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- The magic number
- Ve haf vays of making you cut
- Rising house prices make housing more affordable
- Exit the Fee
The magic number
The magic number emerges. 600 billion it is, divided into 75 billion a month doses, in addition to the existing 35 billion a month. In case you’re lost, the figures are how much money the Federal Reserve will be printing. So, $100 billion a month will be flooding into the economy.
If that sounds absurd to you, you’re not alone. But that’s just what central banks do, so you shouldn’t be surprised. (Germans refer to central banks as “note-banks” – as in dollar notes – for a reason.) And if you’re worried about inflation resulting from all this money printing, you should know that it’s the stated goal of the whole effort. Peter Schiff has nicely summed up the whole shemozzle. He isn’t calling it QE2. He’s calling it the Titanic, because it’s doomed to fail. (The QE2 is also the name of a ship.)
Now all this is big news. Stocks rallied, gold went to a new high and currencies smashed the US dollar. But something may have fundamentally changed. Usually when the fed announces purchases of government bonds, the prices rise and thereby the yields fall.
This is because the purchasing of the Fed puts upward pressure on the prices. But 30 year Treasury yields rose as bond prices fell after the QE was announced. Yes, Fed purchasing, but lower prices. Why? Perhaps the purchases were less than expected. Or the vigilantes are finally moving in. With inflation signals in record high commodities and currencies against the US dollar, perhaps the vigilantes see the spectre of inflation hammering bond returns?
Currency markets are the big hint. The AUD went straight past parity. Yes, the USD’s days are numbered, all puns intended. But what will emerge afterwards? Charles Kadlec from the Wall Street Journal reckons he might have the answer. The right answer that is, not the correct forecast. Analysing the bond purchases in his piece titled Gold vs. the Fed: The Record Is Clear, Kadlec points out what everyone should know about using money printing to create inflation:
This policy is based on a false – and dangerous – premise: that manipulating the dollar’s buying power will lead to higher employment and economic growth. But the experience of the past 40 years points to the opposite conclusion: that guaranteeing a stable value for the dollar by restoring dollar-gold convertibility would be the surest way for the Federal Reserve to achieve its dual mandate of maximum employment and price stability.
The actual likelihood of returning to the gold standard is unknown. But quite a few serious people advocate it. If you would like to know about the demise of the gold standard, I highly recommend this podcast. (Basically, you can blame the French). The point of the podcast is that the gold standard is not something you can simply dismiss, even if you are sceptical.
“Ve haf vays of making you cut”
The Germans are engaging in a dangerous act of self righteousness. And it’s not making them any friends. Except the French President, with whose help the German Chancellor bullied the EU into some serious belt tightening. “Angela Merkel consigns Ireland, Portugal and Spain to their fate,” claims Ambrose Evans Pritchard in The Telegraph. Irish journalist Brendan O’Connor chimes in with a satiric “Ve haf vays of making you cut” and “While the Germans aren’t supposed to invade countries any more, it seems that like vampires, as long as you invite them in, it’s OK.”
It all makes great reading. But underneath the German vampiric military exterior lies a heart of gold. They want what’s best for Europe, so it can buy more German exports. Aside from that, German voters will only take so many bailouts and the German constitutional court might not take any.
When you consider the other option to German imposed austerity, things get really scary:
Economist Colm McCarthy has starkly warned that the International Monetary Fund will be running Ireland by February if the Budget “fails to convince the financial markets”. In what he calls a “scary scenario”, outlined in the Sunday Independent today, Mr McCarthy says “the game is up” if the Government flunks the Budget on December 7.
“The sense of impending doom is also evident in the latest Sunday Independent/Quantum Research poll, which found that a massive 64 per cent believe it to be “inevitable” that Ireland will need the help of the IMF in the new year.
Wait till the Irish learn of the IMF’s track record at helping nations. Then they will really get a sense of impending doom.
Rising house prices makes housing more affordable
Noted Austrian Economist and financial crisis predictor, Peter Schiff, came up with a thoughtful concept he called the “Paradox of Rising House Prices”. The idea was that rising house prices make housing cheaper. Sounds odd, but it makes perfect sense. In 2006 Schiff wrote an article explaining that rising house prices are factored in when buyers buy. They expect equity to be formed. That means rising house prices make buying a house more affordable, particularly when houses are easy to remortgage. Simply refinance after one year for whatever price rise your house has given you. But when prices begin to fall, or stall, that affordability gain is lost, making houses more expensive.
But there is another theory your editor has pioneered. At least as far as we know. When you buy a house, what do you pay? What are your costs? The price of the home, you might think. Nope, unless you’re paying cash. More likely is that you took out a loan, providing the deposit and making the loan repayments over time. Those are the costs, not the house price. Now, do deposits and loan repayments get larger or smaller given rising house prices? Well, if a bank perceives house prices rising as a safe bet, that reduces risk on the loan transaction very significantly. If the borrower stops paying, the bank is left with an asset that has gained value.
Given the lower risks of being in the mortgage business, the market does the rest. Loan providers will compete for business and drive costs for borrowers down. Required deposits fall and interest rates go lower as lenders out bid each other for customers. Eventually, … presto! Buying a house becomes cheaper!
From the land of bailouts, bubbles and billionaires
“Remember when Ronald Reagan was president? We had Bob Hope. We had Johnny Cash. Think about where we are today. We have got President Obama. But we have no hope and we have no cash.” – Speaker to be John Boehner during the election campaign.
Well, the election results are in. The House of Representatives goes to the Republicans, but the Senate remains out of reach. What does it mean?
Why are you asking us? It’s not like politicians’ rhetoric is something they stick by. That’s one of the main points Tea Party leaders are making after their mixed but influential performance. They are planning on keeping the Republicans honest, after G.W. Bush led them all over the place last time around.
As for the racist and homophobic elements of the Tea Party, they didn’t seem to turn out. In fact, gay and racial minority leaders did very well out of the Tea Party wave. The Tea Party darling Marco Rubio is the son of Cuban exiles and got elected as a Senator! The Democrats on the other hand have a bias against the living. They elected a deceased candidate in California.
The big question out of all this is what it means for 2012. Neither party has the mandate at this point. Who will take it when the time comes? Hopefully Europe will be pulling off austerity by then and Keynesians will return to their classrooms demoralised.
Speaking of Keynesians, check out this video on the subject. It’s about the impact Keynes made on the sanity rally held in Washington DC recently. No doubt attendees of that rally would decry the inequality, which is getting out of hand in that bastion of capitalism, the US. The rich are only getting richer, they say.
Only it seems that many of the self proclaimed billionaires are in fact not billionaires at all. Two people were so eager to pay taxes they filed multiple so called “W-2” forms, which made them multiples richer. The supposed mistake skewed the statistics dramatically for 2009. Top US earners went from income growth of 500% to a decline of 7.7% for the year. Oops. The fact that 2 people managed to muck up the report illustrates just how accurate the whole thing is.
Meanwhile, the bailouts continue, with AIG to receive a further $22 billion for restructuring. We can’t keep track anymore. Nobody needs to really, considering the money is being printed out of thin air anyway.
Exit the Fee
Regarding this exit fee shenanigans that Treasuer Wayne Swann has come up with, we have little to say. Particularly in the light of the pain, suffering and violence involved in the issue. Simply ponder this: If exit fees are abolished, where will banks recover the lost revenue?
Probably by charging mortgage holders higher rates. So, those who do not want to swap and change mortgages will take on the costs of those who do. And everyone will be paying more. Best of all, if you can easily change mortgage, why read the fine print in the first place? That in turn means banks can include more dubious clauses. Government intervention will not solve this. And you can’t increase competition with more regulations.
The Average Queenslander
Australian license plates are ridiculous. Victoria is not “the place to be” and Queensland is not “the smart state.” Going by the amount of Victorians driving around Queensland, it’s the other way around. But to the point, the Courier Mail reports on the severely struggling average Queenslander.
New figures show the average Queenslander is left with only $18 a week after basic costs, which do not include medical bills, insurance or entertainment.” And despite Queenslanders supposedly liking an underdog status, this isn’t what they had in mind.
So with the latest rate rise and Commonwealth Bank decision, it’s tough times for the maroahns. Then again, “an $18 “horse dress” bought online has upstaged Melbourne’s most stylish on the biggest fashion day of the spring racing carnival.” Yep, a fashionable north Queenslander took the honours.