. Pete,

    “Mind you, not all of the capital stock will be productive in the future.”…applies to every point in recent history! Unless of course someone has invented capital assets that never break down or need to be replaced.

    Perhaps it has also been a while since Dan has been out to a modern production line? You can scale down just as easily as you scale up when demand increases. Sometimes demand for a certain product never returns..so? Have you guys ever heard of retooling? In the worst case the factory is paid off or closed down and here is a newsflash, that happens even in the good years. It is not nice, but it happens and the world keeps spinning.

    No doubt some extra manufacturing capacity in the global economy will be cut, factories closed and people will have to find new work (and I hope they do) but this is hardly the first time we have gone through this cycle.

    Am I the only one around here that does not think the planet is about to implode? :)

    P.S. I wonder if Dan is still holding onto his Newmont Mining stocks? This would not be the reason he loves gold so much would it?

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  3. Greg: You have the quotation literally and not in context, what is the point of doing that?

    You really think factories can be easily retooled? A car factory becomes paper mill? And how many mills would we really need? The OVERALL production of goods (ie volume) needs to decrease…because there is LESS ability to purchase those goods.

    We could make 10 million factories in Australia, and what exactly would be produce in so many factories? What does the world NEED that it cannot get already? The answer is nothing much*.

    If you read this site and still think there is not a major problem that has two directions (deflation or inflation), then you must be missing the point.

    Newmont is doing quite well actually. If you understand why it is doing well, and will in the future, then you will then understand one reason that Dan is bullish on gold. The topic has popped up once or twice on this site…

    *Technology can change this, but change is still likely to be minimal overall. If electric cars become the norm, that may mean a boom in production in one place, but a reduction in production in another as those factories cant compete.

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  4. Abc was claiming the government have finally abolished the first home buyers grant. It will not be renewed next financial year. So yeah, expect the last minute suckers to lift prices for a month or two longer and then the house price crash should start to hit around October this year.

    Also looks like gold is on the way back up, I was going to buy in this week, but it’s jumped on me so I’m not sure if this is another bump or the start of a large upwards trend..

    beyondtool
    April 24, 2009
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  5. beyondtool – the housing correction will be more of a crumble than a crash initially. The right thing (a sharp and rapid fall to the bottom) won’t happen because the govt is shifting the goalposts .. the mortgage support scheme will mean people effectively won’t be allowed to default if they lose their jobs (for 12 months), which will prevent those houses going to market early. It’s all crazy really. I personally can’t see how anyone is benefiting from all this except for the banking sector.

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  6. Dan: “It’s all crazy really. I personally can’t see how anyone is benefiting from all this except for the banking sector”

    How about the people not tossed out of their homes? I would guess they do not mind steps being taken to help them out with their mortgages?

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  7. Average mortgage is up from about from about $230,000 in March 2008 to $280,000 in March 2009 – Which is good for builders and banks but not so good for home buyers I’d say. The real aim of FHOG (I felt) was always about stimulating the building and allied industries and helping out the banks. (Mr Rudd may well have still had a few quiet concerns about the Oz banks back when the increased FHOG was announced – Despite any public noises he was making to the contrary – I felt.) A fair bit of the FHOG money was probably used by First Home Buyers to buy existing dwellings from investors who’d decided to take their profits and run – Rather than spent on having new homes built – At least if the First Home Owners were smart it was, as you do pay a pretty heavy premium for a brand new house with all its brand new landscaping etc. So the spin off for the building industry could well have been a bit less than government hoped. Some of the Oz bank worries do seem to have settled. Banks have tighted Loan to Value ratios. More job losses seem to be pretty much a given. So banks just may be starting to find a shortage of new First Home Owners applicants they really want to lend to after any bit of FHOG pocket change is discounted from the equation. Increasing the FHOG did have the politically useful effect of avoiding any sharp property price decline starting at the same time as Aussies’ superannuation funds were being hammered – People don’t like too much bad news all at once thanks. Will the government stop fiddling/stimulating? No – But they’ve had their bang for buck out of the increased FHOG in its current form for now by the looks – It was very much a blunt instrument anyway. Could they re-introduce it in a new form where it only applies to newly built homes and maybe only those under a certain price or prorated on price or some such? I doubt it – That would be just a bit obvious and people would resent the removal of freedom to make some choices for themselves. What would actually make sense would be to direct the money only at newly built dwellings of the type the government wants to see built in the specific areas they want it built. But they do can’t do that with something called a FHOG, or else people in some areas would be eligible while people in other areas would not be – That’s not politically acceptable. And only people who can convince the banks of their credit worthiness will be participants – Which is out and out dumb if the goverment and banks are expecting lots of the people who most want housing are not likely to become especially credit worthy any time soon. No, they’ll just use the money to build publicly funding housing of the type they want where they want it – Or at least where the States that get the money want it – That is obviously politically acceptable. And they can’t be being too unfair to date from the States’ perspectives about where they’ve begun directing the $6.4 billion for the 20,000 new social housing dwellings it is going to be used to build or we would have heard a bit more squabbling about it I guess? Construction of that publicly funded housing has started now. So that’s where the savings on not continuing the FHOG increase past 30 June is going to go – Makes sense to me?

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  8. Pete, we don’t have much in the way of discretionary trade production in the bigger scheme of things. Like the rest of the anglophile world what we have in excess is discretionary services production. Some of those services are import trade shop fronts & retail. So mass short selling of malls is overdue.

    The major drag on industrial stocks has not only been the prospect of a collapse in their markets but moreso has been funding & covenant related (and subsequent capital raisings dilutions) and the merchant bank book traders shorting based on market rumours on those minimum equity covenant levels. The other bit is the investment institutions remain norties index fixated & kidding themselves that the financials will retain over 32% of the ASX and not being able to shift out en mass without taking the bath that remains inevitable after the bear market rally when the real economy bankruptcies (personal & business) kick through.

    Reply
  9. Pete, I wrote a reply but it is in the queue I guess…maybe because it had a link to a stock tip by one of the DR crowd a few years ago?

    Reply
  10. Dan:
    You said: “I personally can’t see how anyone is benefiting from all this except for the banking sector.”

    Some people might benefit, if they can get another job and ‘somehow’ keep their home (although they’ll have a whole heap more to pay).

    I do agree with your point though. If it was truly a system to “help” people, then the interest rates charged for that year of unemployment would automatically revert to a cost basis only (eg, wholesale prices). Ultimately the unemployed person, assuming they get job, would have to pay back the years interest, PLUS interest on that interest for the life of the loan. Sounds like the banks could potentially score anywhere between an extra 20K to 50K on an average loan (thats an estimate).

    The other point is that people who would have POSITIVE or zero equity and may want to sell or default to avoid debt after a sale, ‘may’ be caught in a situation whereby they have to wait a year before defaulting. This would mean more equity is chewed up, with the potential of negative (or more negative) equity. Basically, a big waste of money, and the banks win from that one.

    (This is assuming a falling market)

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  11. Ross:
    “…the investment institutions remain norties index fixated & kidding themselves that the financials will retain over 32% of the ASX…”

    Couldn’t agree more. It appears the imbalance went on for long enough for the majority to consider it the norm.

    We’re funny creatures us humans…we take the smallest trends and extrapolate them into the future without considering ‘why’ they may or may not continue.

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  12. Pete in a nutshell my point about factories/capacity is:

    1. Factories close down all the time or are reconfigured when demand drops or products are terminated etc. It the demand never returns the factory is knocked down or turned into apartments etc. I have done a few audits on production lines so I know a car plant will probably not become a paper mill…I never even suggested it. I have not sat behind a desk our entire working life..so give me a little credit please :)

    2. People seem to think that China has added a lot of extra global capacity in terms of manufacturing but they fail to take into account that a lot of capacity simply moved from places like Australia, Europe and the U.S to China. However it is probably correct to say that factory building might have gone a bit too far in China. (certainly a lot of Chinese farmers would say that)

    3. You mentioned “The OVERALL production of goods (i.e volume) needs to decrease…because there is LESS ability to purchase those goods”…..well not always. The other alternative is to reduce unit costs and make your product cheaper,that is what the smart companies are doing right now. Also there is a difference between demand and ability. (and governments right now are trying to help people be able to spend)

    4. Capacity is also taken out of the system by reducing work shifts and job sharing. Japan has reduced a massive amount of capacity like that..but it can be ramped up again easily when needed.

    In any case some factories that were near the end of their lifespan will simply not be upgraded..it is not nice for people (or robots) losing their jobs but the globe will keep spinning.

    Finally..who says demand will not return? It always has in the past few hundred years so I am guessing with time it will again. If you think the DR argument through then you will get to a point when even the demand for gold will plummet, because who the heck is going to be out there buying gold jewelery? (and this is still the biggest area of gold consumption)

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  13. Greg Atkinson – Re “Am I the only one around here that does not think the planet is about to implode?”

    My thought is that there has to be demand – By people who can pay – Maybe they’ll be Chinese. Maybe they’ll be Indian. But the way things are shaping up, not nearly so many of them will be from the developed Western nations as in the past – Unless the West becomes real smart or real competitive.

    Our last innovative idea (AAA Rated Toxic Financial Assets) seems to have been a bit of a flop. And even though the previous one was infinitely better (the Internet and some high tech related goodies) the markets eventually decided it was being a bit overrated.

    I’m just wondering what we really might have to offer the future big potential consumers of the world that they aren’t smart enough or hard working enough to produce for themselves – Apart from some natural resources if you happen to be Canada or Australia? (Heck, the Indians have a USD 2,000 car for sale – Which just might suit a lot of their needs quite nicely. And MacDonalds has had to scale back a few of its ideas regarding China – It appears a lot of them actually prefer their local fast food equivalents.)

    So I agree with you that the planet isn’t going to implode either, but I do strongly suspect things have entered a much tougher phase for the West than we’ve been used to?

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  14. Greg,
    Hate to tell ya that though well healed both me and my Chinese relations in the US, Taiwan, and elsewhere are pretty well stretched; we aren’t Warren Buffett.

    Before the peak of the housing bubble we sold a rental several years ago and went multi-residential. Putting 1/2 down and living within our means is what keeps us out of trouble. If we still had the unit we sold and not the what we have, we would be “shopping” cash in hand as well as with approved credit

    While at it, I want to harraunge my idiot govenment. You can spend what you ain’t got only so long before others get wise to it. To the idiots who are too blind to see it, stagflation is alive and well in California. I am now pay 7 times what I payed 4 years ago for a 10 kg bag of rice. Other than the out of season fruit from elsewhere, all US food stuffs are more expensive.

    Governator thinks he is gonna make tax money by taxing labor? That wrong headed idea means I’m going to put up a new retaining wall and fence myself. Money that stays at home because he made something costly, expensive. Money he misses 2 chances to tax out of greed.

    In addition to all the dammed Illegal Aliens my government don’t send back home, Mexican culture is now dominant in California. In LA a couple years ago a couple Illeagal maids glared at Ling and I continuing a conversation in the elevator they were in speaking Chinese. It was obvious they thought we were RUDE. Wonder if they ever thought what others thought about them speking Spanish?

    Damn Bush; He never saw a Illegal Mexican he would leave behind. OTMs to survive had to assimilate were, never were a problem, and continue to be the ones deported. This current administration is so wacked, it scares the hell out of me.

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  15. Ned S…I am with you there 100%. Maybe this is where I am getting misunderstood because I am talking about the global economy…I am not saying Oz will do well, or the U.S for that matter. But what we are probably seeing is the erosion of U.S. financial dominance and China possibly cementing itself on the list of big guys. (as opposed to a country that churns out plastic thingo’s)

    Also Japan might come out of this okay…if you have been watching the business news then you will see that Japanese companies have been buying stakes in a lot of companies all over the world. India..I am not really sure about, can’t say I have been there or worked there so I am not really up with the Indian economy.

    So maybe we are just going to see the relative wealth gap between West and East narrow…and that is probably not a bad thing.

    Of course, I am just as worried as anyone about what the next great plan with be from the U.S Fed team…they do have the capacity to do a lot of damage! (and already have!)

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  16. Homeowners in distress without employment are people. Any assistance is welcome and the 12 month period of some leniency as temporary as it may be in a deteriorating economy is still in lieu of alternate rental you have to pay, allows some families to finish schooling in the area for another year,allows some to consolidate with family members and find a way through, take in tenants etc. To suggest nobody can benefit except the banks is cynical to the extreme and suggests some on this site would not give a thirsty dog a drink if it was not a good investment.

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  17. Greg Atkinson – Re a narrowing of the wealth gap between the West and the East – I do believe that is the unavoidable mid to longer term outcome. (Happening already to a degree – But with any estimate on time frame for completion being way outside the range of my personal guestimation inclinometer – But certainly decades rather than years if I HAD to take a punt? The Chinese are a patient people.)

    Futher re narrowing of wealth gap: I think of lot of the West is in denial mode. And that denial is being encouraged by Western politicians with words along the lines of Yes it may be tough, but hey we are tough too, so don’t worry about it too much at all because we should be just fine once our stimulus packages kick in. Plus – More recently; We’ve started to very seriously consider letting some truly dodgy big companies go through a bankruptcy process (which will help clear the dead wood) – Even though we never wanted to of course because we loved our dead wood a lot.

    But that is superficial peddling in hope to an ignorant West that wants to be blinded by false hope. With what I see happening being something way more fundamental – A global shift in balance regarding relative national living standards. (A slowish but inexorable real global wealth re-distribution.)

    The West wants to dodge that bullet – Fine. By all means try. It’s just that I don’t personally believe that bullet can be dodged – Not indefinitely. 1.3 billion hard working, fiscally conservative people who are pretty motivated to increase their exceptionally low standard of living (even if there are some environmental consequences the West might make “Tut tut” noises over plus some human rights issues the West just could make Holier than thou noises over) are simply not going to be easily denied mid to long term. And that is just one developing country I’m talking about – Albeit with a bit more going for it than the rest perhaps?

    Having read some popularist Western media advice on the sorts of “sacrifices” people should be considering making to get through this rough patch (eg washing their dishes by hand until they can afford to replace their failed dishwasher using cash rather than credit) – Then comparing that to a developing nation I know where the accepted norm is to wash your clothes in the bathtub by hand (because you don’t have a clothes washing machine let alone a dishwasher!!! – Even though you are a senior accountant in secure fulltime employment and your mummy was a teacher and daddy was an engineer); And a less developed country I know where the accepted norm is to wash your clothes by hand in the local stream and spread them out on the rocks to dry – I do worry a bit that Western politicians might not be adequately preparing their people for just what such a rebalancing of living standards could involve.

    Or be advising them on just how much effort and sacrifice they are going to have to make to get truly smarter and/or competitive if they really do want to temper any resultant ongoing drops in living standards for as long as possible.

    But people can only handle so such bad news at a time I guess. And popularly elected politicians do not get re-elected for making too many unpopular statements – Even if they are true.

    As to which Western nations will be most affected and most quickly? Well, different Western nations WILL be affected differently. And for all sorts of reasons – Some out of their control. But others within their control. (I personally suspect America will hold better than most. For lots of reasons. But I’d like to hear more on your thoughts re Japan one day because I would have put them in the likely basket case category along with the UK – Another time perhaps?)

    But re that ability of individual more developed nations to maximize on any natural advantages they might have – That is a reason I’m real keen for Oz (my “home town” so to speak) to start bringing in as many smart, cashed up, hard working and preferably youngish immigrants as we can lay our hands on. (Within reason.)

    Because for mine, Oz doesn’t really have that much going for it at all if one scrathes even a bit beneath the surface – Apart from being a) a nice place to live with b) some pretty exceptional mineral wealth plus at a pinch c) some quite water limited agricultural potential.

    Australians are not especially hard working, or especially smart/well educated or fiscally prudent or far sighted as individuals or as a nation obviously. (I’d never get elected to politics telling Aussies they are incompetant, poorly educated, dumb, lazy, shortsighted spendthrifts with overly high expectations of life in the global scheme of things given such personal/national characteristics of course – But I have LESS than NO desire to EVER be a politician – So that is all quite fine by me. And it means I can honestly say what I believe – Which I kind of like as well.)

    But anyway, Oz has obviously maxed out its mineral exportation potential for now at least. So about all that is left to us is to cash in on our “nice place to live” potential. With the smart, well educated, competant, hard working, fiscally responsible preferably youngish new Aussies we bring in being a long term potentially wealth generating asset that we can tax a lot to soften the decline for the rest of us drones a bit.

    Oh course my concerns are all bunk if one believes that Maslow was an absolute dill and one also ignores the simple truism that there is only so much to go around even within developed nations which is why they have to try and tax the wealthy a bit extra to make the poor feel a bit less poor and limit crime waves and riots in the streets. And if one believes in Mr G.W. Bush’s one time thought that all nation’s can and will continue to go forward together, growing happily and healthily together to the ultimate (but still relative) benefit of us all.

    Still, some people DO think that cheap energy and/or other technological advancements could take a lot of the pressure off? (And NOT because of any sideline silliness re it being handy for extracting gold from sea water – Smile!) And I also incline to agree.

    So I accept cheap energy will make a difference? But I say if we really believe that then we have a quite attractive interim solution in Nuclear Power … Which we have chosen not to grasp??? (So many questions – So few answers – From me anyway?!)

    But I think the relative problem re cross national living standards will resurface regardless. (As well as questions re relative living standards within any one nation of course – But the latter is an entirely seperate nation specific discussion.)

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  18. Gerry – Re mortgaged Homeowners not being allowed to be tossed out in very tough times – If my recollection of some past reading is correct, Oz introduced legislation to that effect in the 1930s. It has a potentially good healthy humanitarian aspect to it. Plus I doubt the banks really wanted the houses back at those depressed price levels anyway. About as close an approximation as the nation could get to a Win/Win situation in pretty difficult circumstances perhaps?

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  19. Ned S – I think you are right about the West being in denial mode. I think the thought of power shifting to Asia is a bit hard for people in the West to handle, but some power is heading in that direction and it is a good thing. Better to have people sharing the dream then looking across at you with envy.

    I also see a lot of coverage about Japan in the western media that is sort of dismissive of the country, yet Japan is still the world’s second biggest economy and has done this with few natural resources. If the U.S. did not have the vast natural resources they have I doubt they would be in top position…people tend to overlook that.

    Japan also sits in a very competitive part of the world…with South Korea a few hours by fast ferry away, China an hour or so by plane and the same for Taiwan. You put those economies together and you are getting a powerful little group and believe me, they know what hard work is. (and it isn’t 15-20 days annual paid leave)
    Compare that to Australia, where are our competitors breathing down our necks? New Zealand? This lack of competition makes us as a nation, complacent. I could write a lot about Japan but I would start repeating what I have written over at my blog. Maybe you could look my Japan posts and hit me with some questions..I will be happy to try and answer them.

    In regards to the U.S economy maybe you could have a look at this rant I wrote: The U.S. auto industry bailout and some inconvenient truths. In many ways Australia is in a similar position now because we think our economy is robust and it isn’t. If you look at our top exports you will see we rely on mining, farming and foreign students coming to our universities etc. We have no significant high tech industry and basically we are doing well because we are lucky enough to be sitting on a big land mass with plenty of reources. (just like the U.S.)

    Finally don’t get me started with nuclear energy :) Japan has nuclear power plants all over the place and even though earthquakes are common they have had no major problems with them. (mind you if one blows a gasket it is on the news) The Japanese are also the only people on earth to have been attacked by nuclear weapons, so if they can get over their fear of nuclear safety anyone can! Why on earth Australia is not tapping into this source of energy when we have all the uranium we need is beyond me!

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  20. Gerry – I agree that it’s unjust to simply throw an innocent family out of its home, whether it’s a tenanted property or mortgaged. But people with mortgages are not homeowners – that’s a fallacy. People who ‘buy’ a flat screen TV at Harvey’s on credit don’t own it until it’s paid in full. This is what is so wrong with the picture as I see it. Governments keep supporting the credit/debt/mortgage model, from which banks benefit and not people.

    Sometimes I just wish banks were prevented from ever issuing another home loan, and also prevented from ever charging interest on an existing home loan. Maybe something as essential as a house shouldn’t be allowed to be used as collateral, either. The housing market as it stands is very unnatural (hence the bubble). I also think people on TDR are looking beyond the welfare approach – there is a view that if housing wasn’t such a rip off (due to excessive credit) that people would not be forced into de facto serfdom to banks. Paying a third of your income to pay interest is just plain wrong!

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  21. Greg Atkinson – Your thoughts in the “The U.S. auto industry bailout and some inconvenient truths” article line up with my read on history.

    The US also had the advantage of being the holder of the global reserve currency (and still do) – Although it is apparent that can have its downside as well – Leastways if one has not kept fully on top of the responsibilty that comes along with the advantage.

    Tough problem for America – She wants to keep the advantage long term of course. But would also obviously like to see the USD drop to make its exports more competitive in times such as these. It will be interesting to see what eventually comes of that.

    Re Japan: I guess the things that worry me most are a) the aging population, b) with no easy way to offset that due to my impression the country is somewhat “fullish” at least given its limited natural resource base and c) the fact that they are in pretty competitive region of the world – And do wonder if the work ethic of the population which has compensated for its lack of other natural advantages for so long, will continue to do the trick for them given those other factors.

    It is interesting how history is written by the victors though – And specifically that unless one looks, even though there may have been more than one victor, a person tends to only get exposed to their particular victorious side’s take on it. The hsitory doesn’t even have to be deliberately changed for a few false impressions to be conveyed overall – Just play down or even omit some bits and possibly over empathise the significance of some other bits?

    I did read once, that for a developed nation, Americans have one of the lower percentages of passports per capita? (Couldn’t vouch for the truth of it of course!) But I guess if one truly does believe they live in the best country on earth (and in many ways have had good reason to feel quite confident in that general assessment for a good while), then they mightn’t feel too inclined to go anywhere much else. But even so, not having had a bit of exposure elsewhere can make people a bit less open minded re some general topics of debate than they might otherwise be perhaps?

    Australia does strike me as being very similar to America in that we have truly been the “Lucky Country” in many ways for many years. The fact Oz is so lucky, has even meant that by and large we didn’t feel particularly threatened by letting most of our manufacturing go offshore reasonably early in the globalization process. So we have no American equivalent of any possible big automaker collapse to worry about. Although in that same regard I can certainly see why Mr Rudd is pretty concerned about the building industry here.

    But I guess my point is we should be trying to learn from the American experience. And no, I don’t think protectionism is going to cut it. That would be a bit like the Luddites saying we’re really not so sure this Industrial Revolution is such a good idea now we’ve had a chance to get a good look at it and deciding the solution is to smash up the machines.

    The process is underway. And it just doesn’t look stoppable to me. And is probably “fair” – The world gave up on the concept of the divine right of kings to rule quite some time ago. And even became enlightened enough (eventually) to decide that slavery probably should be lived without – Even though lots of people had enjoyed lots of advantages from it for a very long time.

    But I will admit to having the odd concern about the potential “threat” of globalization. And can certainly understand it not necessarily looking especially desirable right now to a lot of comparatively privledged Westerners. (Especially if they truly don’t feel AT ALL privledged as all their personal experience allows them to compare against, is their own national average in that regard.) But be that as may the West still needs to be thinking about how to make the very, very best of it. And it worries me that our leaders don’t seem to be doing much of that at all. It just seems quite strange really?

    One mistake I think many people can fall into quite easily, however, is confusing standard of living with quality of life. The Western consumer based model actively promotes this allusion of course. And while people are different, and for some, a high standard of living is all that really does count, and at the opposite extreme some people actively reject a high standard of living in the hope of achieving a higher quality of life, I suspect that the majority of us could be happy with a bit of balance between the two.

    But having said that, please do note that while I can personally tolerate washing my clothes by hand in a bathtub for brief periods, I don’t enjoy it at all and am real convinced that by adding to my standard of living, washing machine ownership definitely also adds to my quality of life!

    All a matter of things like values and perspective and balance I suppose.

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  22. Dan – Somehow at the real heart of all this problem with the banks and the government and the current costs of housing and the anger being felt by younger Australians who can’t afford to buy them and the fear being felt by older Australians about their retirements, I have a very strong suspicion that the real root cause of the problem lies with the fact that Western governments insist on targeting positive inflation year, after year, after year. Rather than targeting no inflation and no deflation on average.

    Targeting positive inflation devalues our money of course. Yet governments say it is “healthy.” Despite the fact that it obviously keeps us all running like rats on a treadmill. Battling against ever devaluing savings and ever increasing asset prices.

    It smells to me like government has figured out some freebie way (for them at least) to get growth or more taxes (or something??? that they highly prize.)

    But there are NO freebies of course. And the people are paying the price.

    My knowledge of economics is zilch. But there is something rotten at the heart of all of this – And I reckon it hangs off that insistance on targeting positive inflation. If anyone can explain to me what governments get out of it I’d be sincerely grateful. Because I’d like to be able to make an informed decision as to whether I feel that the benefit (whatever it is?) to us as a community is worth the price we are called on to pay.

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  23. Ned S – it all comes down to the belief that inflation indicates the economy is growing and that we the people, like the economy to be growing because we are told more money will come our way. So governments that want to be re-elected feed the masses what they want. In Roman days the Emperor use to toss bread to the people and hold lavish games and the plebs were happy. Today it is the first home buyers grant, baby bonus and cash handouts etc that keep the public content it seems. Sadly we are rats on the treadmill.

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  24. Greg Atkinson – Thanks. I had a sad and sorry suspicion it just might have been that basic. How truly annoying.

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  25. …b’but my darling, i’isn’t that dress a little t’too low cut for a ch’chilly night like this ?…si papasito, but to get a cab real fast, look, i need to lower my intersects rape to attrack more busy and that do not make sense? in light of current resource availability of taxi car, to make for us so fast…?..!…b’but this could cause a crash, it is risky…is she WRONG for you to like me boom-bust cycle no more…?…

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