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’)
- 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.
- 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.
- 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
- 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’.