OLD ECONOMICS NEEDS TO BE REPLACED BY STONE SOUP

 

What year do you want to go back to Phil? That is the question you get when you try and explain that the current global financial system framework is fractured and about to break. That level of cognitive dissonance is a hard to overcome, it truly grinds at me.

How can so many fight so hard believing things are good when clearly they are not? How can so many still be viewing the world through a panglossian set of spectacles or contact lenses?

That question really intrigues me but more importantly it bothers and saddens me. It was the catalyst that pushed me to take time out of an impossible schedule to write this blog. This is a social justice piece of writing that will be my personal flipside reaction to those that have the rosy view. I hope to describe my own version of cognitive dissonance, the type that is conjured up when I am attacked for thinking there actually was a better time to live on this planet than now.

To the people that have called me every name from Mr Downer to Doomsday Prepper. Read this.

To those that have questioned my sanity for making the suggestion that perhaps there was a better time to be living on this planet. Read this.

To the people that are distracted by the mindless dribble of the media and the Kardashians, the news and the NFL, the fear and the football…Please Read this and at the end ask yourself truly how you feel about my thoughts and feelings.

Perhaps I am crazy? Maybe I am not? If you could find time at the end please comment, share your thoughts because as I said earlier I am truly bothered and saddened by the direction of humanity and the apathy and acceptance of the status quo.

Here is my own version of cognitive dissonance – It comes from those that think they cannot make a difference, to those that allow themselves to become slaves to a system that is rigged against them.

I am not a capitalist turned communist, nor am I chasing a time machine so that I can go back to 1991 when Michael Jackson and a band of elite performers released “heal the world”. My answer isn’t that we need to go back in time, nor abandon capitalism for communism but humanity needs an awakening and awareness. It’s not a month or a year but a mindset, it’s not just about economics and finance, it’s about social justice and capturing the spirit of what it is to be warm and caring again.

We now live in a world that celebrates extreme greed. Hollywood even glorifies it by pushing films out like “The wolf of Wall St”. The media and advertising companies promote consumerism at the same time that big multinational manufacturers exploit planned obsolescence. We are a throw- away society, we have our minds focused on today where selfishness is now the norm and not the exception to the rule.

It seems the world is devoid of true leaders, the type that hold a true moral compass and possess a voice that can set the masses back on a more sustainable and healthy path. As I cast my mind over world leaders I struggled to think of a political leader in the world that I feel is truly looking to leave the world in a better place than it was when they found it.

It is truly disturbing when you really think about it. I don’t see any leadership coming from anyone outside of religious leaders such as Pope Francis and The Dalai Lama. Setting those aside I ask myself, where is the Martin Luther King “I Have a dream” or the JFK “Ask not what your country can do for you, but what you can do for your country”.

Where is the next Nelson Mandela? Or the Mother Theresa?

Don’t you dare bring up Bono, or the Nobel Peace Prize winner President “I Killed Osama Bin Laden” Obama who also was elected to end wars rather than start them. It is truly puke worthy watching the celebrities of today producing acts of disingenuous “giving” looking for praise just for helping the very people that support them and their careers.

The celebrity disconnect soared to new levels of ridiculousness recently when  a group of leftover B grade musicians were rustled up to form a band to raise money to aid the fight against the ebola outbreak and the scourge of poverty that exists in many African nations.

The usual hypocritical martyr types were involved again and with Sir Bobby Geldof heading up the army of “look at me helping the poor, where is the media” charity types and of course there was the rusted on Bono sun glasses on, changing the world. What could possibly go wrong? Ok so the name of the group “Band-Aid” is a little, could we say, ermmm.. cringe worthy?

Ok OK I know Bono and Geldof have been accused of tax minimisation, but what does that matter given the fact that they are taking a few hours out of a day to help record a song for charity? Can we not get over that and focus on their righteous and selfless act of giving, we are approaching Christmas in case you have forgotten… or maybe you didn’t know.. or don’t know..

Moving on we have the governments focusing on dealing with poverty the only way they know how, REGULATIONS AND LAWS. In the USA they have threatened a 90 year old man with a jail sentence for feeding the homeless and hungry, the poorest of the poor. If only Bono was there things would have been different…

WAKE UP PEOPLE – IF YOU WANT CHANGE YOU HAVE TO MAKE THE CHANGE.

I say we should all start by tossing out economics, slashing the financial sector and replace it with a real spirit and determination to make a difference. The winds of change are gathering momentum, the protest movement is becoming a world-wide phenomenon.

 

People are angry, but they cannot put their  finger on why. A stolen car space triggers a “red mist” road rage incident, the black Friday store sales looked more like a rugby union maul coupled with a UFC grudge fight. Punch ups, wrestling matches, arguments and black eyes are par for the course in the quest for a cheap TV. It is a sign of the times, the worst traits of humanity laid bare for all to see.

The economic and political system is slowly turning human beings away from compassion and into pack animals. This has me wondering whether we need to relearn compassion and sharing first, then build an economic and political system around those new values second.

We need to all learn the recipe for stone soup before we can move on to thinking of becoming Iron Chefs in economics or master chefs of politics. I have added the recipe taken from Wikipedia that comes in the form of a fable or story. I am hoping that when you have read it you will agree with me that it has the ingredients needed for the framework for building a better system and a better society. If you agree, make a contribution yourself to the change and toss in some carrots, or celery… you will understand what I mean!

The story of Stone Soup described by (Wikipedia):

 “Some travellers come to a village, carrying nothing more than an empty cooking pot. Upon their arrival, the villagers are unwilling to share any of their food stores with the hungry travellers. Then the travellers go to a stream and fill the pot with water, drop a large stone in it, and place it over a fire. One of the villagers becomes curious and asks what they are doing. The travellers answer that they are making "stone soup", which tastes wonderful, although it still needs a little bit of garnish to improve the flavour, which they are missing. The villager does not mind parting with a few carrots to help them out, so that gets added to the soup. Another villager walks by, inquiring about the pot, and the travellers again mention their stone soup which has not reached its full potential yet. The villager hands them a little bit of seasoning to help them out. More and more villagers walk by, each adding another ingredient. Finally, a delicious and nourishing pot of soup is enjoyed by all.”

Please share your thoughts – this is a vital ingredient for the soup and if you enjoyed this piece, share it. If you wish to read more you can follow me @carneycapital on twitter.

 

WHY I JOINED PROFESSOR KEEN AT IDEA ECONOMICS

Economists are a quirky and somewhat religious bunch are they not? Some may say they fit into the nutty professor category and that their body serves no real purpose but to transport their head around the planet. They live in this mental space that is hard to define and because of this are perhaps seen as not living in the real world.

I recently joined the Institute For Dynamic Economic Analysis (IDEA) which is a Not For Profit Organisation that has a huge agenda to reform and transform the way we view economics. There is no doubt the social science of economics needs a total overhaul. It requires a rebranding and relaunch and IDEA has the “A” team get this job done because we know where things have to start, we need to go back to the beginning and unlearn the wrong way we do economics and relearn the right way.

The global economy has transformed into one giant ecosystem, integrated and linked. The ecosystem is delicate and the job of economists is to nurture and protect the ecosystem in its entirety for risking the extinction of one part will surely cause a shift in the balance of the remaining parts.

It is for this reason that I believe that the Federal Reserve and all their support team should have concentrated on reading and covering the work of Hyman Minsky Professor Steve Keen and the work done by the Queensland Department of Agriculture back in the 1930’s before the introduction of the “cane toad”.

I am guessing now that many of you are likely thinking how and what does the Queensland Department of Agriculture have in common with the modern day economic and financial system. If you are thinking that, indulge me by reading on and allowing me to provide clarification. This blog will be a journey for the layperson, a simple explanation that will toss out economics technical jargon and mumbo jumbo.

I hope by the end of this piece you will all see how directly and precisely a comparison can be made between the future impact of the current US Federal Reserve Policy and the disastrous results the cane toad ecological blunder produced in my home country of Australia.

The journey begins  with the US Federal Reserve response to the last Global Financial Crisis. With the beginnings of an exposed flaw in the economic system, the natural forces that had built the economic ecosystem saw need to recalibrate. The global Financial Crisis was upon us. The disproportionate growth in the financial sector vs the real productive economy had upset the natural balanced state of the global economic ecosystem.

The global economic ecosystem was faced with its own version of the “frenchi” and “greyback” beetles that were damaging and eating away at the real producing economy. The Financial sector was hurting production and output the same way those pesky beetles were affecting the output of Australian Cane sugar.

In many ways the Federal Reserve and other Central banks were confronted with similar issues to the Queensland Department of Agriculture. I understand one is about an economics and finance ecosystem and another is a nature based environmental ecosystem however once stripped back to its basic form an ecosystem is an ecosystem is an ecosystem is an ecosystem.

Faced with the mounting damage the beetles were doing to the cane crops the Queensland Department of Agriculture decided to unleash a foreign toad, now affectionately known as the “cane toad”. It was introduced to eradicate those pesky beetles once and for all and return our wonderful natural, even stevens, recalibrated and rebalanced ecosystem to a more productive and sustainable path.

Approximately  80 years have passed since the first  “cane toad” set foot on Australian soil and it is abundantly obvious that is has produced little more than disastrous results. Cane toads have continued to do what they do best “eat and procreate”. They are now an epidemic costing the Australian economy much more than the pesky beetles would/could have. Their population has spread and so has the immeasurable damage they have done too much of Australia’s native flora , fauna and wildlife.

I would say that Quantitative Easing and Federal Reserve interference through its “bond buying” program, is in essence, introducing a foreign species into the global financial ecosystem. There were bank bailouts and a Federal Reserve risk reduction backstop. The “bond buying” program was introduced to keep long term interest rates low to enable a recovery in a similar way the Cane toad was introduced to keep beetle population low to enable a recovery of cane crop production.

Are you following?

So as the Cane Toad population grew so did the systemic damage it was doing, at first slow before accelerating aggressively. So this brings me to my next direct link. QE has had the effect of providing liquidity to emerging markets, facilitated a “carry trade” bonanza as investors borrow at low supressed interest rates in the USA and invest in higher yielding emerging market bonds and equities markets etc.

The Thailand Stock Exchange (SET) has more than doubled since 2010 as have many other emerging economies equity markets. QE has also produced a wave of analysts examining international markets in a different way than ever before. It seems that analysts want to chart the sea of carry trade liquidity as it finds a new home much like a toad would a new river or creek.

Are you following now?

The Shiller index has been touted as a great way of picking up opportunities in emerging markets by identifying value by comparing P/E ratios amongst international equities markets indexes. I admire the work that Professor Robert Shiller has done and the contributions he has made. He thoroughly deserved his Nobel Prize.

In saying that I admire Shillers work,  I do have my doubts that his index can be relied upon to pick up major trading opportunities in emerging markets in much the same way that the path of least resistance my not be the first direction the toads go as their population expands.

Though I take issue in certain ways of calculating opportunity to exploit the effects of QE, I maintain my position that QE is to the global economic ecosystem, what the Cane toad was to the unique Australian natural ecosystem. If the lessons learned by the Department of Agriculture in QLD were examined and applied along with the teachings of Minsky, Keen and co to the decisions made by Central Banks then perhaps the ecological disaster about to strike the global economy could have been avoided.

It seems that for the global economy only time will vindicate the warnings of the maverick band of economists that include Professor Steve Keen, Dr Anne Pettifor, and  Professor Michael Hudson. Though I was originally apathetic, convinced I could not make a difference, my position changed when I met Professor Keen back in Sydney at my most recent visit. He expressed the importance of reform, and though he is softly spoken, I could see what it meant.

I joined IDEA because this is as much a humanitarian plight as it is a fight to change how we do economics and although they are not one and the same fight, they can both make a difference in making the world a better place to live.

So my journey begins at team IDEA economics to make a difference the only way I know how. To give IDEA economics a voice, to bring the message and draw a link between economics and something that real people understand in the hope that 80 years from now my QE and the Cane Toad story will not spread and will be just a chapter in a book that went unpublished.

ENDOGENOUS MONEY - MAX KEISER I WAS WRONG ON BITCOIN

Max, Max, Max. I am sorry. I was blind. You were right, I was wrong.

Why couldn’t you just tell me how you felt? What Bitcoin really meant to you? Why it is truly unique? You said it is beautiful and elegant, you described it as special.

WHY Max? Why did it end this way? Can I do something to fix our relationship? Our time apart has made me realise that BITCOIN is really special, precious. You just did not communicate it clearly or perhaps I just did not understand.

Can we see a counsellor? Once you read this email perhaps you will see how I misinterpreted your explanation. I am hoping you understand my words were harsh, I tend to talk a different language when on the defensive.

DEEP BREATH… HERE GOES.

There was a time I thought I knew it all. A time when I thought I understood money, the way it was created, circulated, used and abused. I supported you Max and stood right beside you when you were fighting against the banks. I miss those days, think about them a lot. We were a team, we dared to dream we could make a difference, motivate support and usher in a new zeitgeist.

Are you seeing someone else now? I noticed you dating and courting that actor comedian last week, what’s his name? Russel Brand? Is it he who you choose to conquer the world with?

I want you back Max, so here is why I was wrong on Bitcoin –

I was wrong on Bitcoin and its potential because I was so stuck on you comparing it to Gold. I thought you were off base with that. It was a deal breaker for me and that began my frustration and fostered my resentment. I couldn’t reach you, you closed me down and refused to talk.

So this is my letter to explain. I confused your message and hyper focused on you comparing bitcoin to gold. I misinterpreted your focus on central banks and banks in general. I acknowledge that central banks can “print money”, I see the incestuous relationship between the financial sector and the policy makers. It really is a case of who co-opted who and trying to answer that is as impossible as trying to solve the chicken and the egg scenario.

You have a complex mind and a unique filter on the way you view the world Max and let’s face it, I am not at your level nor am I a mind reader. I wish to convey so you are aware that at times connecting the dots is a more arduous task than you  might otherwise think for me. This being said our time apart has made me think about where your mind was at with Bitcoin.

I had the light bulb moment last night as I joined the dots to see that Max understands “endogenous money” and the role it plays in the creation of economic cycles. Max, you understand that if history is anything to go by the incestuous relationship between banksters and government will go on, as will the cycles.

There was an opportunity for real reform when Obama said “Yes we can” before his first term as president. The markets were in turmoil, it was clearly time to change the system and reform the banking sector and financial sector in a meaningful way.

We got nothing, nada, zilch! It turned out to be a pretend-a-thon watered down policy and quickly “yes we can” turned to a bank lobby forced “maybe we won’t”. I feel you Max, I now understand your cynicism. It broke my heart that your crusade at times might see some people hurt whilst ignoring  the end goal that global acceptance of Bitcoin may just put an end to these vicious economic cycles.

Bitcoin can help with this. Bitcoin takes power out of the politician’s hands, and the banksters ability to lobby for that power. Bitcoin means we do not need to answer the who co-opted who nor solve the chicken or the egg question.

Bitcoin can control “endogenous money” creation and when it is all said and done a decentralised system means each individual becomes their own bank where they assess their own risk and control the value they get for their bitcoin. They are not subject to Central Bank currency wars and the impact on their purchasing power.

Bitcoin understands “endogenous money”, that is all you had to say to me MAX. It is beautiful because whilst other theories like Modern Monetary Theory and Keynesian, Austrian schools of thought have some great individual aspects, they fail to really understand how to control “endogenous money” and to empower individuals to make their own risk assessment not leave it to the banksters and politicians.

Professor Steve Keen has the idea, post Keynesians understand. Banks create “endogenous money” out of thin air so controlling that involves a raft of policy changes we know we will never get because Banks don’t want to be controlled or restricted and politicians want to get re-elected. Bitcoin controls endogenous money and puts the risk back in the hands of individuals.

 A decentralised power base reduces exploitation to individual transactions whereby one individual decision does not put another person’s bitcoin at risk. Bitcoin by design restricts the ability for collective extractionist avenues such as those explored by institutions like the banks and financial sector that triggered the last financial crisis.

A Bitcoin dominated monetary system creates a more organised decentralised individual control of endogenous money and that makes it Beautiful and elegant. It does not make it gold, but it does make it precious and special. It can work to grow a capitalist economy by attacking the root cause of economic cycles which is the predatory creation of endogenous money. More on this less on the “bitcoin is just like gold” and the message would resonate.

 

May I suggest perhaps a Keiser Report with Professor Keen on the integration of Bitcoin and Post Keynesian theory on endogenous money might be a great way to clear the air between you and I, after all, I have never quit respecting you, I was just hurt!

Hope this email reaches you through my twitter network and that you find it in your heart to accept my apology and see it comes from a genuine place (and you find the humorous side to my message)

Best Regards,

Phil

DOES WALMART KNOW USA TRADE POLICY IS ABOUT TO GO PROTECTIONIST?

After a long hiatus from bloggersphere I felt a timely need to push out a post on a topic that seems to be gaining momentum. I covered in a previous post here http://carneycapitalmanagement.blogspot.com/2014/03/central-banks-gold-accumulation-first.html the fact I believed that the leaders of the world economic powers were working toward a “hidden solution”. It was simply absurd, in my opinion back then, to believe that the system in its current form would or could survive.

 

My suggestion was that the huge acquisition of Gold by the central banks of nations such as China and Russia was the first step toward a new system. Less than a week ago that prediction took one giant leap towards reality as the BRICS nations signalled their interest in pursuing their own miniature trading bloc version of the IMF.

 

This is designed to put pressure on the current system that sets its roots with the World Bank and the International Monetary Fund (IMF) front and centre. It seems the BRICS nations, China and Russia in particular have grown increasingly frustrated at their representation at the IMF and the World Bank both of which are dominated politically by the USA.

 

Here  http://www.aljazeera.com/indepth/opinion/2014/07/brics-bank-beijing-consensus-201472183428811634.html  is a great article that sets the tone and presents the case that transition and change is gaining momentum.

 

I am surprised and alarmed at the complete lack of coverage this is getting in the news given that this move has major implications for the global economy and also possibly world security and stability. The move by the BRICS nations is a direct challenge to the current status quo and although it is but the first step, the step is a monumental one.

 

As I look back and re-examine my post on gold accumulation mentioned earlier in this entry I also see much of the turmoil and tensions escalating. I see Russia and the USA in the most volatile of relations positions since the cold war. China now stands with Russia in this new trade and BRICS institutional deal. If that is not frightening enough then turn to the Ukraine and the Middle East, Egypt, Thailand, protests escalating in just about every corner of the globe, even in Australia.

 

The world is like one giant tinder bundle waiting for the spark and ignition, deteriorating relationships amongst leaders of economic and nuclear powers and within sovereign nations, people protesting and rallying with some internally combusting.

 

There is no doubt that the currency wars and economic wars are being waged, but are we now about to see a return to the old protectionism days? Is the world transitioning and following the historical flow of economic crisis, currency wars, trade wars then finally real wars?

 

Before anyone dismisses my call on protectionism, trade wars as alarmist or contrarian I beg you to read further and perhaps take off that panglossian piece of eyewear you call your glasses because they are clearly distorting your vision.

 

Protectionism and trade wars are brewing behind the scenes, we are seeing the little hints as the major players move their chess pieces around the board looking for a check mate. The recent BRICS move may have caught the USA by surprise a little, but it seems they have responded with new deadlines on Ukraine and are now questioning Russia’s  involvement in that conflict. There have been more economic SANCTIONS, yes SANCTIONS. Can you see them now you took the set of panglossians off?

 

Sanctions are trade restrictions, the beginnings of a trade war perhaps? Is Russia concerned? Perhaps a little less now that China has united with them on this new BRICS deal making it a financial powerhouse group as well as a nuclear and military juggernaut.

 

It was brought to my attention by a close friend here in the USA that Walmart had been on a “Buy American Program” drive that was initiated in 2013. As my readers likely know, err hmmm, I am not a cynic, cough cough. I believe Walmart when they say they want to bring the jobs back to the USA and that they have a deep care and love for the American people. Here is a WSJ article that generated this blog.

 

 Have a read  http://online.wsj.com/articles/the-hard-business-of-restarting-u-s-factories-1405629782

 

If you detected the cynicism– ometer exploding off the charts you are right because when all is said and done, actions speak louder than words. For years Walmart has built a business on the back of the China production line, box after box, TV after TV. It has shipped the jobs overseas, exploited China and contributed to the decline in USA manufacturing jobs that have now been replaced by forklift drivers and dispatch personnel.

Indeed nearly everything comes in a flat pack, easy to load in and out of a container, space conservationists! Now we are to believe Walmart has had a change of heart, that in the face of declining sales they want to revamp production locally and support American jobs. Is your level of cynicism rising yet?

Let me go on. Walmart wants to make TV’s here in the USA, all the components too. It wants to take advantage of the HIGHER costs of production in the USA. Walmart has never really cared about prices have they, what is their slogan again? Walmart everyday LOW PRICES!

Maybe they want to change it to “Everyday HIGH prices” just to support American jobs. Perhaps the next step will be to join in the fight to raise the minimum wage here in the USA also. The higher the price the more the new slogan will fit.

If you are not convinced this “Buy American” drive does not pass the smell test you likely have a blocked nose or missed out when god handed out your senses.

Walmart has lead the decline in manufacturing here in the USA. They have had a neutral stance at best on the minimum wage debate and hold huge power with politicians and are the largest single employer of minimum or close to minimum wage earners in the USA.

The key to the article is not in what Walmart said, but in what the newly anointed manufacturer for Walmart said. The punchline lies here “Tariffs are an unforeseen problem. When Element planned the factory, it expected Congress to extend an exemption from a 4.5% tariff on television panels, but that didn't happen” and  "There are only so many places where I can absorb 4.5% in a very margin-oriented business," Mr. O'Shaughnessy says. "Right now, we're eating it."

It seems that the USA policy lead out of Washington maybe signalling a shift away from import tariff exemptions on Chinese imported components. I note that in the Wall St Journal that published the Walmart piece has also provided another two articles supporting this tariff policy shift. These articles can be read here http://online.wsj.com/articles/shoemaking-gets-a-foot-in-the-door-in-the-u-s-1405294724  and here http://online.wsj.com/articles/just-whose-job-is-it-to-train-workers-1405554382  covering the shift inwards to training people in the USA and c ompleting a trifecta of articles inside of 2 weeks.

 If this is the case, then Walmart has moved to shore up an alternative supply chain locally to protect itself from them protectionism policies that may be right ahead. Walmart has built its gargantuan business model around the China production growth story. If tariffs and sanctions were to render their current competitive advantage null and void, they need a new one, in this case it is hidden in their message "Buy American".

 

If you read the signs, take off the panglossians, pick up on the scent and join the dots you may find yourself drawing the same conclusion that I have. Walmart and its “Buy American” push is a disingenuous pitch, hidden and motivated by self interest, to a confused public that have been deserting the company en masse.

DEBT BUBBLE WILL BURST SOON IN AUSTRALIA – SHOW ME THE MONEY!

Ignorance is bliss, until it hits you where it hurts! Human beings naturally want to ignore painful outcomes, postpone the hurt and pretend and hope eternally that the day of reckoning never eventuates.

That minor tooth ache is just an ulcer, not an infected abscess about to burst, the chest pains are just indigestion and not angina and the belief that the global economy will improve quickly and robustly under the greatest debt burden in human history, well we are all depending on that to be true so hope reigns supreme.

I am constantly amazed by the optimism of many given the dire state of the global economy. I am currently back visiting in my home country of Australia and following a number of discussions with a diverse and eclectic bunch of Aussies was inspired to write this blog. To clarify my definition of “diverse and eclectic” my discussion group included business owners, tradesmen and women, apprentices, finance sector workers, property managers and bright minds like the chief economist at ABC Bullion Jordan Eliseo and my former economics professor Steve Keen.

This blog is very much a collaboration of thoughts as they were expressed to me and my response which aims to breakdown the issues facing the Australian domestic economy as I see it. It will have a particular focus on Australia’s stereotypical family, demographics, and the challenges and headwinds they will likely face over the next decade. I will attempt to crystalize and simplify this analysis into a format for the layperson to understand by applying relevant data, statistics and explanations to what the Australian Beureau of Statistics now defines as a “stereotypical Australian family”.

Economics is not meant to be a confusing, boring, filled with mumbo jumbo terms and charts that look like they have been produced by people from a different galaxy. It is really quite simple and the best place to begin analysis can be as obvious as the family budget!

How tight is the average budget, how much wriggle room is there? I hear the stories about families struggling with the cost of living, I see my own power bills going up, food prices rising rapidly, petrol prices going crazy… But still people are surviving, working, eating, sleeping, working, eating, sleeping, working, eating, sleeping, working, eating, sleeping… Those three things is about all people can do by my calculations.

So here is my take for policy makers and the board members of the Reserve Bank Of Australia. Here are the calculations based on the cold hard facts. Here is how Mr and Mrs Average Australian family with their 1.9 kids (based on the last census) are living by my reckoning. I thought it a timely opportunity given the recent handing down of the Australian Federal Budget that the politicians/policy makers and reserve bank board members understand how regular families are operating/struggling.

There is a whole raft of statistical data that can be found here on the Australian Bureau of Statistics website  http://www.abs.gov.au/websitedbs/D3310114.nsf/home/Home?opendocument

At the risk of becoming overwhelmed and complicating things I will give a generalised assumption based view on figures such as average household income and general costs of living. I will also assume average cost of a mortgage based on interest rates at the 5% low interest rates that can be locked in today. I say assume the average, as much of the data that is openly available measures many of these data points using either the “median” or “mean” methods for calculations. In my opinion both methods can provide warped or skewed version of reality so relying on them as factual and truly representative to form a basis for opinion is absurd.

The median house price in Sydney for example rose 14.5% in 2013 to $655,250 according to this article published in the Sydney Morning Herald.

 http://www.smh.com.au/business/property/australian-capital-city-house-prices-rise-10-in-2013-20140102-306tk.html

In my humble opinion Mr and Mrs Average and their family live in a home with a value perhaps 5-10% less than this median price, a value closer to $550,000.

Average household income is the next important figure for budget formulation. A recent ABS report stated that “average” annual earnings for individuals were $74,000 a year last May. Though many analysts use this number in calculations it’s accuracy and therefore validity is highly questionable. I would assert that this figure doesn’t reflect typical circumstances. I believe that the definition of “average” is an irrelevant socio-economic metric that is increasingly undermined by rare but very large individual incomes and changing and evolving tax benefits and government assistance schemes.

With the above in mind I believe the median household disposable income should be used for calculations. According to the Australian Beureau Of Statistics the median household DISPOSABLE income was a mere $715 per week.  I believe this to be a more accurate reflection of where the average Australian household family income is before government subsidies are applied.

If we use this $715 per week as a starting point and add $220 per week in assistance for 2 children (maximum family tax benefit per child is $220 per fortnight per child) then the median household disposable income is $935 per week.  Given the fact that many of these numbers are arbitrary I will round the median household disposable income UP to $1000 per week or $4000 per month.

I am an employer, I have manufacturing businesses. I know the salaries my employees earn because I PAY them. I hear their stories, child care costs eating into the supplementary income, high cost of living etc. In this blog I want to work through the average budget to show that Mr and Mrs Average Australian Family cannot possibly be saving and if they are it is only due to the record low interest rates (lowest in Australia’s history). When interest rates moderate higher off this low base these savings will evaporate.

So with all of the above in mind here is the budget.

TOTAL DISPOSABLE INCOME (GOVERNMENT BENEFITS INCLUDED) - $4000 PER MONTH

HOUSEHOLD COSTS

Costs to service a $370,000 mortgage principle and interest at low interest rate of 5% fixed for 5 years is $2000 per month

Power and Gas (energy) and Water - $200 a month

Food for family 2 adults and 2 children - $900 month

Petrol - $250 per month

Council rates - $150 month

These costs total $3500 leaving $500 of the household disposable income remaining to cover items listed below:

Home insurance, car insurance

Car repayments

Medical Aid

School fees, excursions, books

Incidentals – car servicing, broken windows, new tyres for the car, car registration, mobile phone bills, internet connection, do I need to go on?

OK I will. Toll charges, parking and speeding fines, basic clothing needs, sheesh birthdays and Christmas and for Hubby what about the anniversary? Oh I forgot the dog! Pet food, the odd trip to the vet.

When you keep on adding up you see there is soon nothing left over. A trip to the movies or a restaurant once a month for a family of 4 is now a $60-$100 outing, as is a trip with the kids to watch the football.

Entertainment money and consumption is nearly a thing of the past. Foxtel is $50-100 per month, Alcohol, cigarettes, who can afford them? It seems many must now be living pay cheque to pay cheque, there simply has to be more month than money, a tragedy given the fact that money makes the world go around… Really it does!

A simple analogy is the story of the the butcher that takes his wife to a hotel for their anniversary. The room costs him $100. The hotel owner then takes that $100 from the Butcher and gives it to the hotel cleaner for her weeks work. The hotel cleaner takes that same $100 and buys a pair of shoes to go out with on Friday night. The shoe shop owner is not going out on the weekend but has people coming over for a barbecue at his place so he goes to the butcher and gives him that very SAME $100 to buy the steaks and sausages he needs… are you following?

The butcher got his $100 back after it passed through the hotel owner, the cleaner and the shoe shop owners’ hands. Was anyone really any wealthier? No. Was there consumption? Yes. Did this consumption create jobs for people? Yes.

So money does make the world go around.

But what if the Butcher couldn’t afford to take his wife out to the hotel because all his money went to the mortgage, food, power and the basic essentials for living? Would the hotel have to cut the hours of the cleaner? Perhaps. If that happened would the cleaner still have the ability to buy the shoes for Friday night? Maybe not. With all of those things in play maybe the shoe shop owner cannot host the barbecue?

So I ask with all sincerity, my readers to consider how current home prices are sustainable, to realise the flow on to diminishing disposable income and therefore reduced consumption.

If you feel I am wrong then please post a comment, but be ready in your explanation to SHOW ME THE MONEY!!!!

 

FOR MY REGULAR READERS

Apologies for the big break in posts. My follow up to this blog will be up in the next few days and will address the headwinds faced by the Australian property market. It will provide a detailed look at demographics, Australia’s aging population, pension implications etc.

 As the baby boomers move into retirement phase will they choose to “downsize” their home? Will government policy shift to means test for the pension including real estate holdings force the biggest demographic (baby boomers) to move into a cheaper home? How will the next generation afford it given current stubbornly high levels of youth unemployment?

These are some of the questions I will be answering  along with others in an attempt to show that the Australian households “wealth” may be at risk given much of the wealth is held in the real estate asset class.

Until then, keep the commentary coming and the feedback. For those that find this blog in some way educational feel free to share. You can also follow me on twitter @carneycapital.

 

 

ECONOMISTS AND POLICY MAKERS FAIL THE "RATIONALITY" TEST

Musings from a frustrated economic mind…Deal with it!

Insanity is one thing, questioning whether irrational behavior is the new norm and pondering whether this makes it rational is another. Huh? 

 

I guess what I am asking is have human beings developed a new ability to blur the line between what is rational and what is irrational? Huh? 

I mean if a human being were to deem irrational behavior as acceptable in certain circumstances, how would this clearly irrational behavior be defined?

How can one define the accepted irrational thought that it’s a certainty that housing prices will continue to rise, as will the stock market and corrections in either are a mere glitch in what is always a long term positive trend. It is a given right? History tells us so, and so it goes, so it is and so it will be.

It seems to me that no matter how many times I read the introductory paragraphs the complex questions, human intuition or the way human beings rationalise for decision making defies logic. OH NO!! Here we go again… “Logic”, isn’t that just as loose a term as rational? How is logical, illogical, rational and irrational behaviour measured in the investment game? Is it segments of time? The amount of profit or loss on trades? How close you go to picking the high or low?

Let me explain by posing another question on top of the 20 I have already asked. Prior to the tech bubble bursting the NASDAQ soared to obscenely high and unsustainable levels, at least in the rational and logical mind of PHIL. Surely it was obvious and “logical” as IPO’s were launched and stocks valued at 80, 100,200x earnings, heck some didn’t have earnings that a massive bubble was being inflated and that eventually people would be hurt? 

So who was rational and logical with their investments? With that meteoric rise was it rational to be buying half way into the rally even though it was clearly, logically and obviously overpriced?

Think of the opportunity lost, 50% of upside before it burst! When I think about this scenario, my behavior into the lead up to that crash, into the bursting of the housing bubble, and now into this new Fed induced cycle I find myself searching for clarity. Could it be possible that I am missing opportunity due to my conservative over analytical bordering on obsessive compulsive approach to what is rational and irrational? 

I know my investment decision making process all too well.  The process is a structured sequential one in which my mind rationalises decisions on a risk reward basis whilst calculating the opportunity cost of multiple investment opportunities all at once as my first two check points in a decision. Thinking through my last investment decision my process works on autopilot and simultaneously seems to apply some kind of weighting to a boost on the upside outside of where my normal “rational” expectations are. Calculate, calculate again, compute, apply, think

.

I said THINK! Is that how you decide where to invest and if you don’t what is wrong with my “rationality” in the way I reach my investment decision? I am sure there are many reading this saying Phil is off his rocker, how could he possibly use those factors when blah blah blahdedy blah are clearly more important…. After all housing prices will always go up long term! So will the stock market! HA!

 

 So what is the blah blahdedy blah?

Sheesh!!! Here I am pondering why people are blind to the fact that it is decisions based on assumptions and acceptance that drive markets through herd mentality, produce bubbles and finally burst them. Should I be saying toss Phil’s rationality out and start afresh? Should I at least consider it given my sense of rationality is different to that of the herd? That makes it irrational doesn’t it? Ok enough of the prodding and poking surely you are following now? If you are still confused I do not know how else to say it! What is there not to understand? Re read and analyse logically one step at a time!

My wife calls me a complex thinker, I turn a decision making process inside out back to front and upside down. I see method in my madness, she just sees the madness. The fact is I am different, but ultimately if I am different to you then surely the same applies and by default you are different to me? If that is the case, then it would follow that our views and perceptions of rational and irrational, logic and illogical differ…. Problem solved! Agreed?

It goes without saying that assumptions of a global set of human rationality guidelines or rules that govern behavior is crazy. We live in a dynamic globalised economy dominated by volatility, creativity. We live in a world where anything is possible if we dream it to be, a trip to the moon even. If anything is possible then obviously nothing is certain, not even that house prices will keep going up forever along with the stock market! So WHY do people “rationalise” and accept this to be?

We are not clones, nor are we robots and economists are wrong in ignoring the massive impacts that go with their fixed thoughts on the dynamic and largely independent process of how an individual meanders through the decision making process. It is perhaps misguided that the “sometimes” periods of herd investment mentality and manias pass off the wrong impression that behavioral decisions follow set patterns… but they don’t, we are different!

So if we are all different, individuals then how the heck can we really guess when the next crisis will hit absolutely and accurately? How can we determine the size and magnitude? I think it is going to be big and I think it will be soon, but perhaps I am just a doomsayer, a glass half empty kind of guy. I am not always like that by the way, I can be fun at parties! My point is an economy is made up of millions of different individuals with different views on rationality, normality and logic. These individuals make decisions that drive the economy of the world.

Economics is a social science because its main participants are people, human beings that have thoughts, feelings, beliefs, traditions, religions, race, circumstances, perceptions of what is moral and immoral and so on. All of these factors drive what each individual sees and feels is rational and irrational, logical and illogical behavior. They also drive what John Maynard Keynes described as “animal spirits”, his attempt at explaining the human aspect and influences to an economy.

Keynes described his “animal spirits” in his famous 1936 book “The general theory of employment, interest and money”.  Keynes asserted that policies should be directed at altering the way people behave in a time of depression or boom to try and smooth out the destructive economic cycles of the past. 

The theory itself has merit in the sense that if it was herd mentality that inflated the bubble, then policies aimed at mustering the herd again to drive them in a different direction may well be achievable. Can animal spirits truly be tamed and controlled? I think not with the handful of tools Keynes proposed as possible solutions. My “rationalisation” in deeming it not possible is derived from my belief that you can’t apply a math equation to social science and expect it to work. I find it amusing how many economists look retrospectively at data after a crash and torture statistics until they eventually conform and support their points of view. It really says that many of the so called experts really don’t have the foggiest!

It goes without saying that everybody fails at something at some time in their lives. I am constantly humbled by new learning experiences. I say that because even the best of plans based on what appears to be a logical and rational theory, produce outcomes that disappoint. Why they disappoint is irrelevant to this discussion, what is relevant is that no matter how much I rationalise and believe does not assure the desired outcome will be achieved.

It is true that economics is a social science based on perceptions. My whole blog has been a journey to show you that everybody is different, so the word rational should be excluded from any economic theory and that includes the work of Keynes. It is ironic that Keynes himself identified the human aspect of the economy in his “animal spirits” explanation only to rationalise or propose solutions that HE had thought would work to unleash HIS version of those very spirits.

So I say that economists and policy makers, as is the case with most self-centred human beings have concentrated and focused for too long on everything but finding out what it really is that drives human psyche, then ultimately behavior

I hope that by illustrating MY process of rationality you can see it is human nature to assume everybody else in the world thinks the way you do, believes in what you do, behaves the way you do… but the fact is they DON’T. 

It is misguided assumption that a group of central bankers and government policy makers know what I am feeling, or you are feeling and why you are behaving the way you are or that Keynes understood how the economy would work almost 8 decades after his book was released and first discussed. Surely that has to be irrational? or is it rational?. 

AHHHHHHHHHHH Can somebody bring me a rationality test to find out and whilst you are at it send it to economists and policy makers.. I am sure most would fail it!

CENTRAL BANKS GOLD ACCUMULATION FIRST STEP TO GLOBAL DEBT JUBILEE?

You are wrong! No you are a leftist socialist! Capitalism is broken! Shut up you COMMUNIST!
I’m not communist! MARXISM? Huh? You are a rent seeker right wing bigot!

Enough of the name calling already, there is a global economic crisis coming that will make the last one look like a pimple on the face of a 450 pound Sumo wrestler. CONCENTRATE and understand that as a global economy we need to set our political persuasions aside and stop wasting energy on verbal attacks that are largely speculative and definitely unwarranted.



I write this blog pondering, as I constantly do, how the world will get out of this huge debt epidemic. I say epidemic because that is exactly what it is, the world has an ever expanding economic debt induced illness on its hands.
I would go so far as to say it’s an addiction. It would be nice if we could just send the major offending nations to counselling…perhaps even “debt-aholics anonymous”…HA . Imagine, the G-20 summit rebranded a debt-aholics anonymous meeting! One cannot deny, admitting the problem would be a first step to recovery.


So that gets me thinking back to the problem at hand, how to solve the global debt bubble about to burst. The extremely painful way is through a depression. This will be long and deep as deleveraging this excessive GLOBAL private sector debt burden will not be easy given the incestuous nature of the international economy. A depression would also see some sovereign nations declare bankruptcy, a likely dismantling of the Euro (which I support) and a ripple effect of losses from these bankruptcies would likely make “contagion” the new economic buzzword.



With all of the above in mind I believe this is not a viable option as governments around the world recognise that this will likely trigger a global revolution driven by revolt and violence. It goes without saying that when people lose everything and have nothing left to lose, they lose their minds. One must only look at the riots and protests in Greece, Spain, the UK, Cyprus, Italy, Ireland and the USA.


I have always been hopeful that there is a master plan hidden amongst the disastrous and destructive monetary policy that is being implemented around the world. In analysing all of the policies in play, questioning the sanity of QE and Zero Interest Rate Policy I often challenged my obsessive compulsive mind to try and find some method in what appeared to be madness. The study of economics is complex, one giant jigsaw puzzle where making sense of the nonsensical can take your mind to the edge.


Taking a look at all of the things in play, I have concluded that the easy monetary policies in place globally are an attempt to buy time until a more sustainable plan can be put in place. I believe that plan has been hatched, evolving and gaining momentum. It seems to try and find the hidden agenda involves a process of examining the debt equation then applying a process of deduction given the fact that global governments will want this as painless as possible. History has been riddled with poor responses to these kinds of financial crisis, from them have produced wars, dictators, fascist leaders, mass murders and bloody revolutions.


The world could ill afford tension amongst nuclear powers and the idea of a world war would be truly catastrophic, that kind of devastation would be immeasurable and would far outweigh any debt forgiveness that may occur in a post war economic reset.


This does raise a key point though, imagine a debt forgiveness program without the WAR. Can it be achieved, if so, how? Following those questions is who would win or lose in a debt forgiveness policy implementation? How would it be implemented and managed? What would be the impacts on the global economy and how would they be addressed as the program was implemented?


The aforementioned questions and the ASSUMPTION that global leaders want a peaceful resolution initially had me looking at the idea that Professor Steve Keen suggested. Keen is a supporter of a Modern Debt Jubilee. For those of my readers that do not know what a debt jubilee is simply a “debt forgiveness” program. The idea is not a new one in fact historical evidence of debt jubilees date back to the bible!


 Delving into the idea of a debt jubilee was a counterintuitive process for me, after all I thought “one person’s asset is another person’s liability”. Would it be fair if those that were irresponsible with their money be helped via forgiveness whilst the savers are penalised for being responsible?


Addressing the asset liability question is simple. Keen says, a Modern Debt Jubilee should be fashioned in a manner which is almost a version of QE, but for the general public and private sector directly. The idea is to in essence, monetize the debt of the private sector. Give that money to the private sector citizens on the basis that debt must be paid off first with whatever is left over going to savings.


It follows that this monetary amount is also given to savers with no debt (answers fairness question from earlier) and this can be added to their savings or used to stimulate consumption.
In a recent twitter debate with my former professor I raised the issue of the immeasurable inflationary effects that may be thrust into the pipeline. I say immeasurable because human beings can be irrational creatures and there is no proven accurate method of truly modelling a response from a debt jubilee or any other proposed fix especially if applied to a global economy.


The complexity of the problem at hand should not deter a search for a solution because ignoring the private sector debt bubble will see the world in a slow deleveraging recession/depression that could last as long as 20 years by some estimates. The deleveraging process is a massive noose around the neck of the global economy and is strangling growth and recovery. The private sector debt also adds to the already mammoth systemic risk that exists across the world and so a reduction may provide a confidence safety net and a psychological boost to the ailing belief and trust that has been eroded over the last 25 years.


My conclusion is that Professor Keens proposal has some undeniable benefits worth analysing. Debt relief through a Jubilee would almost certainly create a buffer or psychological safety net to support the financial system by adding liquidity directly to the private sector at the same time as reducing the debt burden.


The financial system is facing a debt induced meltdown. If one casts their eye over the current state of affairs, they will see asset classes across the world all rising at the same time at unsustainable levels/speeds. History tells us this will end badly. Never before have asset classes such as global Equities markets, gold (even with the correction), oil, property markets, emerging market growth all moving sharply upwards at the same time… It’s an illusion, an economic fantasy.


It goes without saying that a modern debt jubilee may insulate the global economy from the next financial crisis where private sector liquidity will be needed to support a system on the edge of collapse. I believe the IMF along with the members of the G20 members are working on a recalibrated system which will be implemented when the next crisis strikes (explained later).


It is true that trying to pick what triggers the next collapse is difficult and perhaps one should be more concerned with analysing the inherent systemic risk than trying to guess the timing or trigger. I also am a firm believer that major global economic leaders know that the world needs a new system for this current one has run its course. I find it funny that many people fear a new global monetary system and are fighting it. In my humble opinion I feel it should not be feared nor fought but embraced, it is not the first time a global monetary system has changed nor will it be the last!


History is littered with changes, tweeks and overhauls to the global monetary system. For my elderly readers I would point out the gold standard and Bretton Woods monetary systems. For my younger millennial readers we have had the IMF, World Bank, $US as reserve currency and more recently the creation of the $EURO.


With all of this in mind I have turned my focus on to the major economy leaders, the IMF and the Central banks for direction. It is easy to assume that Central Bank policies such as the Fed’s QE program are hatched, born and implemented on a whim or hit and hope basis. I have for the longest time been critical of central bank easy monetary policy, questioned the method and condemned the practice… But is there a hidden plan? Let me explain.


I tend to think the Central Banks with all of their gold accumulation over the last few years are hedging for the inflation that is coming. I agree right now that many leading economic commentators like Peter Schiff have been wrong in their inflation and hyperinflation calls. It seems that they are wrong because of the timing and I understand what it is like to be called a “broken clock”.


The question is could the inflationists or hyperinflationists be wrong? I think they have the timing wrong but not the final outcome. Could Professor Keens Modern Debt Jubilee be the insurance policy to protect against the global debt bomb detonation? I think yes but with a twist.


My conclusion is combining history, with the collective thoughts of the great minds of Professor Keen, Jim Rickards and the likes of Peter Schiff and co. They are all right in their own respects but when combined they produce the solution that I believe is being explored behind closed doors, our new world monetary system!


Professor Keen is right in the need to reduce private sector debt to minimise the drastic effects of a long term deleveraging process. I believe even if this Debt Jubilee takes place in a staged or stepped process that Peter Schiff and Jim Rickards will be right on the inflationary effects. I guess from there I feel a number of questions need answering. These questions are:


Could the answer be that the Central banks around the world are accumulating physical gold in preparation for the implementation of a global monetary debt jubilee? YES


Could this also explain why the almost obvious Gold manipulation has been largely ignored as the race to accumulate and rebalance for Central banks takes place before the Debt Jubilee is enacted? YES


The final question is could a new system involving a gold standard be implemented post the debt jubilee with a recalibrated price to control the runaway inflation going forward?
History says that a gold peg could be deflationary, depending on the re pegged price but am still frustrated by those that assert a gold standard would be massively deflationary. When confronted with a deflationary argument from someone I would always pose the question.. What kind of “deflationary”?


The term “deflationary” is so open ended by definition that it sits closely alongside the term “liquidity” in meaning everything but at the same time nothing at all! Deflation is in the eye of the beholder and is purely dependent on what data, asset class etc one looks at.


I know many of my readers are more than likely picking holes in my plan. The idea of an agreed debt jubilee first to rid the global economy of the private sector debt scourge sounds fictional rather than fact. I am also guessing that many are saying it cannot and will not be done.


I would argue strongly however that with international cooperation and the use of the IMF and its Special Drawing Rights (SDR’s) a recalibration and debt jubilee could be achieved using the “liquidity” and clean balance sheet of the IMF.


The debt jubilee and new SDR liquidity will more than likely force a refashioned foreign exchange market in which all currencies will be priced not only in cross rates amongst themselves, but also in SDR’s. Structures have been in place to debate the way forward into a new monetary system for the world. Economic summits such as the G8, G20 etc brings collaboration and discussion and with the financial crisis of 2008 firmly in the minds of those in charge it would be naieve to assume a plan is not in motion.


The new system will succeed the current system with a focus on factors such as income inequality, currency stability and taming the growth in the financial sector. These factors have been repeated ad nauseam by the head of the International monetary Fund (IMF) head Christine Lagarde.


In taking the IMF’s Christine Lagarde at her word I would make the case that a return to some form of gold standard perhaps, 30% backing of currency to gold would bring back currency stability. It would also be a great policy framework to control the rampant financial sector and bank backed speculative bubbles creation that has so clearly driven the great wealth disparity/inequality.


 It follows that a gold standard also restricts the banks from explosive credit creation and can be used as a way of restricting loose bank lending policies, the very lending practices that have got the world into the huge mess. If the answer is a return to stability, growth, and a workable and sustainable system debt relief must come first (jubilee) then a form of gold standard to control BANKS!
Appreciate any thoughts, commentary and suggestions on this piece for it is open discussion and debate that brings about better outcomes!


For those that like this piece you can follow me on twitter @carneycapital