The Economy

 

“Do you not know, my son, with how little wisdom the world is governed?”
Axel Oxenstierna

Count Axel OxenstiernerSwedish statesman Count Axel Gustafsson Oxenstierna af Södermöre wrote that to his son Johan in 1648. Young Johnny was feeling anxious prior to taking on an important European diplomatic job. Oxenstierner Senior pointed out that the world was—as it still is—run by people a lot less switched on than most of us assume.

It’s been all downhill in the intervening three centuries and I wish I’d cottoned onto the problem a bit earlier myself.

…each of these perspectives comes to the same conclusion, which is that our global economy is out of control and performing contrary to basic principles of market economics.
David Korten

Economics 101 from the few who understand

Around the world, those in charge are making a total cock-up of economic management. Here in New Zealand, then Reserve Bank governor Alan Bollard was paid $600,000 p.a. to declare the world’s recession over in 2008; Prime Minister John Key and Finance Minister Bill English have been regularly predicating rosy outlooks upon the overly optimistic forecasts of the same Reserve Bank. They’ve all been peddling fantasy ever since the financial crisis started in 2007. Here I’m posting snapshots from people who really understand what’s going on.

When the meltdown started in 2007 there was a cry around the world of “Why did nobody see this coming?”.

Well some switched on people did, including—forgive my immodesty—One Wild Kiwi. Not because I understood economics all that well, but because I know who does. Hardly anybody listened to the right people, in fact they were derided, abused, and often fired. They were of course correct and if you’d like to know what’s really happening here are some of those people whose views are of value:
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How the 1% are cleaning out the rest of us: Part I

Occupy Wall Street posterThe Occupy Wall Street movement seems to be gaining momentum and there are people with a good track record of predictions—Dr Ravi Batra for instance—who believe that the time has come for such a movement to change the world. The non-productive money manipulators have broken the free market capitalist model and I’m hoping that pay-back time is nigh.

Where I part company with the Occupy Wall Street folk is that I don’t believe capitalism is the problem. Capitalism works well when adequately contained. It’s the failure of governments to regulate it that’s the problem.

Here is one of the ways the fat cats are creaming the system and destroying the world’s economy for the rest of us.

“Window Dressing”

The money managers borrow short term and use the loans to finance big risks without their shareholders’ knowledge. Then, prior to balance sheet publication, they sell the most toxic of those investments and pay back those borrowings. With luck, they make a killing on the dodgy assets without getting caught. The managers’ bonuses are earned on short-term gains, so their interests are not in line with the interests of their clients who want medium to long term gains on their investments.

The deceptive practice of some mutual funds, in which recently weak stocks are sold and recently strong stocks are bought just before the fund’s holdings are made public, in order to give the appearance that they’ve been holding good stocks all along.

The deceptive practice of using accounting tricks to make a company’s balance sheet and income statement appear better than they really are.
Investorwords.com

From The Wall Street JournalIt doesn’t always pay off as MF Global Holdings may discover very soon. The Wall Street Journal found such activity among “primary dealers,” major banks and securities firms that trade directly with the Federal Reserve are borrowing big during the financial quarter to invest in short-term high-risk investments to maximise their bonuses.When the end of the quarter looms they temporarily reduce borrowings by substantial amounts to hide their dodgy dealings.
Furthermore, the Journal reported in 2010: WSJ uncovered this dodgy practice at MF Global Holdings Ltd, who are filing for bankruptcy protection.

A Journal analysis of financial data from 18 large banks known as primary dealers showed that as a group, they have consistently lowered debt at the end of each of the past six quarters, reducing it on average by 42% from quarterly peaks.

Wall Street Journal 2011

Unfortunately the gambling hasn’t paid off this time:

From Reuters:

Call it the mother of all margin calls: Up to 50,000 former customers of bankrupt broker MF Global must find some $1 billion in additional collateral almost overnight, or be forced out of their trades.

Next: How the 1% are cleaning out the rest of us: Part 2

 

I hate to say I told you so

But I told you soPoliticians are like diapers; they need to be changed often and for the same reason. Mark Twain

After the latest financial meltdown the cries were heard around the globe,

“Why didn’t anybody see this coming?”
“Why weren’t we told?”
“What are these economists smoking?”

We were told.

If you were one of those crying out, you were told. You just weren’t listening to the right people. You were told by Nobel Laureate economist Dr Paul Krugman; by Dr Doom, Nouriel Roubini; by people of integrity right here in New Zealand: Gareth Morgan, Colin James and Rod Oram.

Way back, before the New Zealand 2005 general election, the Wanganui Chronicle published a letter from me. I wasn’t prescient. I was just listening to the people who knew what they were talking about:

It was a relief to find that through your editorial column that our biggest problem has been addressed: the balance of payments. Neither the political parties nor the rest of the media are addressing the matters of most concern: what should we do to grow the cake so that we’re all better off 5, 10 or 20 years down the track.

Everyone’s excited by huge government budget surpluses. They’re blind to the fact that the balance of payments is massively in the red. It’s as if Mum has an extra thousand bucks in the housekeeping jar, but Dad’s putting the mortgage payments on VISA and spending the income at the pub and the TAB.

The major parties with their vote buying strategies are hell-bent on creating a big spend-up. They will exacerbate our already frightening deficit. If we’re to gain anything from having some of our money returned to us we must be bludgeoned into increasing savings, retiring debt and reducing spending.

The crunch will come. Don Brash knows it, Michael Cullen knows it. For short term political gain, or maybe because neither of them wants to win this election, they’re prostituting themselves.

A plague on all their houses.

Give me a checkbox on my ballot paper marked: None of the Above.

Those who cared to pay attention could see what was happening very clearly. And now we’re stumbling along at the mercy of the unprincipled and the incompetent. Politicians whose definition of integrity is whatever it takes to win the next election and our enlightened Reserve Bank Governor, Dr Alan Bollard, who declared the current recession over in 2008.

It’s a bit of a worry.

Tax cuts? Yeah, right

You’re gonna pay

It’s my birthday today. I’m contemplating how much the gifts in the offing are going to cost me. Michael Cullen, with no obvious signs of embarrassment, is finally talking tax cuts from those extra billions of your money which Treasury have “misled” him over for years. Nothing to do with poll ratings and looming elections of course.

The National Party will now be sucked into the race and we’ll all be the losers in the end. Just in case you’ve missed all the expert comment here are a few points to ponder:

  • Any amount a tax relief worth having will be inflationary. The inflation pressure is already there thanks to oil prices, open slather borrowing for consumer items and punishing interest rates.
  • $15 a week more in the average earner’s pocket is a risible amount for all but those on the very lowest income rung.
  • If consumption driven spending occurs following a tax cut the Reserve Bank is obliged to drive up interest rates yet again. The rates are already obscene and the exodus across the ditch would turn from a flood into a raging torrent.
  • Interest rate rises will lead to increases in your mortgage or your rent and wipe out any tax cuts – and then some.
  • Who profits from our disgustingly high interest rates?
    • Overseas investors.
  • Who loses from said usury?
    • Mortgagees, tenants, consumers, business owners, investors in local business, employers and employees.
    • In other words, everybody.
    • That’s you and me.
  • Interest rates go up, so does the Kiwi dollar. Exporters take it on the chin again. More cheap plasma TVs, more borrowing, even more inflation. You get the picture.
  • Eventually the Kiwi will come down. Then what happens to oil prices?

There are alternatives

  • Give a substantial tax cut.
  • Tie that tax cut to compulsory KiwiSaver investment. Never mind that most KiwiSaver accounts are making less than money in the bank. That will change. Markets go up, markets go down, in the long term KiwiSaver will be a boon.
    • If we’d done this when Big Norm wanted to (even Winston First – one of his better ideas) we’d now have hundreds of billions available for local investment
  • Don’t keep on killing the golden goose with interest rate rises. Instead of controlling borrowing by making it more expensive, control it by making it more difficult.
  • Stop the disgusting bribery in the hire purchase industry. No payments for 3 years. No interest. Who are they kidding? If you fall for that bribery you’re paying up front. The TV that you buy under those deals is being sold at a huge profit. Do you believe that Harvey Norman are in the business of doing favours for the downtrodden consumer?
    • Go back to the days when you had to have a 20% deposit for HP. Sure, it’ll contribute to a downturn in retail, but the medicine has to be taken sooner or later.
  • Stop non-residents buying our land. We’re a low wage economy. You can’t tell me that people from higher income economies like the USA, Australia, the UK, et al are snapping up high country stations, coastal farms and cheap rentals in Whanganui for New Zealand’s benefit. And if you don’t believe that those purchases are inflationary I’d love to hear your argument.
  • Instead of talking up a storm about it, we need more action to grow the cake. The only way to increase each individual’s share of the cake without creating inflation is to increase productivity. Instead of wasting $1.5 billion on negligible tax cuts, invest that kind of money into R & D and into reducing compliance costs for business.
  • Slash interest rates. Use alternative measures to curb spending.

So where to from here?

roosting chickens

The chickens are coming home to roost

roosting chickens
The IMF suggest that the world is in the worst economic downturn since the Great Depression. In the US and here in New Zealand we’re in election mode. What have our current governments and our would-be leaders had to say about:

  • how we got into this mess,
  • what they intend to do about it
  • and how we avoid the next meltdown?

Not very much.

Wait for the bang

Major US financial institutions are going to the wall with monotonous regularity; many innocent bystanders have lost their houses, their life’s savings, or both. Tens of billions, possibly hundreds of billions, of US federal funding (also known as tax-payers’ money) is going to be needed to bail major lenders out.

How’s that going to play out? Is foreign money going to continue to be invested in the US? A falling US dollar, reluctance to fix the fundamental problems and endemic bad debt may keep investors’ purses closed. One good thing. Maybe at last we’ll see a revolt against obscene executive salaries and bonuses, especially for those who preside over poorly performing businesses.

Housing is overpriced around the world. Bad debt is endemic, building and construction are in decline. The US Fed chief gets it all wrong or doesn’t know when to keep his mouth shut. “What housing crisis?” he said. And he predicted that no more financial organisations would collapse after Bear Stearns.

Things are going to get worse. You can’t have major structural woes in the US without worldwide problems.

Meanwhile, here in the sticks

We will feel their pain.

Here in New Zealand our banking sector is probably OK, but other financial institutions have been falling like ninepins and there has been lamentable corporate and regulatory oversight of the sector. We regulate productive businesses until they’re strangled, but we can’t enact simple regulation to force financial institutions to act responsibly.

We allow their unprincipled principals to scurry out the back door with tens of millions ensconced in family trusts.

As everybody knows, we have far too much debt. As individuals and as a nation. So the weakening of the labour market is, and will continue to be, a real problem for many. People who are up to their ears in debt—credit cards, hire purchase and mortgages on homes with falling market value—are going to be in deep strife when their overtime dries up or their jobs go down the gurgler.

We’ve actively encouraged people to go into hock for LCD TVs and holidays in Bali. We’ve begged them to max out their credit cards and refinance their homes to spend up large on consumer goods. How stupid is that? Great for Nokia, Chinese plastic junk-makers, BMW and Sony. It may even have produced a few low wage, low productivity jobs in retail, but it’s wrecked our economy.

It’s grim and getting grimmer

Per capita employment has been growing, but working hours have been falling. Have businesses been hoarding labour? What happens next?

It’s already started. Thousands of Kiwi jobs are being lost. 26,000 in the last year. Risk is being reassessed around the globe. Economies with heavy current account deficits are in the gun. Our current account deficit of $140 billion requires 8% of our GDP to service. That’s $14 billion in interest payments. Money that doesn’t get spent on reinvestment, wages and growth. Money that goes to overseas banks’ shareholders.

The investment chickens are eyeing up their home perches.

How much of your mortgage interest payments go to compensate the overseas banks because they’ve been lending billions to dodgy borrowers? If we’d been responsible with our fiscal policies and our personal spending habits your mortgage interest rate would be 5% or less.

Why have we crippled businesses (also known as job providers) with the highest interest rates in the developed world?

We’ve done it in an attempt to stop spending.

Has it worked?

No.

What should we do?

Stop institutions lending irresponsibly.

How?

For a start:

  1. kill no deposit hire purchase.
  2. stop hire purchase interest holidays.
  3. restrict mortgage lending to 80% of registered valuation.
  4. stop owners of second and subsequent houses from legally screwing the IRD.