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

TRACY CHAPMAN WAS RIGHT, JUST 20 YEARS EARLY WHEN TALKIN’ ABOUT A REVOLUTION

How long will this all be allowed to go on? How long will the people wait, how much more can they possibly put up with. I mean day in day out the middle class, or “Main St” get pummelled, pounded, exploited, ripped off and rorted. They watch almost helplessly as governments around the world impose Austerity on their people, they legislate and support bank bail outs, build bombs and defence systems while the poor curl up in a corner with their life savings tucked into a garbage bag and sleep using a step as a pillow.

 As an Australian living here in the USA it brings me to a truly sad view and perception of where the world is headed. It is obvious that the world truly has lost its moral compass and that the system is broken.

To walk out of a grocery store while it is snowing and see a lady with her dog and a sign “can you help me, I have no food, home or hope” breaks my heart. As I park to walk into the grocery store I ponder how many people have seen the lady and ignored her message to help? How many don’t give her a second thought? How many consider helping but don’t?

I often buy her a warm soup if I notice her there, I was raised to be that type of person. I am proud to have been taught that life lesson, it truly is a valuable one. I have fond memories back home of going to the greyhound races back home with my father. Part of our visit to the races included feeding the homeless on the way out, 10 hotdogs later and sometimes a few bucks.

Where is the compassion now? We have a world built on the motivation of personal wealth where greed is almost idolised and money is worshipped. We live in a world where the apathy and hopelessness rules behaviour, where we now render our ability to help a little as useless.

A friend of mine recently pointed out some states here in the US are legislating that a $120 license must be paid for an individual or organisation to feed the poor. I remember when I read his message thinking that he could not be right on that, but he was. WHY???

WHY when there are no jobs, at least no good ones. WHY make it difficult for an individual to extend the hand of hope to the hopeless? What ever happened to being fair and just? Why do politicians seem to act for themselves whilst preaching they represent their constituents’ best interests?

Governments co-opted by corporations in a relationship so incestuous it has me reaching for the bucket to puke. The news is cringe worthy at best as viewers are force fed the lies in an absolutely insulting manner. It truly is difficult to find a neutral news source, everywhere you look the result seems binary when it comes to where you get your news and in your political choices to determine government or president.

CNN is designated for the lefties and Democrats, Fox news for the righties and Republicans. Media and politics are dominated by corporation dollars which in turn drives the bias. It appears to me however that this growing disconnect between politics, the media and the general populous is taking its toll. The natives are getting restless!

I am beginning to feel that the world as we know it is about to go through a revolutionary shift. There is a collective evolution taking place that is ushering in a new zeitgeist or spirit of the age. Technology and the use of social media assist in building momentum as people of like minds bond and chat, sharing ideas, thoughts and emotions. Facebook and Twitter allow collective think tanks and a platform for open forums that assist in connecting people globally in a way not possible less than 10 years ago.

Metaphorically speaking I see the Global Financial Crisis as the fuse and social media platforms/vehicles as the match to light the fuse to mobilise the next revolutionary movement. For those of my readers that disagree on my views that a revolution is in the not too distant future need only look at the edgy reporting Time Magazine is giving the topic.

We are now 2 years or more on from 2011 when Time Magazine made their person of the year “The Protestor”. We have seen governments overturned, protests in the streets of Portugal, Spain, Italy, Ireland and Iceland just to name a few. In the USA there was Occupy Wall St where for the first time income inequality and the incestuous government/corporation relationship triggered outrage.

Below is Time Magazines front cover recapping 2011.

It seems that “Main St” went to occupy “Wall St” in a protest over tax payer bank bailouts which funded exorbitant CEO bonuses along the way. The protests also brought discussion over tax laws that appeared skewed to the wealthy, protectionist policies from cheap imports and also the minimum wage debate.

The Occupy Wall St movement was a show of how social media could be used to garnish support quickly and also appeared to signify a shift in attitude on the need for change. I believe the global protests, marches against austerity and movements like Occupy Wall St are the prelude to the real revolution that appears to be gaining momentum.

Tracy Chapman was “talkin about a revolution” in her song 20 years ago. I cannot help but listen to those lyrics and think she is right.

Below is a youtube clip of the song and lyrics. I suggest you click, listen and read.. then ask yourself after reading my piece, was Tracy Chapman right but just 20 years early?

http://www.youtube.com/watch?v=OVKLmpALMFc

CAPITALISM OR CORPORATE FACISM? KEYNESIAN OR CRONY KEYNESIAN ECONOMICS?

In a world of 24 hour news cycles, social media, print media, the internet it is hard not to get caught up in the moment. The media circus has turned REAL NEWS into a sensory overload experience in ways never thought imaginable. Twitter followers may sometimes get news 10 minutes before it becomes a breaking news story on any of the major networks, slate gives you text news with a blurb and an estimated read time so that you can assess instantaneously whether you feel it is worth the 3, 4 or 34 minutes to read!

The evolution of the way news gets reported and the speed with which it can be sourced is about as fast as it can get. As news has evolved, so has the politics of it, the campaigns, the promotions and of course the slogans. Everything has a nice catch phrase to bring comfort or generate confidence. Everything must be carefully crafted to execute for the media.

Who could forget the Obama “Yes we can” campaign and after he or we didn’t of course it was “Forward”. The “Forward” campaign slogan was important because no one really wanted to look back, least of all the Democrats.

The slogans are not limited to political parties, comforting economic terms to describe monetary policy or political/economic decisions are almost laughable. Here are some examples, Quantitative Easing, sheeesh that sounds good right? It’s quantitative and its easing?

 What are your thoughts on the use of military terminology to define monetary policy with “Operation Twist”?

Last but not least the term “Austerity”. Sounds fair does it not? Why won’t the media and policy makers tell people the truth? Austerity generally means higher taxes, cuts in government spending or perhaps both simultaneously so it follows that the media cannot possibly report that as the mushroom dribble fed plebs would be out on the streets protesting… So “Austerity” it is!

There is no doubt that the global economy is in a dangerous and volatile situation. The global debt bubble is inescapable in my opinion without either a major economic crisis (bigger than the last one) or a period of unprecedented global inflation driven by one big global debt jubilee where debt is monetised in a multinational agreement.

The different attempts at stimulating economic growth that include the easiest monetary policy the world has ever seen is still failing. In conjunction with this easy monetary policy the USA Government has embarked on some of the biggest deficit budgets in an attempt to support the lag and deceleration in aggregate demand from the private sector.

The massive budget deficits of course could not be called that so the term “Stimulus Package” became the accepted politically correct way of misleading the public. With the “Stimulus package” came additional slogans such as the one coined by the BRILLIANT Larry Summers in his testimony before the USA economic committee.

Stimulus packages were the way to go according to Brilliant Larry, but of course the stimulus had to be “Timely, Targeted and Temporary”. HA!. That sounds great and perfectly reasonable. I would support that policy as I am sure many others would, a temporary targeted and timely fix might be great at supporting ailing aggregate demand.

Reading Brilliant Larry Summers testimony I pondered whether the words he spoke would have been echoed by John Maynard Keynes. Students of Keynesian economics would have seen the Summers testimony as filling the criteria set out by Keynes as the targeted, timely and temporary stimulus aimed at supporting aggregate demand in the short run.

In a recent discussion with a close friend of mine back in Australia, a topic trigger and blog idea was born. As we discussed the USA economy, the GFC (don’t call it the Global Financial Crisis) he raised the issue of the humanitarian side to Keynesian economics. It seems an economics professor from his home town had engaged him in the justification of Keynesian policies saying the deep hurt without the Government stimulus would be profound.

In once again agreeing that fiscal stimulus if it is “timely, targeted and temporary” has benefits as a short term fix, the implementation of the fiscal stimulus to satisfy the slogan is a completely different proposition. Let us address each of the Brilliant Larry Summers’ criteria looking in the rear view mirror from today all the way back to his testimony in January 2008.

To provide for open discussion and debate, along with my opinion I would like you to read the link below of the American Recovery and Reinvestment act of 2009 (ARRA).

. http://www.ask.com/wiki/American_Recovery_and_Reinvestment_Act_of_2009?o=2801&qsrc=999&ad=doubleDown&an=apn&ap=ask.com

TIMELY – Debate will always rage over the timing of the stimulus package as the crisis was already rolling and the devastation had already been felt. The stimulus package was more of a clean-up effort after a massive tsunami than it was a barricade built to protect the economy before the storm. President Bush enacted the Economic Stimulus Act of 2008 as an outgoing president however this was largely a watered down attempt and a patch fix than a fully-fledged program or recovery policy.

TARGETED – This is where I have my biggest issue with the Keynesian economic “demand side” theory in that it tends to be driven by short term aggressive spending measures to raise short term aggregate demand. This aggressive spending largely gives a misguided improvement signal by masking the structural economic issues at hand.


A monetary solution to a structural problem may offer relief, but that relief comes at the expense of a planned mixed policy that targets real jobs growth and the private sector which ultimately offers a more sustainable humanitarian solution. I would suggest that the fiscal stimulus package should carry a larger weighting on bigger incentives to promote employment rather than spending measures on public sector projects which provide temporary jobs that may terminate once the project is exhausted.

One measure may include tax concessions for an employer for providing a new job equal to the tax that will be paid by the employee in the job. A cash neutral tax policy aimed at jobs which will directly feed into raising aggregate demand from the private sector through earned wages that takes the burden off the public sector. This measure, may assist in raising efficiency and cost effectiveness in the public spend whilst promoting a more sustainable and organic growth environment.

Looking at the tax concession section of the ARRA you can clearly see that of the nearly $800bn package only $51bn was offered as incentives for companies and $237bn in incentives for individuals. Before you think I am beating the corporation drum at the expense of the individual I am not. I support the $237bn incentives for the individual, but believe at least $300bn should have been provided for business targeting employment promotion. The remaining $250bn could be used on targeted public sector infrastructure projects aimed at assisting in raising productivity. Improved roads, transportation, ports etc.

The fact is that there was over $350bn in stimulus spending including $155bn on healthcare, $100bn on education, 100bn on infrastructure. There was also $40bn allocated to extend unemployment benefits, $20bn for food stamp program, 14bn in one off $250 social security payments. In the same section is the provision of  $3.2bn for “temporary welfare”. The upside of this section was a miserly $3.45bn on training programs and an absolutely insultingly low $500m for vocational training for the disabled!  

All of the above were implemented with the backdrop of public sector wasteful spending that include the government trying to pick winners through initiatives such as the auto industry bail outs and green energy sector (solindra) just to name a couple.


 Airport runways were fixed in towns where literally only 5 or 6 planes land per day, potholes fixed on Rodeo Drive, heck there was even a few million spent by the department of defence to try and determine how democratic goldfish are (not kidding you, worth a google). It is absolutely absurd to think that in a true capitalist economy the private sector would facilitate any of the above especially the goldfish study!

I am sure when Keynes proposed his theory of government fiscal support he did not intend it to be inclusive of waste. Sure a monetary solution to an economic problem that is structural is not ideal, but a targeted and efficient government stimulus spending program would not be so bad if it was cost effective and provided similar returns on investment than would be achievable out in the private sector.

There should never be waste because the debt incurred by the government in enacting the stimulus will ultimately be serviced somewhere down the line by the tax payer, or felt by the country’s citizens in the form of inflation as the debt gets monetized.

Looking back over the last 6 years the USA Federal Government, under President Obama has doubled the public sector debt adding some 8 or more Trillion dollars to the bottom line. With this in mind I pose the question how “targeted” could the spending have been given the fact that the workforce participation rate here in the USA is the lowest it has been in nearly 3 decades? GDP even under the new calculation methods is lagging and signs of improvement now appear a pipedream not a chance of becoming reality.

TEMPORARY – Well this one should be self-explanatory, we all know that the Government deficit spending has been at record highs since 2008 and that is represented by the double down in public sector debt in that corresponding period.

So from a humanitarian perspective, my contrarian view to the Aussie professor is, that Keynesian fiscal stimulus that is not implemented with a timely, targeted and temporary focus will end up a short term fix at the expense of a deeper humanitarian issue into the future when the public debt has to be serviced.

I would also argue the point that Keynes advocated tax cuts in conjunction with government stimulus spending. Governments seem to ignore the former and concentrate on the latter more for political and not economic reasons.

If Government spending through stimulus is largely inefficient and wasteful vs private sector then surely the stimulus is more of an inefficiency enabler rather than an economic restructuring promoter and the adverse effects will be felt into the future rather than in the now?

To illustrate my point more simply, if an individual has a certain propensity to borrow, to service their debt and have their credit card maxed out they have no other option but to either work another job or begin to deleverage or save. A shift away from consumption and spending to savings and production is needed, that is a recession!

The economy needs to recalibrate and restructure. Right now despite the fact that there have been massive year on year government deficits investment into the private sector which will ultimately drive consistent and sustainable employment growth has been slow. As has been discussed in previous blogs the correlation between employment and credit acceleration/deceleration are undeniable.

Below is a chart which illustrates the “private sector” investment from 2007-2012

 The correlation between employment and credit acceleration/deceleration is also supplied for those reading my blog for the first time.

I will also add a link to view money velocity chart as a point of reflection to illustrate that it is the private sector that drives the employment, money velocity, credit acceleration in a cyclical growth loop.

http://research.stlouisfed.org/fredgraph.png?g=stp

If the Professors justification of Keynesian economics is to give the debt laden individual another credit card to ease the pain in the short term and it is proven that the credit card will be used inefficiently (just like government spending v private sector) surely the new maxed out credit card simply exacerbates the problem already at hand.

So whilst the theory has merit the policy implementation is far too inefficient and ineffective. It does not address the issue of debt driven deflation as household and private sector try and deleverage as central banks and government try and force feed the economy more debt.

The theory has also been tested and proven largely ineffective in producing real thrust into investment into the private sector that is needed as this is the engine room of the economy. The problem with policy makers and indeed many economists is that they read and rely on text books and largely ignore the problems of the dynamic global economy which tosses up real evolving problems that require flexibility in policy not rigidity.  

The stimulus policies along with the term “Too Big To Fail” are destroying capitalism and morphing it into global corporatisation where oligopolies rule. Oligopolies lead to idiocracy and you only have to take a look at where the USA is headed with the number of low paid jobs increasing at the expense of high paid jobs.

The four words “Too Big To Fail” according to Gerald Celente were the words that signalled the end of capitalism. I feel he is right, right now we have either crony capitalism or corporate facism where  the incestuous relationship between government and big business is becoming more and more of a blur. The relationship is so incestuous now it leaves me pondering from a historical perspective the question of who co-opted who?

Was it the Government representatives that co- opted big business or was it big business that co-opted government? It may be a case of the chicken or the egg, but really who cares when it’s a rotten egg!

A further example of this shift away from true capitalism into corporate facism can be found in the number of ex GOLDMAN SACHS executives now involved or heading up Central Banks. There is Carney, Draghi, Paulson and of course MF Global’s Jon “The Don” Corzine. Below is a link with a revolving door list CBS composed, reading it will take your breath away and have you questioning how any of this has been allowed.

http://www.cbsnews.com/news/goldman-sachs-revolving-door/

I have arrived at the conclusion throughout my personal study and analysis that we do not have a capitalist economy, we have corporate facism or crony capitalism.  I am also saddened for the destruction of Keynesian economic theory as governments have, for political reasons (my opinion) implemented Crony Keynesian policies in an attempt to kick start a recovery. These have been largely ineffective and inefficient and therefore lump more public sector debt burden on to an economy that is trying to restructure and recover.

To those that disagree I would like to leave you with a few thoughts and questions to think over and critically analyse. These are the questions I had sought answers to and the answers derived formed the backbone for my assertions in this blog. Perhaps if you answer these questions you may come to similar conclusions.

1. Given the benefit of hindsight on his policy implementation of QE, operation twist etc which has added over $3tn to Fed balance sheet. Would Bernanke do the same given the sluggish recovery since the programs were implemented?
2. Considering the fact that US public sector debt has added over $8tn or 8,000 BILLION for those not familiar with what a TRILLION is. Why has the unemployment scene not improved significantly? Why are GDP numbers still representative of a sluggish growth economy? What will be the impact this additional $8tn will have on a recovering economy when interest rates move up and the cost of the borrowing mean higher tax impositions to service the debt?
3. Finally after assessing all of the above consider if the policy agenda in 2009 targeted private sector growth, more tax cuts for small and medium business, tax incentives to employ people in the private sector, reduction in red tape constraining private sector would there have been a better result?

My point is if one were to assume that the $8tn that was added to the public sector debt was not used on Government “stimulus” packages where the government tried to pick the winning projects, rather the stimulus money targeted private sector growth. Could we or would we have a more sustainable and organic growth story now driven by employment growth which will drive real GDP?

I have no doubt that $8tn spent driving employment in the private sector, a more aggressive tax reduction and a reduction in red tape would by now be netting a positive return as the economy recovered. Permanent jobs in the private sector and not temporary project jobs in the public sector is the answer. Employment growth means an increased taxation base, a reduction in the welfare drain, a boost in perceived recovery, increase in money velocity, increase in GDP and a REAL recovery.

If Keynesian economics is passed off as being more of a humanitarian policy as the professor back in Australia asserts, surely a stable secure job creation policy driven by private sector provides the best avenue. Perhaps I am making the assumption that he supports true Keynesian economic policies not crony Keynesianism, just as I support true capitalism not crony capitalism or corporate fascism.  If that is the case, I apologise, but still thank him for the idea for this blog and hope that he can find the time to critically analyse my piece and offer his ideas on my assertions.

The right of rebuttal is open to all and I welcome feedback from all of my readership.

If you like this piece you can follow me on twitter @carneycapital

OVER TO YOU!