Negative Gearing: A symptom of a much bigger problem.

The “negative gearing” mania in Australia is largely a symptom of a bigger problem as without an expectation of excessive capital gains few would be getting excited about negative gearing ‘Oz Style’ (aka losing money operating an investment property in the hope that capital gains on the land will make the exercise profitable).

The economic model whereby the Australian economy is driven with RBA ‘bait rates’ and growing household debt is the core of the problem as that has driven and is continuing to drive the excessive capital gains on land/residential housing.

In short, land prices have been rising much faster than they should simply because rising land prices is the fundamental mechanism by which households are induced to take on debt and households taking on lots of debt is how the RBA drives economic activity.

The household debt “bubble” or “binge” was the great ‘invention’ of politicians on both sides of politics over the last 20 years – Howard and Costello discovered the ‘seam’ but both sides have mined it like “miner 49’ers” ever since. The process works as follows – households run themselves into the ground with larger and larger levels of debt  (from circa 30% of household disposable income in the early 90s to circa 160% now) while the pollies skim off the cream (some of the debt taken on by households) and use it to run surpluses or small deficits. Continue reading

RBA Watch: Minutes and Glenn in the “Big Apple”

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

The RBA have been busy overnight publishing the most recent minutes and a speech by Governor Glenn in New York.

What does this mean for interest rates in May?

Within the logic of the current debt driven economic model and a heavily over indebted household sector the tractor beam of ZIRP is almost inescapable so further cuts are just a matter of time.

Especially when the government is still deep in Clockwork Orange-style deprogramming of its mania for fiscal conservatism and the treatment is not showing signs of success – yet.

Having said that it is clear the RBA are getting worried about the frequency with which more and more people are pointing out that the Household Debt Machine is blowing smoke and dripping oil.  Normal people are just not borrowing and the Household Debt Machine is now running on an unstable and volatile mix of the “white shoe brigade” and that newly discovered (but last resort) source of debt demand the First Home Investor “FHI”. Continue reading

QandA Briefing: Mr Robb and his radical ‘Top Secret” TPP and FTA mission.

GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

Update:   Unfortunately, last night QandA managed to spend well over an hour on everything (including railway crossings in Melbourne) other than the top secret proposed TPP agreement.  The QandA producers apparently thought it not worth the time to allow a single question to the Minister responsible for keeping it a secret. 

On Monday 20 April 2015, Mr Andrew Robb, the Minister for Trade and Investment will appear on ABC TVs QandA program.   This special post is designed to give the QandA audience and viewers food for thought (and perhaps ideas for questions) whatever political tribal scarf they prefer to wear.

If anything, traditional conservative viewers should be the most concerned by Mr Robb’s efforts.

The focus of this post is the proposed but top secret Trans Pacific Partnership deal and the various “FTA” agreements that Mr Robb has been signing with unseemly haste on our behalf since the LNP took government in 2013.

The 6 key points about “Free Trade Agreements”.

1.     Free Trade Agreements are not about trade.

Free trade agreements are not really about trade in goods and services.  Or to put it another way, improving trade in goods and services (especially Australian goods and services) is not the reason that our trading partners want to sign FTAs with Australia.

Over the last few decades Australia has UNILATERALLY reduced the majority of its tariff and other trade barriers on imported goods and services.   That is why our shops are simply packed to the rafters with cheap overseas goods from the four corners of the globe.  Even our few industries with some remaining ‘trade protection’ – like cars – have very low levels of protection compared to most of our trading partners.

About the only remaining barrier to goods and services landing on our shop shelves are quarantine barriers and even those are under ongoing attack by our trade competitors who would prefer that our industries suffer from the same diseases as theirs.

Australians already have great freedom to buy goods at the lowest possible cost from whoever they want so if someone (say Mr Robb) tries to tell you the TPP and the FTAs about improving the flow of cheap toasters, T-Shirts and TV’s you can politely yawn as we have “been there done that” and we didn’t need a FTA to do it either.

2.    Free Trade Agreements are about capital flows.

Because our trade competitors do not need easy access to our markets for their goods and services – we have already given them that without asking –  the reason they are keen to sign FTA’s with Australia is because they want an easier path to pursue their preferred business model which is to manipulate their exchange rates by exporting capital.

When a mercantilist country (i.e. a country that manipulates exchange rates to protect their domestic industries) or its banking system buys Australian Government bonds, Australian banking sector IOUs or acquires the ownership of Australian assets, it is driving up the $AUS and driving down their own currency.

As you might expect this makes their domestically produced goods and services cheaper than those produced in Australia.

Australian industry finds its output cannot compete on the international market and against imports because our trade competitors are effectively placing a tariff ON our domestic producers by manipulating their exchange rates. So when Mr Robb applauds large new inflows of unproductive capital from our trade competitors – keep in mind that it makes OUR industries LESS competitive.  Loony stuff.

At this point it is important to distinguish between productive and unproductive capital imports as in theory some capital imports are productive and useful.   The problem is that Australia is drowning in unproductive capital imports that are more about exchange rate manipulation and the “currency wars” than anything else.     See this Glass Pyramid discussion and this recent note on the sale of Toll Holdings to Japan Post for more details and discussion of the differences between productive and unproductive capital inflows and how to pick the difference.

Be ready to note the way Mr Robb will blur the distinction to make it sounds as though we have to accept a mountain of unproductive capital from our trade competitors to get the limited forms of productive capital that we need.

3.    When it comes to Mercantilism – It takes two to Tango

A mercantilist country cannot export capital and manipulate its exchange rate without a willing partner (boofhead is a more accurate word) Continue reading

Don’t let the “mining booms forever” crowd off the hook.

GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

Note:  An earlier version of this edition referred to “cretins”. That was unkind to the cretin community. References have been replaced with “snake oil merchants”. Apologies in advance to law abiding and legitimate merchants dealing in that fluid.

Now that the end of the mining boom is rapidly moving to the realm of undeniable fact it is important that the snake oil merchants who promoted the idea of a mining boom that would last for decades are held responsible.

We are talking about those who said that a balanced economy should be thrown overboard to accommodate a land of ‘sweeping mine holes’.  Those who said that Australia’s fate was to be a destination for off-shore predatory capital – like some colony who never grew up.  Those who said manufacturing was for the birds and we should just leave that to our “currency warrior” capital exporting trading partners.

Care must be taken not to fall for the line / nonsense, that the snake oil merchants are already preparing, and that is to blame the victims who swallowed the BS hook line and sinker.  Who are the victims? All those individuals and small and medium sized businesses who made the mistake of accepting as reliable all the rubbish spouted by the mainstream press, over lobbied pollies, policy wonks and “pet economists” of the FIRE sector .

The lines run will be along the following lines “..no one was forcing them to borrow”,  “..we did not think anyone would take us seriously”, “..people are adults and able to make their own decisions…”, “…It should have been obvious we were all self-interested spruikers or as clueless as the next guy…”.  Basically the sort of stuff the tobacco industry and fast food industry rolls out when their products of addiction and disease cause injury.

The snake oil merchants know that by blaming the victim and “spreading the blame” it is more likely that they will be able to sneak away without censure or penalty. They also know it is more likely that the taxpayer will be called in to make their victims good rather than themselves be held to account.

Even worse we will get even more claims by people like Mr Robb Continue reading

IMF Watch: RBA told to give the Debt Machine more juice!!

GLASS PYRAMID ‘EXCLUSIVE’ SEALED SECTION CONTENT

As regular receivers of Glass Pyramid transmissions would be aware, the RBA and its Debt Machine maintenance techniques are a regular source of wonder and amusement to those of us who live in glass pointy things.

According to one of the remaining bits of the Sydney Morning Herald () devoted to real news, the IMF has been wagging its finger at the Reserve Bank of Australia for shirking its Debt Machine duties recently.

The Reserve Bank has been warned it may have to keep cutting already historically low interest rates to prevent Australians from becoming fearful of falling wages and weaker employment prospects.

Most shocking of all is the news that some group called “private economists” are worried. One wonders if “private economist” is some new euphemism for “economists paid by the private banks to say what suits their business model”.

The stark message, delivered overnight by the International Monetary Fund, will put more pressure on the RBA which is already being questioned by private economists for its recent interest rate decisions, with some accusing the bank of behaving unpredictably.

Unfortunately the article is lacking a clear explanation of what the IMF is really asking the RBA to do.  Rather than simply state that the IMF wants the RBA to:

  • further lower the existing “bait rates” to drive even more punters (but largely wealthy speculators) into the warm embrace of debt merchants and even larger debt loads.
  • and by doing so hope that some fraction of this freshly baked private bank ‘endogenous money’ when driven into asset prices might leak out into the broader economy via crumbs from the speculators tables (wealth effect) or from wages/ fees / slices of the action paid to renovators, spruikers, lawyers, finance brokers, real estate agents, house fluffers, reality TV show producers etc.

Continue reading

China: Is a hard landing inevitable?

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

No major impediments to the Chinese government ‘re-balancing’ the economy towards consumption and services and away from concrete and steel stuff.

All they need to do is to allow (i.e. one of the joys of being authoritarian) wages to rise at a steady rate and the citizens of China will do the rest.  Like most people around the planet the average person in China is quite capable of applying financial resources to improving their lives as they see fit.  (Yep – consumer sovereignty – a hate word for technocrats and know-all’s right around the world)

Sure this will put their export industries under pressure but providing they can maintain their trade balance neutral or close to it, those industries can be re-orientated (i.e they find new domestic customers) towards domestic production – just at a lower, less quality or feature rich, price point.

Of course they need to keep an eye on inflation but that may be less of a problem considering the deflationary pressures being exerted by their energetic credit growth in recent years. Experimenting with a modest and undeclared program of some mild variant of “QE for the People” seems somehow appropriate for the CCP.

The only real obstacle for China is overcoming the pressure to join the western orthodox economist club of magnificent theory that just doesn’t work in practice – or at least doesn’t work without massive unnecessary cost.

Politics of Fear: Coming soon ….in 3D “The Economy Edition”

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

“”…but my money is still on the possibility/likelihood they will try to avoid complete acknowledgement of what is unfolding….”

In response to the above comment by  that the Federal Government might still have its head gently resting in a large bucket of finest “Kurnell grade” sand.

Certainly the government has been spending too much time reading old waiting room copies of Readers Digest for news on what is going on economically but by now the ‘magic’ of the unfolding situation will be seeping into their thicker than average skulls.

POLITICS OF FEAR.

Nothing conservatives like more than Continue reading

RBA Watch: The Debt Machine is a “..little deuce coupe..”

The RBA has a rope tied to each arm and leg and a team of horses pulling on each.

They love their household Debt Machine – it is what they have been polishing for the last 20 years – but they may be getting worried that it might not thrive on the corrugated dirt track that lies ahead. The smooth asphalt of a commodity boom is what the Debt Machine really likes.

Leveraging up the proceeds of a commodity boom does not work too well for a CAD country in the absence of a commodity boom.

They may be realising that if they want to avoid blowing up the Debt Machine they may need Governor Glen to walk in front with a red flag and the last thing they need is for it to be in top gear as it jumps the gutter at the end of the last new Chinese ghost city subdivision and heads off down a traditional low return Aussie commodity bush track.

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

APRA Watch: Why is APRA doing very little as Sydney housing foams?

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

In this scene Michelle Pfeiffer reminds me of those still hoping that APRA (Valmont) will do “the right” thing with regard to how banks respond to the excessive demand for credit from speculators and assorted punters due to the “bait rate” program administered by the RBA.

As Valmont explains – it is beyond his control.

https://www.youtube.com/watch?v=cjUmvHBgHr0

The RBA “bait rate” program is intended Continue reading

Has the RBA lost its Mojo or is it just “idling” the Debt Machine.

To read the original version of this comment in the original context at Macrobusiness.com.au click this link. (link maybe locked – but there is a free trial available)

The RBA certainly seems to be waking up to the fact IT is the wrong tool for the job at hand.  The “bait rate” cheerleaders were left feeling desperate and dateless yet again as the RBA failed to deliver an interest rate cut on Tuesday.

While it needs to maintain new debt creation (money supply expansion) to support the existing mountain of interest incuring private and public debt that is spraying deflation rays in every direction,  the RBA can no longer pretend that a large chunk of that new debt / new money being created is NOT going to the wrong places – namely, wealthy speculators, prices of existing housing (yes and even to dog box purchases by foreigners) and other asset prices favoured by assorted debt Base Jumpers (apologies for the double negatives folks).

The grand, if increasingly musty, theory that new debt created by a private banking system would go to an optimal mix of productive investments across the economy determined by an invisible hand guiding a nation of rational actors is not producing empirical results that make for a nice graph

The Glass Pyramid suspects Continue reading