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Reckless Greed: How exposed are we?
Webdiarist John Pratt has collected some recent commentary on the global economic situation and speculates on its implications for our future. Thank you, John – this is an elephant that we must not ignore.
Reckless Greed: How exposed are we?
by John Pratt
Four weeks ago, Will Hutton wrote in the Observer :
Never in human affairs have so few been allowed to make so much money by so many for so little wider benefit. Across the globe, societies and governments have been hoodwinked by a collection of self-confident chancers in the guise of investment bankers, hedge and private equity fund partners and bankers who, in the cause of their monumental self-enrichment, have taken the world to the brink of a major recession. It has been economic history's most one-sided bargain. Last week's financial panic was further evidence of the extreme foolhardiness with which global finance has been organised and managed. There was the biggest one-day fall in Wall Street since 11 September, which spilled over into every world stock market and the largest single cut in American interest rates for 25 years as an emergency attempt to stop the rout. A new crisis emerged in an obscure American insurance business (monoline, it is called). To cap it all, there was the £3.7bn bank fraud at Société Générale.
The growing realisation of how exposed the financial system is – and from transactions that should never have taken place – is reinforcing the mounting credit crunch, which, in turn, is spooking stock markets. The US economy is weakening while in Britain new mortgage lending is at a 10-year low. The staples of a settled life – jobs, pensions and house prices – are all under threat.
The Australian stock market is experiencing another week of extreme volatility. How safe is our superannuation? How safe is the Future Fund set up by the Howard government, 61 billion dollars being gambled on the stock market instead of building schools and hospitals. Australian super funds are holding a summit in on April fools day in Sydney. This is a promotion for the event.
Australia’s $1 trillion superannuation industry is poised to deliver its best returns this decade. The industry has reported its strongest financial gains for four years in a row. Sweeping super reforms are boosting industry coffers, including profitability for sectors like retail and wholesale master trusts and self managed funds.
Just how safe is the $1 trillion? What happens if world markets collapse? Will the superannuation industry still be able to report strong financial gains? What happens if the US goes into recession and the Chinese boom falters? Have Australians put too much faith in the continued growth of the stock market? Some experts think that we are due for a stock market crash.
Back in November 2007, Dan Denning wrote in the Daily Reckoning:
Your guess is as good as ours. All we have here is our knowledge of history and market cycles. We seem to be at the apogee of a great growth cycle. But if you look around in the two main engines of that cycle—China and the US—you begin to see evidence that the cycle is at its limit. A great contraction is in order. Or even a crash.
“Crash is coming, warns top investor,” write Jason Dowling and Peter Weekes in the Age. The gentlemen have spoken with Leo de Bever, the chief investment officer of the Victorian Funds Management corporation. He thinks that when things can’t get any better, they don’t.
“The man responsible for investing AU$41 billion of the State’s money has warned mum-and-dad investors to prepare for a massive sharemarket crash. He says a dramatic downturn is inevitable as the rapid rate of investment is unsustainable, and the repercussions of the US$300 billion subprime lending crisis in the US are yet to be felt fully.”
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Imperial realities
Roger, in the good old pre-WW2 days of empire, colonies were about an assured supply of cheap raw materials, plus markets into which the industries within the empire could sell their goods under various imperial preference (protection) plans. Pre-WW2, most Australians drove British cars or else American ones made in Canadian factories (eg Fords).
This arrangement came unstuck at the end of WW2 when the Australian government wanted to set up car manufacturing in Australia. No British company could do it; the only volunteer was General Motors of the US, who drove a damn hard bargain. Thus Holden was born, and Austin, Humber, Morris, Riley, MG, Jaguar, Bentley and Rolls-Royce slowly but steadily bowed out, along with imperial preference and everything else Bob Menzies held dear.
Cut to the present: There can be little doubt that the US invasion of Iraq had at least something to do with oil, and many Webdiarists have expressed the opinion that the US military secured the place for the likes of Halliburton: a classic imperialist move. So according to this theory, the US motorist should be enjoying record low retail petrol prices at the moment, and driving out of the service station singing the praises of GW Bush and his neocon mates.
This is not the case. From Reuters (March 11, 2008):
As far as I have been able to find out, this site has the most up to date (2002) comparative retail petrol prices by country, based on World Bank data. This shows the US in position 102 out of 141 countries in descending order of petrol prices. I would be interested in finding out what the US ranking is today, but suspect that it hasn't changed much as a result of the Iraq War.
Now to your projected and forthcoming Chinese Empire: The current problems the Chinese face in Tibet are a foretaste of what is to come if they should be so old-fashioned as to continue down the imperial road they have inherited. The last attempt at conquest of Australia was made by the Japanese, and involved the preliminaries of China, Vietnam, the Philippines, Malaya, Thailand, Burma, Indonesia, New Guinea and assorted Pacific islands. Yet the Japanese as a nation today are arguably as well off as they would have been if they had kept the 'Greater East Asian Co-Prosperity Sphere', which was what they called their short-lived empire, and the huge armed forces needed to garrison it. In short, empire (like crime) does not pay. At least not any more.
The (bizarre) clincher is Quebec, forever dissatisfied as part of Canada. Its Southern Hemisphere equivalent is New Zealand, which at the time of Federation declined to be joined with Australia into one nation. So it is happily independent, but economically just as locked into Australia as Quebec is into Canada.
I suspect that today no bureaucrat in Beijing is courageous enough to suggest that Tibet be given its independence, and a future as assuredly linked to China's as New Zealand's is to Australia's. But at the same time, I doubt Beijing's appetite is being whetted for further conquest.
Santayana Rules
Hi Ian, I have prefered to think about US strategy in the light of "having it" rather than "what we pay for it". My assumption is that the corporate realists who pull the President's strings made the Hubbert connections immediately in 1974. It coincides with the Nixon/Kissinger initiative to hold its enemy close. While the conventional wisdom held that N/K wanted to drive the wedge deeper between Russia and China it would have been apparent to forward thinking analysts that China would eventually prove to be the US's greatest threat because of its unlimited potential.
I have stated from the outset my belief that the US invasion of Iraq was all about oil and specifically an end run around China's ability to get Iraqi oil. If the US has Iraq's oil (and Greenspan admits it) then the Chinese do not. The longer that the Chinese do not, the longer the US has to develop its alternate strategies and stave off its slide into non-super power. As an interesting little side note, in the press reports about Cheney's visit there was a single line that was completely overwhelmed by the brilliant tactical diversion put on by Cheney and Bush. By loudly promoting the infuriating lie that things were going well, that line was left uncommented:
The real fear for the US power elite is what will happen on the day that the 300 million+ realise that their day in the sun is over. When a US president has to address the nation and admit that the Chinese now run the world show there will be hell to pay.
In this scenario, the price of oil is irrelevant. For the time being (actually for as long as Japan, Saudi Arabia, China, the UK and other agree not to pull in their Treasury bill markers) the US can print "funny" money to pay for oil with relative impunity. Goods need to flow in and out of the US and USD greases the rails.
Eventually, when the Chinese no longer have need for US technology, the US will be allowed to collapse and the Chinese, like every empire builder before them, will ignore Santayana's aphorism and ignore history's lessons.
They will be bullies on a scale never witnessed before because the world has never had to deal with a 1 billion+ people superpower before. Only India will have the capacity to stand against the Chinese and eventually supplant them.
Santayana's Rule (via the refresh button)
Roger, googling around to refresh my overloaded brain as what what Santayana's Rule actually was again, I came across this:
"What was it he said? Ah, yes... 'Those who refuse to learn from the lessons of history are doomed to repeat them.' Let's look at some history. IBM created a PC with a proprietary architecture. Others created an IBM-compatible PC that was an open platform. Which one is around today? Apple created a brilliant PC device with a closed architecture and a proprietary operating system. Microsoft created an open OS platform and actively recruited developers. Which one owns the market today?"
The internet comes up with some marvellous revelations. On my own I probably would never have seen such an analogy between open computer and political platforms, but there it is: the Chinese in Tibet are fighting to maintain a closed platform, while the Tibetans want a more open one. Nothing in their own history has been more savage and repressive than Chinese rule. The Chinese are valiantly trying to reconcile Stalinist politics with a crony capitalism masquerading as a free market special, where so much in recent and not so recent history is yelling out that every thing should be open-ended and be connectable to everything else.
Who is better connected to the world: the Dalai Lama, or the latest faceless bureaucrat at the top of the Chinese pyramid?
"They will be bullies on a scale never witnessed before because the world has never had to deal with a 1 billion+ people superpower before. Only India will have the capacity to stand against the Chinese and eventually supplant them."
Perhaps, but they will still remain one-sixth of the world's population.
However, should the US try to close an energy loop of its own with a gasoline strangle on the Chinese, I would bet on an overnight alliance between China and Venezuela (and sundry others) in response. 1962 all over again, with bells on.
However hard the control freaks of the world work to create a closed shop, it won't happen. There are too many wormholes, mouse holes, rat holes, rabbit holes and wombat holes to plug, and they all work against the a***holes.
Very Interesting
Ian, your argument makes sense and assumes that reasonable people have control of the various levers of power.
While I don't claim any special insight into the American psyche I have had the opportunity of seeing that country from the perspective of the insider having lived there for 8 years.
I have American friends and acquaintances and my friends are dear and special to me. They all have a quality unknown to most Australian, the sheer certainty that they are the power elite of the world. It manifests itself subtly and I rarely saw its raw and blatant triumphalism. Yet it is always there. It is in the way they view their country, in the way they view their government and the way they see the rest of the world. It is in the way that their news is presented and in the comments within forums like this one.
I was working there during the Iraq invasion. With the exception of National Public Radio you would be hard-pressed to know that there was a Coalition of the Willing. I witnessed weeks of relentless propaganda. Occasionally you would see a momentary appearance of the head of state of another country, Spain was one that came to mind. I think I heard Australia mentioned once on CNN, twice on NPR and not at all on Rupert's network.
The need to keep the US at the forefront of world affairs is continuously serviced. I believe that the closed loop that you speak of is actually every present in the minds of the power brokers. It is foolish and futile, as Santayana has alluded, but it will drive the US nevertheless.
I don't believe that any empire has ever accepted its demise until after the event.
Paul, you have a unique perspective. I don't understand it at all. It seems immune to the type of logic that I acknowledge but, hey, maybe it makes the world go around.
Europe
Doom and gloom everywhere
That's nothing. Check out these...
But there, is of course this, from 1978
Banks
Scott Dunmore, re “can I counsel you against reading into a post more than is there?” I agree with this advice Scott, the written word is easily mis-interpreted, I thought my last post was pretty harmless.
Re “Don’t try and explain bookkeeping to me” I don’t know what your background is Scott, I just tried to answer your question.
Re “please explain to me what bookkeeping has to do with company balance sheets and auditing” this is in the link from my previous post.
From the Wiki page “In accountancy, the double-entry bookkeeping (or double-entry accounting) system is the basis of the standard system used by businesses and other organizations to record financial transactions” Of course any bookkeeping / accounting entries that hit asset or liability accounts would then end up on the balance sheet.
Re “Here I suspect you of naivety: how can you be sure?” I’m sure Scott, the RBA doesn’t do overdrafts. This PDF link about the Exchange Settlement Account is a brief rundown on how interbank payments are settled within
Re “No depositors’ funds, only shareholders' equity” Ordinary deposits are loans too (as far as a bank is concerned) and can be even more short term than the funding methods RAMS used to finance its lending. Northern Rock found this out the hard way.
Milt The Stilt
Scott Dunmore: "Paul, you’re in the same boat. If you knew about Friedmann what the hell was the reference to him doing in your post in the first place? And what on earth was the reference to Naomi Klein all about? (I had to Google her and I can see only a tenuous link.) What’s this all about? If you can’t beat ‘em with science, baffle them with bullshit?"
Again Scott; I think we have our wires crossed. Milton Friedman (hugely unfairly) is often linked to the Reagan/Thatcher governments - along with many more brutal governments. He in life (and it has become worse in death) was a hugely maligned man in certain circles. People can fairly argue with his schools economic policy (opinions are a freedom thing); however, arguing the personality(morals) of the school is plainly offensive, and wrong. The aforementioned Ms Klein is one of the new (popular in some circles) practitioners of this art.
Warning, this post may cause drowsiness
Scott Dunmore, at the risk of boring you to tears with the fundamentals of accounting. Double entry book keeping underpins all the worlds accounting systems and accounting standards. For every debit there must be a credit. These systems and standards are how the reported profits (and losses) you see in the financial news are calculated.
In the last few weeks I have seen and read dozens of views on what the future holds economically. Marc Faber has been one of them, I’m not sure what specific points you wish to draw to my attention?
Nellie Melba it is then
Gareth, can I counsel you against reading into a post more than is there? We weren’t locked in mortal combat; I had decided to withdraw from the debate for a reason. I thought you would be interested in the 7.30 Report transcript and put it there for the benefit of you and others. You have, however, irritated me and for that you can have a serve.
Don’t try and explain bookkeeping to me; one of my first jobs on leaving school, the best part of fifty years ago was that of a bank clerk in charge of ledger keeping in a branch of a minor bank in Tottenham Court Road. I had “Personal” and “Impersonal” accounts and had to balance the two every day before I could go home. You’re digging yourself into a hole. Again in all sincerity, please take a deep breath, close your eyes and exhale slowly. Did I sting you? That wasn’t my intention but your response looks like a knee jerk reaction. If you care to, please explain to me what bookkeeping has to do with company balance sheets and auditing. I’m open to ideas and if you can I’ll not only be grateful but gobsmacked.
“It’s not possible to lend money you don’t have.“
Here I suspect you of naivety: how can you be sure? With interbank lending and labyrinthine paper trails who the hell can know? (Including me; I’m merely voicing my suspicions.) RAMS, Aussie Home Loans? No depositors’ funds, only shareholders' equity. Here’s an adage: you don’t borrow short term to finance long term investments.
“the bank has to hand over real dough.”
Oh yeah, what are we talking about here? $100 bills, gold? Wise up.
I make no claim to be anything other than an analyst (although you should catch my dance moves), but any analysis I make is only as good as the information I have. I think you can do better than that. If you can score some hash, THC has the effect, as I remember, of inducing otherwise unachievable perspectives and thoughts, many of which are retained and are of value.
Paul, you’re in the same boat. If you knew about Friedmann what the hell was the reference to him doing in your post in the first place? And what on earth was the reference to Naomi Klein all about? (I had to Google her and I can see only a tenuous link.) What’s this all about? If you can’t beat ‘em with science, baffle them with bullshit?
“Do you agree the problems are being redressed at the moment?”
No they bloody well aren’t: they are being exacerbated in the case of Fed intervention. Read my previous link.
Ditto this, “I hope you’re not advocating the issuance of more worthless USD.”
Read what Dr Marc Faber has to say.
Both of you can have the last word if you want; I won’t be responding.
Ups And Downs
Roger Fedyk, I agree with you.
Scott Dunmore: "Friedmann himself decried the selective abuse to which his economic theory was subjected in order to give intellectual credence to a political agenda."
Yes he did. Somebody should pass on the message on to Naomi Klein. They could also tell her the poor little rich girl routine is wearing a little thin.
The United States has huge fiscal scope at its fingertips. The US dollar isn't worthless - that's just silly.
Do you agree the problems are being redressed at the moment? Has it ever crossed your mind that intervention is the reason for it not being redressed years ago?
The United States will survive this recession the same as they have survived the recessions before. Be it a bear or a bull beware the words: This time it will be different.
Gadzooks Batman
Scott, the side track began with Rudd promising something to someone.
Paul, while it is not disputed that we will survive the current situation, the US will suffer the same fate as Britain. In a mere 30 odd years the British went from world masters to bankrupt with two world wars exacerbating their plight. If you asked an Englishman in 1900 what were the chances of the sun setting on "the empire on which the sun never sets" you would have gotten a right royal bollocking. It was inconceivable that in the moment of greatest power were already sown the seeds of disintegration. So badly did the Poms suffer that it took until the early 60's before all rationing ceased and the UK only made the last payment on Lend/Lease to the US last year.
The US will not bounce back to their former eminence. The world has irrevocably changed and the US will slide to a B power. When the current situation eases in 3-5 years, China will be primed for next huge step that will push it past the US. The Americans will be left ruing the trillions of dollars that have been wasted and are still to be wasted in Iraq. The US reaching of the break even point, namely when the oil they control in Iraq is only going to repay the military outlay to get it and keep it, will see an accelerated decline in US fortunes. By that time the foreign hold over US assets particular in the form of trillions in Treasury Bills will see the US either default and/or assume the secondary status currently occupied by the UK.
The house of cards will be kept standing for some time yet because it is not in China's interest to see its largest market decline. However, the Chinese will have already planned appropriate retribution and humiliation for what they believe they have suffered for the past 60 years at US hands.
Declining Empires
Actually the second half of the Victorian era was characterised by anxiety about the empire, the fate of civilisation (they thought them roughly equivalent) and so on. Joseph Conrad's brief but wonderful 'Heart of Darkness' captures this mood brilliantly. Kipling shows well this sort of anxiety. The emotional urgency about defending the empire came from its being threatened - If is a testimony to stoicism not complacent triumphalism.
American public rhetoric shows far more arrogance than the British at the end of the nineteenth century. It does seem they believe that they can spend on military stuff and never have to pay the bill.
This doesn't mean I'm looking forward to the triumph of China. Their human rights record I find truly chilling.
More Predictions
Scott, Paul, Evan : In 1990, I formed the opinion that the US empire was bound to decline and that China would rise, followed by India. At the time, not much about this was circulating in the national presses of the world and I developed my thoughts from whatever materials were available.
Around 2002, I first started reading WD comments later volunteering my own. At this time, I first encountered the Peak Oil debate with fiery exchanges between Ian McPherson and apologists for the other side. It was eye-opening to find out that in 1974 King Hubbert already foresaw the end of oil, during a time when the average person had not the slightest inkling of a future economic train-wreck that would happen when the black stuff was no more.
Whether we are more enlightened today is debatable. However, every person in the Western world potentially has access to information of the same quality as that which business and government use to make major decisions. In spite of this, as a group, we choose to remain ignorant simply believing that someone will solve our problems with no call on our own efforts. I see it in my own extended family where the prevailing attitude is one of naive optimism.
While no one wishes to play the "prophet without honour" it is saddening to realise that here in Australia we do not recognise the enormous threat to our national existence from China's rise. When the US is relegated to minor power, the Chinese bully will terrify the world and nothing will prevent it from annexing Australia. We will be the "lebensraum" for the Chinese expansion and what remains of our mineral wealth will become theirs. Sometime in the 22nd century Australia will cease to exist.
Those wise enough to see that future will be planning for their families' relocation to Europe in the next generation while the situation remains relatively stable.
Gloomy
Hi Roger, pretty gloomy predictions. I wish I was confident you were wrong or unrealistic.
I don't know about Europe wanting us by then. Pacific islands? But they will probably much reduced in size from sea level rise. Maybe India? - Australians can be quite popular there, especially if you know anyone on the Australian cricket team.
Can I leave now?
Firstly Gareth apologies for the manner in which I addressed you. It was uncalled for and please let me assure you had this conversation happened across my bar it would have been far more temperate. If it served no other purpose I suspect it gave our Roger cause for merriment but he wasn’t on the receiving end. (Just as well.)
We must agree to disagree on the relevance of double entry bookkeeping to the subject matter.
Thanks for the link. However, it doesn’t do much to allay my suspicions and I give you my reasons. The reason banks have cited for putting up interest rates is the higher costs of international credit. There could be good reason for this if what they are talking about is the difference between what they can get domestically as opposed to lending offshore but my suspicion is that they were/are borrowing money offshore to finance domestic debt. I could be wrong. There is an instance of banks lending not so much as what they don’t have but that which doesn’t belong to them. I’m talking about the short term money market. Twenty odd years ago my sister and I were remitted identical amounts from our mothers’ estate simultaneously. She received hers three days before mine. I also do a lot of internet banking. The money comes straight out of my account but the payees don’t receive it for two days minimum and four if I’m silly enough to do it on Friday. Also EFTPOS transactions that I make on my terminal I know are debited directly from my guests’ accounts; I don’t see it for two days and four for Fridays’ transactions. I’d refer you to previous comments I have made on paper trails etc. My background could be best described as chequered if you’re interested. I’m a sixty five year old who doesn’t know what he wants to be when he grows up.
(You’re not a bank employee are you? Only joking.)
I’ll leave it there.
Sorry
Paul, I must have been in a foul mood. From what I've just read you have a better knowledge of Friedman's life and times than I, it's just the way it came across two posts ago and I certainly seem to have the wires crossed.
Roger, my thoughts exactly for a number of years now; do think there was a master plan there? Imagine the the consequences of China dumping its dollars and revaluaing its currency. We'd be quoting the price of oil in yuan.
Fudged money
Scott Dunmore, Re “you’re telling me that the worth of an organisation is a variable depending on the accounting methods applied.” Of course, this has been the case since double entry bookkeeping was invented centuries ago. Do you realise Australian companies with dual listed shares here and in the
Re “Lending money they don’t have is doing exactly that.” It’s not possible to lend money you don’t have.
Re “fudged figures on data bases have exactly the same effect.” A home buyer taking out a mortgage cannot settle with ‘fudged figures,’ the bank has to hand over real dough.
In really really short terms, banks borrow money (deposits etc) and on lend it to commercial and residential borrowers claiming the margin in between. In order to prevent banks running out of money, they are required to support the whole operation by retaining a portion of liquid funds (typically funded by shareholder equity/capital).
Many US states are going broke due to decline in tax revenue.
Many states in the US are struggling to maintain services. This will mean more job loses and a move deeper into recession. The first to suffer will be the sick and elderly. On the bright side fewer prisons will be built, but that might lead to a crime wave. How long before the suffering US population will demand a big cut in defence spending?
Disclaimer disclaimed
That site is back up, Paul: pick up a house and block for nothing.
Please, Gareth, have mercy on me...
"As for where the money went, one place would be American housing stock. There’s no such thing as a ‘housing crisis’ in the US - American first home buyers can pick up an average house in a place like Austin, TX (high growth town similar in size and nature to Perth) for less than $200K."
As opposed to "Expensive houses, expensive loans" down under...
"A STATE of permanent transport gridlock is threatening to choke Sydney as it grows by a forecast 1.1 million people over the next 20 years.
The Iemma Government has released draft targets for each local government area to house the population boom, promising that $7.5 billion in road and rail infrastructure, bus services, open space, schools and health facilities will follow.
Under the draft plans compiled for the Government's Metropolitan Strategy, 600,000 new dwellings will be built by 2031. The City of Sydney heads the list for the number of new dwellings with 55,000. A further 248,000 will be built in nine western Sydney council areas."
55,000 "new dwellings" in the City of Sydney? I guess they're flats.
Anyway, there's no actual "population boom" in Australia. It's a population growth "policy" based around the "need" for skilled labour.
A house for under $200K? And that's just US dollars, not real dollars.
Cheap houses and expensive loans
Scott Dunmore, I hope you don’t mind me interjecting here to explain a few points.
Re “What happened to all that money? After all, if it existed in the first place then somebody else should have trousered it but they haven't.”
The losses being reported by investment banks relate to asset write downs. Accounting rules have changed in the last few years and now require market traded assets like mortgage backed securities (MBS) to be re-valued on a regular basis (typically daily internally, reported publicly quarterly or half-yearly). If the value of an asset increases it is reported as a profit and in the current environment the reverse happens. For example bank A bought 1Mil MBS for $100, they now trade at $20. Therefore bank A has ‘lost’ $80Mil.
As for where the money went, one place would be American housing stock. There’s no such thing as a ‘housing crisis’ in the US - American first home buyers can pick up an average house in a place like Austin, TX (high growth town similar in size and nature to Perth) for less than $200K.
Re “What do you make of inter-bank lending? My take on it is that it's a pass the parcel game whereby banks were making heaps out of money they have been printing themselves which I doubt is a healthy practice and have been allowed to do so by governments trapped in an ideology that worships deregulation.”
Interbank lending is rarely a source of profit, rather a mechanism that ensures liquidity throughout the financial system. Banks can’t ‘print money’; they lend to a certain % of their capital base, which is determined by various prudential requirements (managed by APRA in Oz). Under the old regulated environment banks were able to make a ridiculous margin on mortgage lending (something like 2-3%). Since competition was allowed, the margin is closer to 1% and often less. Under the old environment the standard variable home loan interest rate would be more like 12% at present.
No interjections here
I don’t consider your post an interjection, Gareth. This is an open forum and all reasoned responses are a contribution. However, while I suspect, in all sincerity that you have a better knowledge than myself of the mechanics of international finance your answers aren’t helpful to me.
“Accounting rules have changed.” You‘re confirming what I thought. There’s, I suspect, an unconscious irony here; you’re telling me that the worth of an organisation is a variable depending on the accounting methods applied. That’s got to be a worry for investors especially those charged with the duty of investing other people’s money.
“Banks can’t ‘print money’.” Lending money they don’t have is doing exactly that. Of course it’s not ‘printing money’ in the literal sense, but fudged figures on data bases have exactly the same effect. I read in the Business section of the SMH on Saturday that two banks, half a world apart, are investing 1 billion dollars in each other. Que? That looks like a hedge to me. I freely confess I still don't know what a hedge fund is but I do know what the word means in gambling parlance: it's what you do when you're over exposed and nervous. There's an adage; you don't gamble what you can't afford to lose.
Paul, I don’t want to spoil your day but there’s something I forgot.
“it is synonymous with Milton Friedmann.” Friedmann himself decried the selective abuse to which his economic theory was subjected in order to give intellectual credence to a political agenda. Reagan was an idiot; only slightly less so than the incumbent and it is highly doubtful he would have ever read Friedmann let alone understand him.
Bloody 'ell; this stuff is doin' me 'ead in.
How to turn $150 into $2
How to turn $150 dollars into $2.
A lot of Moms' and Dads' super funds are going to be hit hard.
And People Want To Give Them More Power
Justin Obodie: "It is interesting to see capitalism at work and how many a capitalist will seek protection from the taxpayer when capitalism comes crashing down about them."
That's not true capitalism, and I've made the point ever since I began posting here. It's a good reason for the current mess though.
Call it robber capitalism, and we'll always have it whilst we have politicians. Business and politics is the love that dare not speak its name. People like to believe they can change this - good luck I say to them. We privatize our wins and socialize our losses and it has ever been thus.
This form of capitalism also works in communist and socialist societies - only there for the party faithful - more often than not completely useless entities (at least in corporations a form of Darwinism does exist). It is no coincidence the hot blonde always seems to find her way into the nice suburb - under any system. I might ask for an explanation from freakconomics guys in their next book.
True Capitalism?
"true capitalist "
That is an interesting term, Paul, and makes me wonder what true capitalism is.
Is true capitalism that brutal type of centuries ago or the more socialistic kind we have today?
It is interesting to see capitalism at work and how many a capitalist will seek protection from the taxpayer when capitalism comes crashing down about them.
The problem with capitalism is that, when left unchecked, it will quickly sort out the players from the punters; many will be left wanting; and if over checked things can simply stuff up all together.
Capitalism in many ways is a double edged sword, it brings out both the best and worst in humanity.
Only a healthy democracy (the heart) can keep capitalism (the head) in check.
The biggest threat to both capitalism and democracy is the unhealthy marriage of politicians and corporations who quite often do not act with the commonwealth in mind. This we know well.
Money Concerns Only Give You Cancer
Scott Dunmore, no problems and I apologize. Must have been something that got lost in translation. We move on.
The problem that is haunting all of us now is something that should have been avoided (at least to this extent). The reason we are all in this mess is exactly the thing you wish to see more of - government intervention. The Fed was lazy after the dot com collapse - and took the easy and populist way out. The Fed was lazy on the Capital Management collapse - and took the easy and populist way out. The Fed is attempting to be lazy now - and there is no easy populist way out - it is time to suck it up.
The problems you discuss have been known about for years. It is the duty of investors to take such risks into account. It is also the duty of such investors to accept the punishment that comes with such decisions gone bad. The system works, and exactly what is happening now proves it works. What you are witnessing is something called a readjustment - such an adjustment should have (as you stated earlier) taken place a long time ago - the higher the rise, unfortunately the further the drop.
This is a complete fiction - and no serious thinker could promote it. The US economy is in a period of readjustment - and it will cause pain - lots of pain. It is however a long way from bankrupt, and it will end up nowhere near being bankrupt - that's just silly.
The coming close of the cold war had more to do with this than Reagan could ever have. If what you are referring to is the deficit that is the easiest thing to fix. The US economy has huge latitude to readjust this in a relatively short period - it won't be without pain but the choices of doing otherwise no longer exist - and it is long overdue in my opinion.
"Reaganomics" as you call it is synonymous with Milton Freidman. The monetary policies of Milton Friedman did happen to end years of stagflation - the thing we are now entering, and the thing rarely mentioned by its detractors. Any monetary system will work if it is followed to the letter - something very few governments ever do. And you wish to give these very same people even more power?
Sure we are risk, and life will get a lot harder for a lot of people. This is the shake-up of the captalist system - exactly how it is meant to and does work.
A good buy is always a good buy; a bad buy is always a bad buy (your choice so choose wisely). Nobody ever succeeds without the courage of their convictions - and he who dares wins has always been the true capitalist way; and it will always be the true capitalist way - that is why the true capitalist way is not only the greatest system it is the only system.
A can of worms
And we have taken the lid off one here. Paul, you’ve still a couple of questions to answer but your forgiven, I don’t want to keep you up all night. As with everything else, answers beget more questions, and I tend to agree with Justin re the definition of “true” capitalism. Its definer and the only sensible economist in my book, Adam Smith, identified many areas in unbridled capitalism that could cause harm. I wonder what he would make of derivatives and the practise of short selling, essentially fraud and carried too extremes, a method of market manipulation. Should we let that continue unchecked?
“And you wish to give these very same people even more power?”
They already have the power; they just don’t use it wisely. I studied Economic History in my youth and it taught me one thing above all else: that market forces and regulation (or lack of it) only ever equalised things in the long run. One extreme to the other. We’re all both socialists and capitalists simultaneously; it’s just a question of degree. In a perfect world we would have no need of government in any form but we’re stuck with what we’ve got. As Churchill said, “Democracy is the worst form of government except for every other kind.”
“The problems you discuss have been known about for years", yes and never been redressed. How could the adjustment have been made without regulation?
“the deficit that is the easiest thing to fix”. I hope you’re not advocating the issuance of more worthless USD. Gold though is getting a good price; whether or not the Yanks have enough of it stashed away in Fort Knox and Manhattan is another matter.
“The US economy is in a period of readjustment”. Wouldn’t argue with you there but the time frame? How long to re-build their manufacturing infrastructure when the point comes that they, (and us,) can no longer afford foreign goods?
“the hot blonde always seems to find her way into the nice suburb”. I can give you the answer to that one without being a dismal scientist. It’s the same reason the fightingest tiger gets the tigress and kills any cubs sired by the conquered.
One last thought; “capitalism” isn’t a system, it’s merely a word for the way things work. Our stone age forbears were capitalists: if you were on top of your game knocking out flint spear and arrow heads you’d do better than others that weren’t.
Don't Blame Us: We Are Only Paid To Govern The Place
Roger Fedyk: "Alan, in my opinion we could appoint "Ralph The Diving Pig" as our PM and he would do just as good a job as Rudd or Nelson or Turnbull. The ideological battle is totally pointless."
So I take it Roger you saw the light and didn't bother voting? Interesting line of argument and one I most certainly didn't read on here "pre-election" (it was an election for national survival or something back then). Perhaps Australia could get smart and transfer the entire government into the offices of Bear Sterns - cheap rental and God knows many there are looking for a new employment. Never it seems has a nation been governed by so many to do so little.
In defense of Alan; he probably only wants to know what happened to the promised cheaper gas, produce, and housing. And here I was going to try and get Mr Rudd inducted into the hall of economic fame......
An Opinion On Governance
Paul Morrella, personally, I have advocated, over my years at WD, the abolition of all political parties and the adoption of a direct governance model. The Australian Constitution does not mandate the creation of political parties. It does mandate instead that an independently elected representative champions the interests of his/her electorate.
What we have instead is a corrupt plutocratic duopoly that, in turn, plots and lies to gain power and continue lying to stay in power to distribute largesse to their patrons (not the voters). My preference is for Ralph The Diving Pig.
If Alan or anyone else have some expectations that either Labor or Coalition will satisfy their desires then they are fools. Of course if you are a hegemon member then you will be given satisfaction. That definitely does not include anyone blogging on WD.
As I have volunteered a number of times, the ideological battle is totally pointless: the political duopolists exist for each other not against one another.
Wrong topic?
While I couldn't agree with you more Roger I think you're on the wrong page. It's happened to me; we'll blame the moderator.
Gareth, instead of me flapping my gums (figuratively,) about a subject of which I only have a generalist knowledge, can I refer you this in case you missed it?
Can't quite grasp what double entry bookkeeping has to do with the subject matter though.
I'm outa here for a while, my wife agrees with Jenny re the doubtful qualities of blogging vis a vis turning a quid. (Unless I do a Jenny style Nellie Melba.)
Sixteen Years of Growth Was Good
Scott Dunmore: "Hey Paul, take my advice and take comfort in the knowledge we'll all be in the same boat."
Well I wouldn't want to speculate on my own financial situation, lest I be accused of diversion, temerity or passing judgment on the ability of a fellow diarist (in good faith) knowing more about my position than even me. I will say bull and bear market people do have one thing in common; the ability to pee themselves in anticipation and excitement.
My advice: Take comfort in the fact that everything has a ceiling and a floor. Bull and bear markets have happened before and they will happen again; what goes up comes down and goes up again......
You've lost me
Not too sure quite what you meant Paul but if you think I made any assertions in my last post about your financial status you're wrong. I'll make one now however: I'm sure you have more money than sense.
Smart arse comments aside (on my part), if you want to engage in serious debate I have some questions for you. How you answer will determine how and if I respond.
Don't you ever question what you see? Look at the figures recently quoted on losses of major finance institutions, in their multiple billions.
What happened to all that money? After all, if it existed in the first place then somebody else should have trousered it but they haven't. William Knox of ABN Amro on The ABC's business program this morning described it as "Monopoly money". It seems I'm in good company. What do you make of inter-bank lending? My take on it is that it's a pass the parcel game whereby banks were making heaps out of money they have been printing themselves which I doubt is a healthy practice and have been allowed to do so by governments trapped in an ideology that worships deregulation. Sixteen years of growth built on the back of credit has to end somewhere and the fallout could be very bad for a hell of a lot of people.
It’s not about bull and bear markets. As you say they come and go and any one who ignores the rules of P/E ratios deserves all they get although earnings can and do change depending on economic circumstances. A good price for a stock this year can be bad value the next.
The USA is an economic basket case and in the opinion of some very astute thinkers has been a dead man standing for a long time. “Reaganomics” took it from being the world’s greatest creditor nation to its exact opposite. The flight from the USD is starting to reflect this. If the US goes into recession let alone the “D” word think about the consequences for the world economy. If you have faith in the resilience of the US economy check this out, there’s a lot of bargains to be had.
There’s another factor and it’s not global warming. All our current wealth has been created (and must be maintained) on the back of cheap energy from a source that is experiencing unprecedented and increasing demand and static supply. If you doubt this check the current price for oil and coal.
On the question of, "are we at risk?" what are your thoughts on a scale of "Very much so" to "None at all"?
I desperately hope I’m wrong, I’m as vulnerable as anyone.
There’s my questions for you, Paul. Care to come up with some answers? By the way, I lied. I don't think there is much comfort.
Disclaimer
Since I started this post the site has changed and now makes little sense. At the time my son forwarded this link to me derelict houses in Detroit suburbs that were in the same condition were selling for $100 US. An hour or so ago that had changed to $400. Don't know what's going on.
America's Northern Rock
And all the king's horses and all the king men couldn't put Humpty together again.
Oversized?
Roger, I'm not sure that Australia even makes cork status --- I am sure that if Australian markets closed down for a month it wouldn't even cause a blip on the major markets' consciousness.
We Are Good At Sport
Peter, in 1986 I was living in Houston. Some of my buddies worked at Bechtel and Shell. They loved "you Osssies". However, I was also reminded that as far as Bechtel and Shell were concerned if Australia disappeared beneath the waves no one would notice.
Of course, we have success stories and we do punch above our weight division but that it is merely at the paternal whim of our partners. If it suited the US to abandon us we would be cut off without mercy overnight. Ditto for China or Japan or the EU.
Alan, in my opinion we could appoint "Ralph The Diving Pig" as our PM and he would do just as good a job as Rudd or Nelson or Turnbull. The ideological battle is totally pointless. They are all politicians and you can't trust any of them to even lie in bed straight. They are not your mates and they are not mine.
Falling skies and apple pies
Yes Alan, many of my friends -- well those who still talk to me since the election --- tell me repeatedly that Rudd will tip the world into recession, and that the sky will fall ---- any day now!
Every morning I creak across to the window and peer out, fearfully, but so far the sky is still in its place!
Still, when Rudd could only find a place for one woman in a committee of ten . . . I sincerely hope that Therese has him sleeping in the dog kennel!
I also suspect that that would be a real punishment! She looks to be an interesting, fun lady . . .
Then there is the scrapping of the carers' bonus --- how bloody miserable can you be?
And tomorrow Rudd is going to congratulate Israel on 60 years --- 40 odd of consistently committing war crimes.
Jenny: I didn't ever have a birthday cake, either! But my mother did make a chocolate cake for me occasionally and her mother, who was superb cook, used to make apple pies for me, not with pastry, but I have forgotten the word!
Apple pie and farm cream! Today I would have to seriously consider declining a serving, or the second, or the third . . . My weight you know!
When greed has to be reined in
Peter Hindrup, I'm with you on the apple pies and farm cream. My father used to grow the grannies and then skim some cream off the top of the vat every morning. My mother did the rest. But I think last year we voted boiled rice and milk and sugar as tops in the dessert ranks. When I do rice I always make extra for that purpose.
On more serious matters. If one takes a stroll through those big malls one can see the extent to which shopkeepers have geared themselves up to meet the greedy materialistic society. All manner of goods, nearly all of which we could either do without, or certainly do with a lot less of adorn shop after shop. Fancy sweets and foods, endless kitch bric a brac, toys, kinky hats and other clothes, travel bags, jewellery and trinkets of every possible kind, homewares, electrical appliances that might work for a year if you are lucky, calendar stalls, ugg boot stalls - you name it is there - much of it superfluous to actual need.
So as families realise that they can do without much of this stuff, and the belt has to significantly tightened, then a lot of people in those shops are going to feel the pain, and probably already are as consumer demand has plummeted in the past three months.
Greed and materialism can have terrible consequences in the long run.
There is no need to mention the obesity issue, not helped in those malls by all that mostly junk food you see people gorging on.
Give me the simple life. It will at least save the kids having to sort through a mountain of junk on the day I depart this world if nothing else.
To brighten your day . . .
For those who missed it . . . it is well worth a read!
Australia faces recession: analyst
David Uren | March 10, 2008
THE economy is headed for recession next year, with a 50 per cent plunge in share values and a double-digit drop in house prices.
Do I have your attention?
Bang goes the birhtday cake, hopefully
Reading one of the weekend rags I see parents here are trying to ape their overseas cousins when it come to lavishing treats on the kids. In the US parents are reported to be spending 10 000 dollars on the birthday party treat for little Joe or Jane. And it is now a case of keep up with the Jones on that score.
Parents here have got the message and are spending up to 2000 dollars on the kid's birthday cake, while a cheapie is around 300.
Nothing short or pathetic in my view.
Maybe this is the recession we have to have. Hopefully the first casualty will be that birthday cake. What happened to a white wings special iced up and decked with some hundreds and thousands. Hell, a flaming 12 month old is not going to give a damn as he tucks in.
Not only that I found those fancy things are totally inedible anyway, as did a lot of the kids on whom I saw one inflicted.
Greed takes many forms as does reckless discretionary spending.
Maybe I'm just jaundiced. I don't think I ever had a birthday cake when I was a kid. Maybe it was just not memorable enough. but I coped as I am sure kids these days would, given the chance. Parents need to wake up to themselves.
Recession
Mr 40 Watt Bulb
Geez Alan, how did you dream that up? In 4 months, Rudd has taken us from a super-affluent, very comfortable society to recessionaries.
How do you figure that? Got any more leaps of fiction you would like to throw about.
On fictitious value
From The next bubble: Priming the markets for tomorrow's big crash
by Eric Janszen
Harper's February 2008
"In a bubble, fictitious value goes away when market participants lose faith in the religion—when their false beliefs are destroyed as quickly as they had been formed. Since the early 1980s, the free-market orthodoxy of the Chicago School has driven policy on the upward slope of an economic boom, but we’re all Keynesians on the way down: rate cuts by the Federal Reserve, tax cuts by Congress, deficit spending, and dollar depreciation are deployed in heroic proportions."
*************************
"Fictitious value is the delta between historical-trend growth and growth brought on by asset hyperinflation. As an anonymous South Sea Bubble pamphleteer explained: 'One added to one, by any rules of vulgar arithmetic, will never make three and a half; consequently, all the fictitious value must be a loss to some persons or other, first or last. The only way to prevent it to oneself must be to sell out betimes, and so let the Devil take the hindmost.'”
**********************
"The U.S. mortgage crisis has been labeled a “subprime mortgage crisis,” but subprime mortgages were only a sideshow that appeared late, as the housing-bubble credit machine ran out of creditworthy borrowers. The main event was the hyperinflation of home prices. "
Worth a read.
Worth a read.
Certainly was Ian and thanks.
Roger, you're forgiven for not finding the link to that article on the parallel conditions of now and the late twenties. If it's the same one I read, it is now, to the best of my recollection two or three years old. The only thing that surprises me is the size of the bubble; it should have burst years ago. There was a chap on TV last night of whom I caught a brief glimpse. As I walked past the TV he was saying "if you base an economy on credit, the last thing you want to see is a credit squeeze." Well of course we've known about for god knows how long now but somehow that chap brought it in to stark relief for me.
We, (along with the Brits and the Yanks,) produce very little of added value. We run huge trade deficits and when we look at our economy in a historical perspective we see that the proportions of goods to services in GDP has been completely inverted over the last three decades.
Hey Paul, take my advice and take comfort in the knowledge we'll all be in the same boat.
Alan, (I must be in one of my moods even talking to you,) remember the coalition's election stunt a few years back when they put a lorry on the road and named it "Labor's Debt Truck"? Guess what, it is now the "Coalition's Debt Road Train". Get back to me.
Leaps
Good Question
Alan, you raise an interesting question and it has a very simple answer.
Assuming that we are not ideologically driven, and even if we are, every person in Australia needs a severe reality check.
Let me recount a story. In 1976 my boss returned from Syracuse, NY. He had been to our parent company's manufacturing facility. We manufactured equipment for the oil industry. As my boss said, "There's a mountain of equipment on my right going to Texas; there's another mountain on my left of stuff going to California. Over in the far corner there were two pallets going to Australia".
And that Alan is a measure of our true status. We are a bobbing cork on the world's economic ocean. Neither the Right not the Left of politics in Australia has any effect on the economic health of Australia. Everything that happens to us is determined by someone else's reality.
We are literally powerless and beholden to the economic fate of the world's financial giants. Your assumption that there is some value in arguing that a Liberal buffoon is going to manage our economy better than a Labor buffoon is Alice In Wonderland stuff.
That is reality. Can you face it or would you prefer to hide behind political name calling?
I guess you prefered reality is that a Coalition government would be immune to a world recession driven by the massive financial disaster that is now underway in the US (the war in Iraq, actually, not the sub-prime crisis). Dream on!
Good question
To Brighten Your Day Further
Unfortunately, I cannot find the link but will repeat the prognosis of a leading US economist (name also forgotten).
The gentleman was making the point that all the conditions that triggered the '29 Stock Market Crash and then the Great Depression are now in evidence throughout the Western world.
His warning was stark. A lot of pain unlike anything that the Baby Boomers, Gen X and Gen Y can imagine will soon be upon us.
Tighten your belts as all the sins of the world are called to account (economically speaking).
Of course, we will survive this misfortune and will be severely chasened only to forget everything that was learned within two decades.
They say that we are the smartest species on this little rock. Not in my book. The developed world is populated by buffoons, morons and the predators who feast on their carcases.
Markets crash and the rich get richer and the poor get poorer.
Yet again the financial news is all bad. This article in The Age writes of the risks to our financial future.
That's right the rich get tax cuts while the poor get interest rate rises. Why do we attack the weakest in our society to achieve our financial goals? Surely it is the rich that are over spending and under saving it is the rich that have the money not the poor. Its just like the climate change we want the poor to act on their pollution while the rich continue with their pollution. It is time for the rich to bare some of the burden. Overwise greed will be the end of us.