Month: August 2010

In "The Triumph of Politics" , David Stockman brings us a front-line report of the miscalculations, head-on collisions, secret manipulations, and alliances that led to the failure of the Reagan Revolution, a failure that has produced a staggering deficit of one trillion dollars instead of the balanced budget the President had promised the electorate by 1984………. Far more than any journalist’s expose̒. "The Triumph of Politics’ is an insider’s revelation of what happens when a radical ideology backed by the power of the Presidency runs into the world of personal rivalries and special interests and ignores our continuous national tradition of accomodation and compromise.

Cover sheet of David Stockman’s "The Triumph of Politics", 1986.

Peter Walsh always had the reputation of being the ‘hard man’ of the Labor Government during the 1980’s. He was closely involved in all aspects of economic policy, ranging from the systematic and far-reaching deregulation of our financial system to the relentless cutting of government expenditure. He had the stamina and conviction to cope with the arguments and the endless meetings of the Expenditure Review Committee – and the inner fortitude to say ‘NO’ to a whole range of special interest groups. Peter Walsh entered Parliament thinking that the economic ‘experts’ knew it all – only to have a rude awakening when he saw them at close quarters. He knew that the Labor government had a unique opportunity in the 1980s to achieve fundamental and lasting change to our whole economy – and he tells of how some of those opportunities were seized, but others tragically missed.

Cover sheet of Peter Walsh’s "Confessions of a Failed Finance Minister", 1995.

But if Obama is not blinded by dollar signs, he suffers from a cultural class myopia. He’s a patsy for "glittering institutions that signified great achievement for a certain class of ambitious Americans". He surrounded himself with the best credentialled, most brilliant policy mandarins he could find, even if almost none of them knew anything about what it was like to work in a small business, manufacturing, real estate, or other parts of the economy…… Lawrence Summers Machiavellian efforts to minimise or outright exclude the input of of ostensible administration economic players such as Paul Volcker, Austan Goolsbee and Christina Romer seem to have engaged his energies as much as the policy issues at hand.

"He Had A Dream", the Australian Financial Review insert of 27/8/ 2010, where Frank Rich reviews Jonathan Alter’s book "The Promise: President Obama. Year One."

In the midst of the crisis, while visiting the London School of Economics, Queen Elizabeth ll asked why the economics profession had failed to see it coming. In fact, most economists did not forecast the coming turbulence. This set includes, virtually all academic economists, those presenting the official views of the IMF and OECD, and those representing most national governments. For the record, however, a few did give advance warnings. They told "stories" about what they felt was going wrong, based on insights mostly drawn from pre War ll economists. The more interesting question is why no one, including policymakers, was inclined to take those warnings seriously.

From an essay dated July 2010 by William R White "Some Alternative Perspectives on Macroeconomic Theory and Some Policy Implications" www.dallasfed.org

 

Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)

1. Reagan restored America’s belief in itself, but failed at the fiscal level by saying ‘yes’ to almost anybody. In many ways he is the father of America’s welfare society and the architect of its huge military industrial complex.
2. ‘Success has many fathers’, but Peter Walsh (Finance Minister under Hawke) has never received due credit for his major contributions to Australian fiscal policy. He remains Ecinya’s most highly regarded post-war politician.
3. The jury is out. Will Obama succeed, will he fail? Does he know that a strong economy produces balanced social policy? Has he become more of a celebrity and less of a leader? We sincerely hope not.
4. Outside of Fed headquarters some of the most revealing and cogent arguments are developed in relation to fiscal and monetary policy. The St Louis Fed Review is notable. This essay from the Dallas Fed is excellent and worth a visit.

 

PREAMBLE

Australia is but 1% of the global economy which means that 99% of the global economy is beyond our borders. On a per capita basis we can get to about 6% of the global economy which means that 94% of the global economy resides outside of our borders. In a world of circa 6.8 billion people we are 0.3% of global population. Our recent economic managers Messrs Rudd and Swan have had a tendency to grossly exaggerate their intellectual and economic management capacities on the local and world stage. The hubris of travel abroad and five star hotels can impact on the ego of almost anyone, including our very own editor in his younger days of first-class business travel.

Based on our current and past observations and experience, an alliance of the Greens, some of the independents, and Labor might well UNDO the good works of Peter Walsh, Paul Keating, Bob Hawke, John Howard, and Peter Costello. If their behaviour and policies are any guide such a combo might focus on wealth redistribution rather than wealth creation. But we might be lucky. Luck is not a good policy premise if you are after sustainable outcomes. The independents would be wise to ask themselves "Who can we trust to run the economy without their personal aspirations and egos getting in the way of good policy?"

If America remains sluggish, then China slows, and Australia is impacted adversely. Pretty simple really. Our export income falls, our imports stay relatively high, we tax emerging miners, unemployment rises and our low level of public debt rises and becomes a problem. ‘Vision’ is just a fancy way of saying anticipation of problems and recognition of opportunities. You don’t need too much vision to run the Australian economy well, just an abundance of common sense. What makes good common sense, generally makes good economic sense.

 

BELIEFS AND VIEWS and/or GUESSES

‘INFLECTION’ means ‘change’. ECINYA is of the view that the next bull-market has the potential to start sometime in the fourth quarter of 2010. This means possible early recognition in September/ October and some momentum going into November/ December, with September being the month where markets generally make their intermediate low. Our considered guess is circa 950 for our global proxy the SP500. But if Obama does not address some of America’s structural problems, then his impotence will be felt around the world. The November mid-term elections might propel him back to the centre of the economic debate. The global recovery is, in our view, underway but we would like to see some bold and frank public utterances from the home of global free enterprise.

What does this require? It means that America has to move towards rational economic policies and our various articles on Kotlikoff is, in our view, a substantial part of the solution. It also will require some evidence that the structural problems of America are in the process of being properly addressed – the twin deficits, electoral reform and tax reform, reduced defence spending, a viable health service, attitudinal things "less sizzle, and more steak’, less imports and more exports, less dependence on foreign oil. Progress is an evolution, NOT a revolution.

 

WHAT LEVEL OF GOVERNMENT EXPENDITURE IS VIABLE?

It seems that governments all over the world having been asleep at the wheel as the years of excess cascaded into monumental folly have now over-reacted and that the public sector is running at about 30% of GDP with ever-mounting public debts squeezing the life out of the private sector. The growth of the Asian economies with cheap labour and cheap labour on-costs are the suppliers to the lazy west and every import has become a job created abroad. The reduction of imblances between east and west is a good thing, but the gains to the west have been squandered in poor domestic policy settings and poorly conducted wars abroad. Our guess is that government expenditure as a percetage of GDP needs to be closer to 20% than 30%.

 

DOUBLE DIPS

David Rosenberg ex Merrill Lynch and now with Gluskin Sheff of Canada, says don’t talk about double-dips, the first recession is not yet over. What he means, essentially, is that the recovery in the markets has been force-fed by government and ‘the recovery’ is really a statistical recovery engendered by policy such as ‘cash for clunkers’ and the ‘Troubled Asset Recovery Plan’. In his view the underlying market and economic metrics are still exceptionally weak. We cannot disagree.

 

WILLIAM R WHITE

Just as the Australian response to the’global financial crisis’ was over-done, over-budget, and poorly targeted William White says the fault lies in an overly strict belief in the excessively Keynesian macroeconomic models that determine and guide policy responses. He along with a number of other authors is of the view that the stimulus packages have largely failed. Policy should be a mixture of art and science, and reliance upon just the science has led to sub-optimal outcomes, possibly laying the seeds for further strife. He seems to say that Keynes has to be blended with the Austrian School led by Von Mises and the work of Hyman Minsky. Without knowing it he refutes the anti neo-conservative essay written by Kevin Rudd just after he became PM.

 

WHAT SHOULD GOVERNMENTS DO?

They have no money other than taxes and the printing press; ANY money they earn from direct sources (other than gambling and traffic offences) is usually less than the cost of the service they render, so they should spend taxpayer’s money carefully, respectfully, wisely. The $43 billion broadband policy is likely to be a fiasco, a travesty, a disaster.

 

AND WHAT OF BANANAS AND APPLES AND DAIRY PRODUCTS AND BOB KATTER

‘Free trade’ is a nonsense concept. Let us just opt for ‘beneficial trade’. Regional Australia has been neglected for far too long. Little wonder that Bob is upset. If we cannot do the math on why we should NOT import bananas then something is wrong. Have a tariff, that’s OK. Likewise apples. In relation to dairy farmers, how many have committed suicide as Bob Katter says? Are the deaths as awful as troop deaths abroad? Why should the city get cheap milk if it means that a dairy farmer cannot support his family and earn a return on his capital investment? Nonsense upon nonsense is crazy economics and poor social policy…….. and poor mathematics. As an aside the technology being developed by Papyrus Limited in relation to banana husks for paper and timber is interesting.

 

 

 

 

Dorothy is a girl who lives in a farmhouse in Kansas with her Uncle Henry, Aunt Em, and little dog Toto. One day the farmhouse, with Dorothy and Toto inside, is caught up in a tornado and deposited in a field in the Land of the Munchkins in the Land of Oz. The falling house kills the ruler of the Munchkins, the Wicked Witch of the East. The Good Witch of the North comes with the Munchkins to greet Dorothy and gives Dorothy the Red Shoes that the Wicked Witch of the East had been wearing when she was killed. In order to return to Kansas, the Good Witch of the North tells Dorothy that she will have to go to the "Emerald City" or "City of Emeralds" and ask the Wizard of Oz to help her.

On her way down the road paved with yellow brick, Dorothy frees the Scarecrow from the pole he is hanging on, restores the movements of the rusted Tin Woodman with an oil can, and encourages them and the Cowardly Lionto journey with her and Toto to the Emerald City. The Scarecrow wants to get a brain, the Tin Woodman a heart, and the Cowardly Lion, courage. All are convinced by Dorothy that the Wizard can help them too. Together, they overcome obstacles on the way including narrow pieces of the yellow brick road, Kalidahs, a river, and the Deadly Poppies.

When the travelers arrive at the Emerald City, they are asked to use green spectacles by the Guardian of the Gates. When each traveler meets with the Wizard, he appears each time as someone or something different. To Dorothy, the Wizard is a giant head; the Scarecrow sees a beautiful woman; the Tin Woodman sees a ravenous beast; the Cowardly Lion sees a ball of fire. The Wizard agrees to help each of them, but one of them must kill the Wicked Witch of the West who rules over the Winkie Country.

As the friends travel across the Winkie Country, the Wicked Witch sends wolves, crows, bees, and then her Winkie soldiers to attack them but they manage to get past them all. When the Wicked Witch gains one of Dorothy’s silver shoes by trickery, Dorothy in anger grabs a bucket of water and throws it on the Wicked Witch, who begins to melt. The Winkies rejoice at being freed of the witch’s tyranny, and they help to reassemble the Scarecrow and the Tin Woodman. The Winkies love the Tin Woodman and they ask him to become their ruler, which he agrees to do after helping Dorothy return to Kansas.

When Dorothy and her friends meet the Wizard of Oz again, he tries to put them off. Toto accidentally tips over a screen in a corner of the throne room, revealing the Wizard to be an old man who had journeyed to Oz from Omaha long ago in a hot air balloon.

The Wizard provides the Scarecrow, the Tin Woodman, and the Cowardly Lion with a head full of bran, pins, and needles ("a lot of bran-new brains"), a silk heart stuffed with sawdust, and a potion of "courage", respectively. Because of their faith in the Wizard’s power, these otherwise useless items provide a focus for their desires. In order to help Dorothy and Toto get home, the Wizard realizes that he will have to take them home with him in a new balloon, which he and Dorothy fashion from green silk. Revealing himself to the people of the Emerald City one last time, the Wizard appoints the Scarecrow, by virtue of his brains, to rule in his stead. Dorothy chases Toto after he runs after a kitten in the crowd, and before she can make it back to the balloon, the ropes break, leaving the Wizard to rise and float away alone.

The Soldier with the Green Whiskers advises that Glinda, the Good Witch of the South, may be able to send Dorothy and Toto home. They, the Scarecrow, the Tin Woodman, and the Cowardly Lion journey to Glinda’s palace in the Quadling Country. Together they escape the Fighting Trees, dodge the Hammer-Heads, and tread carefully through the China Country. The Cowardly Lion kills a giant spider, who is terrorizing the animals in a forest, and he agrees to return there to rule them after Dorothy returns to Kansas.

At Glinda’s palace, the travelers are greeted warmly, and it is revealed by Glinda that Dorothy had the power to go home all along. The Red Shoes she wears can take her anywhere she wishes to go. The Red Shoes are lost during Dorothy’s flight and never seen again.

Wikipedia’s description of the story of ‘The Wizard of Oz’.

One day perhaps someone will be interested enough to trace the point at which the journey into fog began. There can be no respect for the truth without respect for the language. Only when language is alive does truth have a chance. As the powerful in legend turn the weak or the vanquished into stone, they turn us into stone through language. This is the essential function of a cliche, and of cant and jargon; to neutralise expression and ‘vanish memory’. They are dead words. They will not do for truth.

"Death Sentence – The Decay of Public Language" by Don Watson, 2003.

 

PROLOGUE

The yellow brick road in the novel ‘The Wonderful Wizard of Oz’ is a mythical journey of discovery, overcoming obstacles, and restoring the personal deficiencies of the three supporting characters – the Cowardly Lion lacking courage, the Scarecrow without a brain, and the Tin Woodman lacking a heart. Good government and good governance requires a blend of all three to achieve recovery in current circumstances, with sustainable progress as an achievable possibility.

 

ON THE YELLOW BRICK ROAD TO RECOVERY AND PROSPERITY

The story of the ‘ Wonderful Wizard of Oz’ which became the 1939 MGM movie is a useful metaphor for thinking about the coming economic recovery. Dorothy represents the optimistic heroine who inspires three lost souls…. one lacking courage, one without a brain, and one without a heart. Dorothy’s journey overcomes significant obstacles, but good and positive attitude gets her through, and achieves desired results for her fellow travellers. The impediments to progress led by the force that is the wicked witch are dispatched to the dust-bin of history.

The collective personnel that gave the developed world the ‘global financial crisis’ to us is the personification of the wicked witch – a composite of characters like Fannie & Freddie, Mr Greenspan, George Bush, Dick Cheney, Tony Blair, Goldman Sachs, the ratings agencies, Wall Street, various governments in Spain, Greece, and Ireland etc etc. These forces between them had little regard for truth and consequence and deviated sharply, sometimes fraudulently, from the simplicity of ‘what makes good common sense generally makes good economic sense’. The disequilibrium that is the US twin deficits have now become major structural issues that can only be met and overcome with brain, courage, and heart.

Our local election has mimicked the dysfunctionality of the American political system and weasel words concocted by professional spinmeisters have mitigated against sensible debate. Through the abuse of language and the portrayal of lies as facts our politicians have become embroiled in a ‘race to the bottom’.

 

AN ENDURING LESSON OF ECONOMICS

The law of opportunity cost: That in a world of limited resources and unlimited wants and needs, the cost of doing one thing is the opportunity foregone to do something else. The cost of building a nuclear bomb is the lost opportunity to build, say, a hospital. Governments have to spend taxpayers’ money wisely, set priorities, seek a balance between the private sector and the public sector.

 

CONCLUSION

The restoration of pervasive prosperity Dorothy would say requires that government in a collective sense needs a brain (the capacity to think), courage (a penchant for truth and persuasion) and a heart (to help the genuinely disadvantaged).

Let us hope that Saturday in Australia is the beginning of that process for us and that the US mid-term elections might restore some balance in the United States of America. Let us hope that the spirit of Dorothy and her mates still resides in the wonderful world of Oz.

 

BALANCED FREE ENTERPRISE

Ecinya has long suggested that the expression ‘beneficial trade’ should replace ‘free trade’. The expression ‘balanced free enterprise’ should replace ‘capitalism’. Though ‘socialism’ has placed China on the yellow brick road to democracy and balanced free enterprise it is not a political and economic system that will survive. China will soon need to join the developed world and delete "Communist" from its party political name and manifesto.

It is clear that there is a role for government in relation to matters economic. The days are past when unfettered capitalism was a useful description of the way developed economies work, or a reliable framework for poorer economies to attain sustainable prosperity. The recent exotic debt implosion and the previous dot com bubble/bust are contemporary examples where capitalism has clearly failed. In each of these busts the government was found wanting. It is axiomatic that ‘socialism’ has failed, but the welfare state is far from dead. The challenge for free enterprise economies is to define the limits of government involvement, and the scope and manner of intervention. We have a target for inflation in Australia, why not a target for taxation and government spending as a proportion of gross domestic product.

Prosperity is the tide that carries us all to realisation of our material and social aspirations and trade is an aspect of the attainment of prosperity. It is axiomatic that an effective trade policy requires a strong and balanced domestic economy. ‘Balance’ requires a viable and progressive tax system. Ecinya has suggested whileever we exempt food from GST we cannot achieve real tax reform that delivers reward for merit and also provides an appropriate social safety net within an efficient and targeted welfare system.

Leadership is an important issue in progress and even good leaders have been beguiled by the fruits of success and succumbed to the siren call of various wicked witches and used taxpayers’ money in an attempt to purchase an additional term of office, sometimes with great success. When having the job becomes more important than doing the job… it is time to go. That happened to Bob Hawke and John Howard. It was also the fundamental flaw in Kevin Rudd’s tenure before and after he became Prime Minister.

The editorial in The Australian today said: "One thing is abundantly clear, however: Kevin Rudd’s big-government experiment was a disaster. Whichever party is returned, this ugly revival of old-style central planning must be buried and cremated. The Australian regrets taking Mr Rudd at his word in 2007 when he presented as an economic conservative who believed governments step in only when markets fail. The trouble was markets were deemed to have failed when Mr Rudd decided they had failed, and that was often. Long before the global financial crisis, the dead hand of government was touching the private sector in inappropriate places, and its behaviour grew steadily worse. GroceryWatch and FuelWatch were early signs of the hubris that resulted in the atrocity of a mining tax ."

An unknown source to which we constantly refer in similar vein said it thus: "No man or woman is great enough or wise enough for any of us to surrender our destiny to. The only way in which anyone can lead us is to restore to us the belief in our own ability to take responsibility for our own lives.’"

This is in no way a statement that says we should not look after the genuinely disadvantaged. Of course we should. Civilised society demands a viable heart.

 

 

 

To talk about economics requires more and more, that one write about politics.

Paul Krugman "The Great Unravelling" 2003.

It can fairly be said that the chain of catastrophic bets made over the past decade by a few hundred bankers may well turn out to be the greatest non-violent crime against humanity in history. They’ve brought the world’s economy to its knees, lost tens of millions of people their jobs and homes, and trashed the retirement plans of a generation, and they could drive an estimated 200 million people worldwide into dire poverty. In other words, never before have so few done so much to so many. And has there been even one major, voluntary resignation by an American financial executive? One sincere apology? One jail sentence? Why the American public hasn’t taken to the streets in revolt is a mystery that can be linked to our inherent belief in the virtues of capitalism.

Graydon Carter Editor Vanity Fair, June 2009 issue. The magazine is an excellent source of economic and political material.

 

Firm predictions are out of the question. The future depends on the policy responses the financial crisis will provoke. But we can identify the problems and analyse the policy options. We can also make some firm predictions about what the next era will NOT look like. The post-World War ll period of credit expansion will not be followed by an equally long period of credit contraction. Boom-bust processes are asymmetric (not identical) in shape: a long, gradually accelerating boom is followed by a short and sharp bust. Consequently, most of the credit contraction can be expected to occur in the near term.

The Bush administration shows no understanding of the predicament in which it finds itself. Eventually, the US government will have to use taxpayer’s money to arrest the decline in house prices. Until it does, the decline will be self-reinforcing, with people walking away from homes in which they have negative equity and more and more financial institutions becoming insolvent. The Bush administration resists using taxpayer’s money because of its market fundamentalist ideology and its reluctance to yield power to Congress. It has left the conduct of policy largely to the Federal Reserve. This has put too much of a burden on an institution designed to deal with liquidity, not solvency, problems.

George Soros "The New Paradigm for Financial Markets. The Credit Crisis of 2008 and what it means." Reproduced from Ecinya’s first new web-site issue of 28 July 2009. Please note we have been publishing now for 10 years.

 

In just that week, the Party of No’s intransigent campaign of obstruction and obfuscation went belly up. The Obama White House moved to get its act together with an alacrity lacking in its health care campaign, abruptly adding Thursday’s New York speech to the president’s schedule. The bipartisan Financial Crisis Inquiry Commission at last issued it first supoena — to Moody’s, one of the rating agencies that for a fat fee slapped triple AAA ratings on the toxic garbage Goldman packaged and sold to benighted suckers on the other end of a huge bet placed by a favored client, the hedge fund player John Paulson.

Salutary as this rush of events is, it still adds up so far to just one small step for mankind. We don’t yet know how many loopholes lobbyists will slip into the bill-in-progress. We don’t yet know the outcome of the S.E.C. case, let alone what other much-needed legal pursuit of Wall Street may follow it. And we still don’t know what, if any, true correction lies ahead for the financial sector’s runaway casino culture — much of it legal — that turned a subprime-mortgage bubble in a handful of overheated American states into an international economic meltdown.

Frank Rich, The New York Times, 25 April, 2010. ‘The Party of No’ is the Republicans.

 

The US mortgage bond market was huge, bigger than the market for US Treasury notes and bonds. The entire economy was premised on its stability, and its stability in turn depended on housing prices continuing to rise. "It is ludicrous to believe that asset bubbles can only be recognized in hindsight" Michael Burry wrote. "There are specific identifiers that are entirely recognizable during the bubble’s inflation. One hallmark of mania is the rapid rise in the incidence and complexity of fraud…. The FBI reports mortgage-related fraud is up fivefold since 2000." Bad behaviour was no longer on the fringes of an otherwise sound economy; it was its central feature. "The salient point about the modern vintage of housing-related fraud is its integral place within our nation’s institutions," he added.

From page 55 Michael Lewis’s book "The Big Short, 2010. Michael Burry was a hedge fund manager exploiting the chasm that mortgage bonds was to become.

 

Success breeds excess: America has come to believe that its profligate behaviour in relation to energy consumption, poor wages in many areas of its economy, unfunded pension liabilities, a second class education system for many of its residents, the same in health, corporate welfare, tax shelters for those who can afford them, and excess of legal mantra over common sense and good sense, rampant debt creation largely involving other people’s savings, excessive speculation via derivatives and other exotic financial instruments, poor public and private accounting, has led to a country seemingly out of control and exposed to regular crises, few of which are anticipated and after the event, the response is shambolic.

The Ecinya pages 13 January, 2006.

 

Lawrence J Kotlikoff

Mr Kotlikoff is professor of Economics at Boston University and his Curriculum Vitae can be found via Google.com.

Last week (21/4/2010) Charles Babington, Associated Press Writer, reported as follows: "President Obama suggested Wednesday that a new value-added tax on Americans is still on the table, seeming to show more openness to the idea than his aides have expressed in recent days. before deciding what revenue options are best for dealing with the deficit and the economy, Obama said in an interview with CNBC, "I want a better picture of what our options are."

This report brings into focus the essay from Lawrence Kotlikoff which appeared in The Federal Reserve Bank of St Louis Review July/ August edition 2006. The essay was titled " Is the United States Bankrupt?"

His paper concluded that countries can go broke, that the United States was going broke, that remaining open to foreign investment can help stave off bankruptcy, but that radical reform of US financial institutions was essential to securing the nation’s economic future. The paper offered three policies to eliminate the nation’s enormous fiscal gap and avert bankruptcy:

• A national retail Sales Tax
• Personalized Social Security
• A globally budgeted universal healthcare system.

It is interesting to Ecinya that Australia has all three of Kotlikoff’s measures in place today, not necessarily operating with a sustainable degree of perfection, but close enough. They are called:

• The goods and services tax
• The superannuation guarantee levy
• A universal healthcare system run by the state governments.

It is interesting to note that America has just one leg in place of the Kotlikoff three-legged stool and even that leg was constructed against a background of extreme angst and controversy, and has not yet begun.

 

WHY CONTINUE TO FOCUS ON AMERICA??

US gross domestic product is about US$14.8 trillion and this translates into GDP per capita of US$43,180. China’s GDP is about US$9.8 trillion and this equates to $7,350 of GDP per capita. Let us assume for the sake of argument that the USA’s GDP does not change over the next 8 years and China’s GDP continues to expand at 9% per annum. Let us further assume that China’s population stays at its current figure of 1,339 million. On these bizarre assumptions China’s GDP would rise to US$19.7 trillion and per capita GDP would rise to $US14,705, equivalent to 34% of America’s current per capita GDP per capita. It does not take much imagination to see that the world wants and needs a robust and efficient and growing United States of America.

 

BACK TO KOTLIKOFF

The GST (the national sales tax) came about in Australia because it was first proposed by the Labor Party under Paul Keating, Bob Hawke and Peter Walsh, acting on advice received from Treasury. But Hawkie decided he could not sell it to a sufficient mass of voters that would get him re-elected so he abandoned it. Mr Keating as the appointed chief salesman (later fall-guy) said he was not at all miffed, but subsequently went to the backbench and from that vantage point rolled good old Bob and became Prime Minister. The Liberal Party could see an opening during all of this so they elected John Hewson as leader who tried to sell the concept of a GST, but failed miserably, and Keating was elected Prime Minister in his own right (‘The sweetest victory of all’). Along came John Howard, sold the GST to the electorate, and the defeated Paul Keating moved to the Eastern suburbs of Sydney to join Mr Hewson in sniping at Mr Howard for the next 11 years.

What is the message? The GST saved Australia because it was sensible policy and facilitated better spending decisions, lower company and personal tax rates, fostered lower interest rates, and about 11 years of further economic expansion was added to the Hawke- Keating years, assisted,of course, by the rise of China and other emerging nations. As Keynes said: "Fundamental change does not occur quickly."

President Obama is coming to town. It will be interesting to see whether, or not, and presuming the Banking and Financial sector reforms currently going through Congress are passed, that towards the end of the year and going into next year the next major reform in America is a national sales tax. Let us hope he gets to meet John Howard to discuss the matter. Let us hope that some of his economic advisers know what is going on in Australia that might be relevant to their own country. One can only hope.

 

THE PHILADELPHIA FED APPEARS TO HAVE JOINED THE KOTLIKOFF CHORUS

Even with a GST Mr Rudd has dug a great big hole which we are in the process of falling into by declaring "We are all Keynesians now" and spending vast amounts of money on over-funded projects which either have failed or are in the process of failing, or are doomed to failure beyond the next election. These of course are the emissions trading scheme debate, the $900 hand-outs and the national home insulation roll-out, the Building Education revolution, and last week the "new" health system. In relation to the latter many health professionals don’t appear to know how it will work, how it is supposed to work, who will be responsible for it working, and what it might cost. The same questions appear to apply to the proposed $43 billion national broad band network concept (is it a plan?)

We have found an edited transcription of remarks given at the Philadelphia Fed’s policy forum "Policy lessons from the Economic and Financial Crisis of December 4, 2009 by N Gregory Mankiw (an Harvard Professor) titled "Questions about Fiscal Policy: Implications from the Financial Crisis 2008-2009". It appears that the St Louis Fed is also involved in this paper’s creation.

Mankiw believes in Keynesian theory but not without reservations and suggests that enhanced government spending can inadvertently drive up interest rates and taxes. He poses a number of questions:

• Can governments spend large amounts of money quickly and wisely?
• Are the relevant multipliers that are applied to Keynesian spending correct as opposed to the multipliers that pertain to lowering tax rates? He says the Keynesian conclusions are questionable.
• Do tax rates influence work and savings incentives?
• Will healthcare legislation reduce healthcare spending?
• Is the VAT coming?

 

SHORT TERM FEARS AND RIDDLES (with Postscript updates where relevant)

• The IMF has said global growth has returned to circa 4%. They didn’t know about the GFC until it slapped the entire world in the wallet. Thus we should treat their pronouncements and actions with some scepticism. Currently, their Greece solution seems to be fluid in context of rubbery Greek numbers on the depth of the ‘crisis’ and the political reality of potential solutions. (Postscript: Global GDP forecasts now being revised down)
• What has emerged with Goldman Sachs thus far looks like the the first cockroach, meaning that more are sure to exist. (Michael Lewis’s book throws up a lot of questions)
• The new GDP numbers for most of the developed world have been achieved via massive fiscal and monetary stimulation so that unqualified comparisons seem misleading. Australia has moved pre-emptively on interest rates and that seems good policy in context of sub-optimal fiscal policy outcome. (Postscript: TARP was designed to save a host of "too big to fail organisations" and rightly so, but let us now get real and save mainstreet)
• US housing is still cum the housing credit and better weather for construction. (Postscript: Foreclosures on the rise again and Fannie and Freddie look sick)
• Can the US continue to borrow abroad at current interest rate levels? Watch 10 year bond yields. (Postscript: Another bubble)
• The Henry tax review is likely to be substantial nonsense. (Postscript: The parts adopted by the governemnt were nonsense and the super profits mining tax was nonsense)
• The All Ordinaries index looks weak vis the SP500. (Postscript: Markets rolling over, fear returning, early days but ominous)
• The SP500 looks stretched and vulnerable. (Postscript: Markets rolling over, fear returning, early days but ominous)
• The Shanghai index looks to be rolling over.(Postscript: Markets rolling over, fear returning, early days but ominous)
• The copper price looks like the Shanghai index. (Postcript: Copper not looking too bad)
• British politics looks to be complicated leading into the election. ( ps: Election over… a good result)
• America believes it is a capitalist country and wants to debate socialism under Obama and capitalism under anyone else. Congress seems to be fighting old wars on dogma and confusing and disappointing main-street. (Postscript: American politics looking dysfunctional)

The principal contribution that monetary policy can make to economic well-being is to maintain low and stable inflation. I think it is true to say that if you wished to forecast the path of the Australian economy, and you were to have foreknowledge of only one economic variable, the one you would choose would be the path of the world economy. That is not to say that we have no influence over our own destiny – we can make the situation better or worse than it would otherwise be – but we cannot escape the influence of the world business cycle and the other factors that feed off it.

Ian Macfarlane, then Governor of The Reserve Bank, 14 June 2005.

The way of Heaven is profound and mysterious and the way of mankind is difficult. Only if we make a profound and unified plan to follow the doctrines of the centre, can we rule the country well.

Proclamation of Emperor Qianlong of the Qing Dynasty, 1645, taken from the information board sponsored by American Express and located before the steps leading to The Hall of Central Harmony in the Forbidden City, Beijing.

In today’s style over substance economy, the job of Treasury Secretary has devolved into a pitch man for the government’s economic disinformation campaign. To qualify, an aspiring Treasury Secretary must have the credibility and rhetorical skill to simultaneously instill enough confidence in America’s creditors for them to keep lending, and in American consumers, to encourage them to keep borrowing and spending. If our economy were really sound, it would speak for itself. It would not need a professional promoter to talk it up. With his nomination of Goldman Sachs CEO, Henry Paulson, it appears that President Bush hopes to recreate the Greenspan/ Rubin mystique. Since Wall Street specialises in applying lipstick to all manner of financial pigs, Paulson may be uniquely qualified to tart up the biggest pig of them all.

Peter Schiff of Euro Pacific Capital, 1 June 2006.

If Obama wins, however, there will be a different challenge. He will have to return full force, to the inspiration business. The public will have to be mobilized to face the fearsome new economic realities; he will have to deliver bad news, to transform crises into "teachable moments". He will have to effect a major change in our political life to get the public and the media to think about long-term solutions rather than short-term balms. Obama has given some strong indications that he will be able to do this, having remained level-headed through a season of political insanity. His has been a remarkable campaign, as smoothly run as any I’ve seen in nine presidential cycles. Even more remarkable, Obama has made race – that perennial gaping wound -an afterthought. He has done this by introducing a quality to American politics that we haven’t seen in quite some time – maturity. He is undoubtedly as ego-driven as everyone else seeking the highest office – perhaps more so, given his race, his name, and his lack of experience. But he has NOT been childlessly egomaniacal, in contrast to our recent baby-boomer Presidents, or petulant, in contrast to his opponent. He does not seem needy. He seems grown-up, IN A NATION THAT BADLY NEEDS SOME ADULT SUPERVISION. ( Caps inserted by Ecinya).

Joe Klein, Time Magazine,No 43, October, 2008

 

Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)

1. Australia is more dependent on global growth than most developed economies. We import far too much such that our economy has some structural imbalances given our narrow export base.
2. Too many governments in benchmark economies are spending about 30% of nominal GDP and topping up the tax shortfall via borrowings, whilst pretending to be taxing less and governing in the common good.
3. When over-spending governments fail then the spin comes in using spin-meisters who have developed their skills in the private sector around branding and focus groups
4. Obama has been a tad unlucky but he has only just begun to realise that he has become ‘unreal’ and forsaken the clarity of thought and expression that got him to the White House. He needs to move from pussycat and back to lion.

 

OVERVIEW/ CONTEXT

Phase 1 of the Global Financial Crisis/ Recovery is over and it has not been as great a success as we would have hoped to date simply because it could not be. The calamity was too deep and the saviours were a big part of the problem in the first place. Phase 2 will begin shortly and then the speed and nature of the recovery will become more normal, more evident and more transparent. But first a few background points –

• America is about 22% of the global economy and the other members of G7 (Japan, Germany, France, Italy, the UK and Canada) are about 22% of the world economy. If we add in China and India we get about another 13%, which means that 9 countries account for about 60% of world GDP. Counting Australia we only have to really watch 10 countries.
• Australia comes in a tad above 1% of global GDP.
• In per capita terms expressed in $US America’s GDP per head is circa $47,000, China is about $7,000, Australia is $39,000. China has a long way to go.
• America has deep structural and systemic problems and its politics have become dysfunctional.
• If we exclude Japan Asia is in better relative shape than Europe and America, but we cannot have a sustainable global recovery if America does not get its political and economic house in order.
• Australia is well positioned in Asia, but we are dependent on commodity prices given that our public debts have spiralled under Labor and inflation lurks within the shadows. The excessive response to the GFC exposes our vulnerabilities, but the RBA is ahead of the curve. They now know the government are dunces.
• The more cerebral debates in Europe and the Americas are revolving around deflationary threats, not inflationary threats. Deflation is not a place for happy campers.

 

POLITICS AND ECONOMICS

The American and European banks and the US car companies that went broke as a result of the GFC had to be bailed out simply because they were too big to fail. And they had to be bailed out quickly. And it was the right thing to do. But Ben Bernanke and Hank Paulson cannot tell the truth about the bail-outs as this would cause more problems than it would solve. Pending legal actions and a few good books will reveal the extent of the deceptions. Michael Lewis’ "The Big Short", Lowenstein "The End of Wall Street are current examples, but more will follow. However, the system will not change quickly, if at all, and we have to live always with the twin imperfections of big business and big government. Overall, that is a manageable situation and not particularly daunting. Paul Krugman said: "To talk about economics requires that more and more, that one write about politics. John Maynard Keynes said: "Fundamental change does not occur quickly".

Good economics is the stream that feeds all social and commercial progress, but the pity of the GFC is that the capitalists turned out to be so dishonest, immoral, and amoral that big government has become fashionable again in America. This will delay the global recovery and/ or make it more vulnerable and problematic. Essentially, in economics there are two economies- the real economy being the production of goods and services, and the symbol economy – money and credit. Once upon a time the latter existed to make the former possible and viable. Today that relationship is pressured and the symbol economy tails seems to often wag the body of the economic dog.

We will survive and prosper from the latest bout of economic folly, but the recovery timetable is uncertain and certain to be bumpy. Thanks to Hawke-Keating- Walsh -Howard-Costello, Australia is well placed to participate at its recent historical level, or slightly above, in the recovery process.

 

JAMES QUINN

Mr Quinn wrote an article for www.financialsense.com on 23 July, called "Economic Plan for America" which included the table set out below –

Mark Twain said : "I’m in favour of progress, it’s change I’m against." Mr Quinn believes that there are entrenched agendas in America that cannot undo the fiscal positions in the above table and that the absence of strong and effective leadership exacerbates the problem. On the one hand America cannot increase its taxes to reduce the domestic deficit, and on the other hand it is impossible to cut expenditures without offending welfare recipients (many of them worthy and many unworthy) or the neo-con war-mongers who want a strong military in both software and hardware terms. The military software is, of course, the personnel, and the hardware is the expensive technological equipment being employed which is such a vital part of the US economy. All of the big-ticket items are untouchables.

BUT THERE ARE SOLUTIONS……. AND WINSTON’S WORDS ARE COMFORTING

Winston Churchill (born of an American mother as an aside) said that "You can always rely on America to do the right thing, once they have exhausted all of the alternatives".

A few of their current existing politicians are interesting – Ron Paul of Texas, Scott Brown of Massachusetts come to mind and Newt Gingrich. . Mr Paul goes a little far in wanting to abolish the Federal Reserve and has been tainted by occasional flirtations with the ratbags in the Tea Party. In a democracy you need the ratbags so you can identify the sensible people, but it is a pity that ratbaggery is so prevalent in America. Mr Gingrich is abrasive in the extreme and has an unfortunate marital history. Scott Brown looks promising and may soon be joined by Peter Schiff who is running for the US Senate in 2010 and quoted in our head-notes above.

And there is Obama who has so far failed to live up to his early promise, but it is not too late. True, he has many excuses; The economy was much worse than he could have predicted, he did not spend enough time with Paul Volcker and instead opted for the easy solutions, some of his personnel choices are suspect on the economics front. And worst of all Afghanistan and Iraq are not going so well and the Gulf Oil spill was an unlucky event.

BUT if the mid-terms are a wipe-out for the Democrats, America may move back towards the centre. Someone needs to steer America away from Sarah Palin, who is box-office nonsense.

 

SO ARE WE IN A MUDDLE OR ARE WE MUDDLING THROUGH?

Obviously a bit of each. But our dominant predilection is that we are muddling through, and this by definition takes longer and seems arduous. The deflationists are in the recession, depression camp and say that more monetary stimulus can get America and Europe out of its troubles. They suggest, in broad terms, more quantitative easing where the central banks buys bonds and increases the money supply. The inflationists say lower taxes and more monetary stimulus and more spending on infrastructure. Circling around the edges of the debate is the Austerians, the Von Mises Austrian school of economics, that calls for austerity, cutting back on government spend and/ or raising taxes. They are opposed by the Keynesians who say deficits don’t matter in a fiat money world and government spend on anything is good enough. We still believe that Keynes was in favour of disciplined spending but spruikers never let that fact get in the way of a good story. The solution will be a hybrid of the prevailing economic orthodoxies. The main thing is to have the right people in place.

As far as America is concerned Ecinya subscribes to the solutions outlined by Lawrence J Kotlikoff in our Insight Article of 26 April 2010.

 

SO WHERE ARE WE IN RELATION TO THE CURRENT STATE OF THE MARKETS?

We have to get through the Australian election and then review the reporting season which we believe will be reasonably satisfactory. Towards the end of August the northern hemisphere enters autumn and then winter follows which is generally a period of subdued economic activity as the construction industry goes to sleep. Then the mid-term election campaigns begin and with Obama’s approval ratings looking dismal, we anticipate a lot of nonsense and trauma. In technical terms we see our global proxy the SP500 falling to around 1000 to 950 as world growth slows in the second half of 2010 and doomsayers dominate the early stage debates. Note that the SP500 companies earn about 40% of their profits from abroad so that a lot of America’s financial success happens outside of America.

We currently believe the beginnings of the next bull-market should be evident in the fourth quarter of this calendar year.

In relation to our local elections we have already published two documents recently under Insights but thought it then premature to have a definitive opinion. During the week our editor answered his own vexatious question on the train trip from the northern suburbs to Wynyard. The question was "Why are left-leaning governments so inadequate when it comes to good economic outcomes?" His answer was; "Left leaning governments approach public finance from a position of morality. They fail to learn that what makes good common sense generally makes good economic sense. When their morality becomes unaffordable they attempt to spin their way out of trouble in the blind pursuit of power, and make things very much worse." Their infrequent election wins only makes matters worse as they indulge themselves in fantasy and half-baked ideas born out of the excitement of victory. This Labor government is exceptionally incompetent.

We believe that Mr Abbott will find a fair bit of his programme unaffordable, but the Liberal party has a better track record in government than Labor. Ms Gillard is unfortunately making Mr Rudd look good. Mr Hawke is the only Labor Prime Minister with an excellent economic track record in the post-Menzies era. True that history was on his side and his companions in office were economically sound, as were sections of the business community Mr Hawke was prepared to listen to. Labor in its current configuration is anti-business and thus anti-jobs and anti-listening and anti-consultation. Unlike the rest of us they are possessed of infinite and innate wisdom. It was said of King Philip ll of Spain, the surpassing wooden-head of all sovereigns: ‘No experience of the failure of his policy could shake his belief in its essential excellence’.