Australian politics was a disaster zone this week. Joe Hockey suggested regulating bank lending rates. That put him on the “lunatic fringe” according to a MP of his own party. Usually Hockey’s comments are quite alright, but this one is way out. The idea that governments should determine interest rates is ridiculous. Everyone knows central banks should have that job. Lunacy indeed.
Then the government realised the fine print in the Mineral Resource Rent Tax (MRRT) is a bit too vague for its liking. It didn’t deal with those pesky States’ royalties. Dan discussed it in detail on Thursday. The pre-election agreement with the big miners could be off, at least to some extent.
The possible collapse of the deal comes amid revelations Treasury is refusing to hand over legal advice that raises constitutional concerns about the planned mineral resources rent tax…. The dispute centres on whether the miners or the government are exposed to a potential multi-billion-dollar bill for increases to state mining royalties.”
Yes, the federal government could be paying state royalties!
Apparently its “obvious common sense” (not one or the other, but both) that this can’t be the case. But maybe Julia Gillard should check what laws she is writing before she goes out and says things like that. It could end up embarrassing for her.
So if the federal government isn’t footing the bill, who is? Uh oh…
Rio Tinto’s iron ore head, Sam Walsh, came out with this statement, which just about sums up how concerningly naive the miners have been in their cosying up with the government, “If you can’t trust government, who can you trust?”
More on that below.
Road to Nowhere
Markets continued their stumbling around this week. Well, in some ways, they have been doing the same for a long time. Over the past year, the ASX has gone nowhere. The year before that, the same level. Two years before that, the same level. Buy and holders must be going nuts! Meanwhile, Slipstream Traders are seeing their editor’s price theories play out in text book fashion. And they stand to profit from it.
Money is funny in Bernanke’s World
The world awaits what its most powerful resident will decide. QE or no QE? QE, in case you’ve missed it, is short for Quantitative Easing, which is a fancy way of saying money printing by the central bank. Everyone is speculating on whether the Bernanke Fed will give the market a big cash fix.
Then again, it’s probably a question of how much, not if. If bank analysts are right and the markets have priced in huge QE, you wonder where the market would go without it (down).
But hold on.
What can QE actually do? What is it trying to achieve? Let’s walk through it. The Fed has short term interest rates at zero percent. They can’t go lower, unless they go negative. Now the idea of paying people to borrow money sounds absurd (which is what having negative interest rates implies), even when the current environment of nominal rates below inflation is doing just that.
Professor Roger Garrison drew up the following description on mises.org, “At the zero rate, the Fed has put itself in the position of a first-time water skier who has the tow rope pulled up against his Adam’s apple.” If you aren’t familiar with the phenomenon, you should know it ends badly for the skier. They either fall backwards from the sudden lack of speed, or they get pulled forward for a face plant as the slack picks up again.
Which outcome – falling backwards or face plant – would you prefer to see? (Your editor has managed both in a single tumble.)
So if money can’t be printed in the name of lowering interest rates, it will be printed in the name of… printing. How is that supposed to get the recovery going? Is it supposed to reliquefy the debt markets? Is it supposed to devalue the US dollar to spur exports? It all seems a bit of a punt and hope strategy. No real aim.
But even without aim, there is direction. And money printing always ends in the same way: inflation. The funny thing is that Bernanke has kind of skipped over the concept of using QE to get debt markets going, walked straight past devaluation of the dollar to spur exports (which is a politically sensitive topic right now) and actually stated inflation as the goal!
Yes, by decreasing the dollar’s purchasing power, he hopes to get people to spend more. Does that make sense to you? Only if you’re a Keynesian.
They think that the problem ailing the US economy is a lack of demand. Rising prices will spur people to purchase more out of fear from having to pay more tomorrow. Sounds like a wonderful way to run an economy.
The concept struggles in a number of ways. Our favourite is the idea of “sticky wages”. Oddly enough, Keynes had to think of it in order to make his theory work, even though it argues against it just as much.
If wages are “sticky”, meaning they don’t change quickly, then inflation will be a huge burden for those stuck on incomes that don’t change quickly. Prices will rise much faster than incomes. Income earners will have less purchasing power from their income and will be able to buy less, not more. Of course, the rich will be fine with their savings to spend. The poor will struggle the most.
Flash Crash 2
You may not have heard about it, but there was another flash crash. Apparently a software glitch caused the S&P 500 ETF to trade 10% cheaper for a couple of seconds. US$ 7.9 billion in value disappeared and then reappeared when the trades were cancelled.
Yes, automated trading systems are only allowed to make a profit. When they make a loss, the trades are cancelled. Check with your broker for similar arrangements.
As the US foreclosure mess continues to ripple through the pond, locals have taken matters into their own hands. A Chicago Sherriff is refusing to proceed with foreclosure evictions for Bank of America, unless the bank can prove the foreclosure was proper and legal.
And after having bailed out Bank of America (BoA) in an impressive list of direct and indirect ways, the Fed is now joining a group of institutional investment firms in a lawsuit against BoA. The aim is to get BofA to purchase back dodgy securitised mortgages back that it sold to investors during America’s housing boom. The total cost of purchasing back those mortgages could sit at US$ 120 billion. But why bully BofA? Surely the other banks were as bad?
What has us bothered about all this is where the suing will end. The homeowners will sue the banks, the mortgage backed security investors will too, but is the bank the end of the line? Maybe not, because the banks outsourced much of the legal work to people like David J. Stern and his foreclosure processing business. Now David finds himself with unwanted media attention from the likes of Bloomberg, which features the Google maps image of his house in its article. The image shows his mansion and yacht, and mentions the Bugatti in the garage. Maybe the suing will end with him? This article suggests so.
In the right direction?
Labour market data from the US continues to look remarkably bad, despite being impressively fudged. US unemployment is back at 10% according to Gallup. Economist Mike Shedlock is predicting a large rise in unemployment after midterm elections in the United States in November. Basically, the data is a joke and a large number of analysts have picked up on it.
If austerity measures play out favourably in Europe (although it’s not working out so well in France at the moment), this will make things interesting in the US. It will be the Keynesians vs. the Tea Partiers with Republicans eager to not embarrass themselves. It should be good fun to see what policy comes out of that mess.
Treasury Secretary Timothy Geithner is a Pelican
Some would call him a goose. Either way, he is a complete plonker. Reuters reports that he, “vowed that the United States would not devalue the dollar for export advantage, saying no country could weaken its currency to gain economic health.
Geithner now finds himself in a combination of economic no-man’s land and a state of outright dishonesty. Firstly, who is he to tell the Fed what to do with its monetary policy? The statements have no clout whatsoever. But he still makes them as though they are definitive: “It is not going to happen in this country.” Geithner told Silicon Valley business leaders of devaluing the dollar.”
In this country? What on earth? Where will it happen then when the Fed revamps QE? And hasn’t it been happening for years now anyway?
Secondly, Geithner is now at odds with most of the people who believe in him. A weaker dollar is supposed to spur exports for a US recovery. That is what Keynesians are banking on. But here goes Geithner again:
It is very important for people to understand that the United States of America and no country around the world can devalue its way to prosperity, to (be) competitive,” Geithner added. “It is not a viable, feasible strategy and we will not engage in it.”
The whole world is engaging in it! And it has caught some nations out, “Brazil’s top economic officials will not be attending meetings of Group of 20 finance ministers and central bank governors in South Korea this week…. Finance Minister Guido Mantega canceled his trip because of currency issues.” Yep, after seeing the Brazilian Real rise rapidly, Brazilian officials scrambled to put their own measures in place, realising that they haven’t printed enough money to keep up with the Fed.
Charge of the Austerians
Whoa, it seems Europe is really going for it! French President Nicola Sarkozy holds firm in France with his pension reforms, despite growing violence. The UK government has rolled out its austerity plans too, despite an all time record government deficit for September. Let’s take a closer look at Europe’s turmoil.
France has gone violent, according to media reports. Burning cars and tear gas featured. It may seem like nothing new, but the students causing the ruckus are protesting about something that won’t affect them for about 40 years! And the retirement age is only being increased by two years!
What about democracy? Don’t they care that the majority want austerity (assuming it does)? How do they justify putting the nation to a stop over something they can already exercise their vote on via the ballot box? Do we sense a crumbling of majority rule in favour of unalienable rights?
On the other side of the channel, up to 500,000 public jobs are to go. UK government “departmental spending reduced by an average of 25 percent” and defence is facing some rather odd reshufflings, including an aircraft carrier which will immediately be mothballed after being built…
But taking the cake is Spain, with its marvellous demonstration of how government subsidies end. Having provided massive incentives to build solar power installations, the Spanish government is leaving its formerly prosperous dependents high and dry in the name of austerity. More than 50,000 solar power entrepreneurs got sucked in by the government’s guaranteed above market price for electricity and now face financial ruin. “You feel cheated, we put our money in on the basis of a law,” one says. Oops.
Correcting past politician’s mistakes is something politicians rarely spend their valuable time doing. It’s usually just more laws and spending. So the question is if modern politicians have the balls Lady Thatcher did. And even then, will austerity really work?
The Daily Reckoning, brought to you by Senator Conroy
Labor Senator Stephen Conroy has one of the most impressive sounding titles in Government. He is officially the Minister for Broadband, Communications, and the Digital Economy. On top of that massive edifice, he is building himself a monopoly on the new fibre optic network. He says that, “If passed, the laws would make NBN Co the sole fibre network operator nationally, enshrining in law that no company may build or operate a network that competes directly with NBN Co for customers.”
Henry Ergas’ article in The Australian does a brilliant job of explaining the harrowing details. It’s a must read in itself, so we won’t give you a summary.
The Longest Day 2 to be screened in black and white as well
Joining the list of those forecasting a war is Jim Rodgers: “It makes logical sense: Whenever you have a shortage of raw materials in the world, it historically has led to war.” Which raw materials?
The NY Times is unusually clued in: “China, which has been blocking shipments of crucial minerals to Japan for the last month, has now quietly halted shipments of some of those same materials to the United States and Europe, three industry officials said on Tuesday.”
Hopefully you know what rare earths are by now, because Australia is set to profit from them. Australian Small Cap Investigator subscribers have been for months. Basically they go into most high tech items, including your colour TV.
Until next week,
The Daily Reckoning Week in Review