I am so sick and tired of the rubbish and scaremongering from people who (on paper) should know better.
It is a breath of fresh air to read something which actually nails the real cause of the problem and
what the problem is (solvency vs liquidity)
http://online.wsj.com/article/SB122428279231046053.html
It is like people complaining about shares going down and their super (like 401k) being down 40% this year after 4 years of more of 20% gains!
Year 1: $100,000
Year 4: $207,000
Year 5 $124,000
Showing posts with label economics. Show all posts
Showing posts with label economics. Show all posts
Monday, October 20, 2008
Thursday, October 16, 2008
Zero interest rates?!?
Ahh the Global Financial Crisis otherwise known as Global Fried Capitalism or GFC.
Blame it on capitalism and use it as an opportunity for another experiment with socialism.
Doesn't Russia's 75 year bloody detour into hell tell you something, what about North Korea....
No the enlightened, elected few and their many unelected advisors believe they can do better to "manage" the economy.
With a fundamentally socialist organization at the core of each "free market" economy, I am talking a reserve bank, it is not capitalism, never was. It is what is called a mixed economy.
What the reserve bank does is set its target rate, which is normally what banks can borrow money from it.
It defends this rate by either buy or selling bonds. It is based on the idea of a natural rate of interest.
Here is the BS that is peddled by reserve banks and economists the world over. They set their interest rates in line with the natural rate of interest, which is in fact indeterminable (unknownable) at the time they set their rate.
Set it too low and the reserve bank is said to be running an "easy" money policy...
Set it too high and the reserve bank is said to be running a tight money policy.
So reserve banks the world over have been running a easy money policy, pretty much from 9/11/2001. Eventually the easy money, at one time confused as excess savings finds it way to the most profitable game in town and then beyond, causing inflation to rise.
The reserve banks begin to raise interest rates, the media reports, "Reserve banks has a tightening bias" and suddenly things which only work when money is close to free (to banks) are no longer profitable, whoops we need to blame, executive greed, extreme capitalism, mean street, the masters of the universe.
I actually want those idiots to go to the wall and go bankrupt. That is the best thing which could happen to them and their unproductive use of money. Shuffling/merging/bundling crap loans with good and calling them Triple A assets, is like wrapping a dogshit in a bun and calling it a hotdog. Both are going to cause violence reactions.
We have a solvency crisis (not a liquidity crisis), the only way banks are going to lend to each other, rather settle accounts with each other (noone trusts the solvency of the other bank) is when the Government owns 51% of the bank and forces the banks to lend and settle.
Simple as that.
The bankers are doing, at the moment, what makes good bankers, that is, being cautious and prudent.
The Governments of the world want them to go back to be incautious and reckless.
No doubt the music will begin again when reserves banks reach that magical point again where it is easy, close to free money and all the unproductive businesses (and profits) can start again.
Then we have this bloke saying zero rate interest is going to happen.
http://business.smh.com.au/business/zero-interest-rate-a-possibility-20081016-524u.html
Noone asks the Japanese how their little experience with zero interest rate went... whoops a 15 year period in the doldrums. No thanks I would rather have money mean something.
Here is the point.
The reserve banks are to blame, they are the root cause, and provided the incentives for all the unproductive use of capital. Trying to control/manage and thereby corrupting the price signal that money provides through time (I am talking the interest rate) they have corrupted the whole structure of the economy.
That people who are fundamentally opposed to free markets are using Wall Street and Capitalism as the scapegoat is nothing new.
Mostly they are control-freaks who hate the idea that things just work out without requiring government policy or intervention. Otherwise they are peddling a social agenda which takes from the productive and gives to the people who will vote them back into office.
If the local Australian government really wanted to fix things and use their surplus properly, they should give everyone back their money their paid in taxes rather than a select group.
http://www.theaustralian.news.com.au/story/0,25197,24494843-5013946,00.html
The worse advice I have even seen was from Wayne Swan and Lindsay Tanner (who should know better).
Go and spend the payment!!! don't save it, spend it! FFS why not helicopter everyone $1000 dollars so we can all spend it! It will make us all richer won't it.... but wait, don't stop with $1000, what about $10,000 or even $100,000. How about everyone wins lotto courtesy of the government. That seems to be working in Zimbabwe and worked in the Wiemar Republic, and John Law's Mississippi Bubble as well didn't it?
They should bring it forward to have the payments arrive on the first Monday in November (before the first Tuesday ala Melbourne Cup) it will have the same effect.
The words of the late Kerry Packer come to mind...
"if anybody in this country doesn't minimise their tax, they want their heads read".
"the Government wasn't spending it so well that we should be donating extra".
Nice to see my tax dollars at work allowing people to blow it on the pokies, drink and piss it against the wall or spend it on retail goods.... I can do that as well, without having to support the ATO and government bureaucracy along the way. But wait, the politicians don't give a toss either, they are living off the tax money as well.
Have Fun (on my hard earned tax dollars)
Blame it on capitalism and use it as an opportunity for another experiment with socialism.
Doesn't Russia's 75 year bloody detour into hell tell you something, what about North Korea....
No the enlightened, elected few and their many unelected advisors believe they can do better to "manage" the economy.
With a fundamentally socialist organization at the core of each "free market" economy, I am talking a reserve bank, it is not capitalism, never was. It is what is called a mixed economy.
What the reserve bank does is set its target rate, which is normally what banks can borrow money from it.
It defends this rate by either buy or selling bonds. It is based on the idea of a natural rate of interest.
Here is the BS that is peddled by reserve banks and economists the world over. They set their interest rates in line with the natural rate of interest, which is in fact indeterminable (unknownable) at the time they set their rate.
Set it too low and the reserve bank is said to be running an "easy" money policy...
Set it too high and the reserve bank is said to be running a tight money policy.
So reserve banks the world over have been running a easy money policy, pretty much from 9/11/2001. Eventually the easy money, at one time confused as excess savings finds it way to the most profitable game in town and then beyond, causing inflation to rise.
The reserve banks begin to raise interest rates, the media reports, "Reserve banks has a tightening bias" and suddenly things which only work when money is close to free (to banks) are no longer profitable, whoops we need to blame, executive greed, extreme capitalism, mean street, the masters of the universe.
I actually want those idiots to go to the wall and go bankrupt. That is the best thing which could happen to them and their unproductive use of money. Shuffling/merging/bundling crap loans with good and calling them Triple A assets, is like wrapping a dogshit in a bun and calling it a hotdog. Both are going to cause violence reactions.
We have a solvency crisis (not a liquidity crisis), the only way banks are going to lend to each other, rather settle accounts with each other (noone trusts the solvency of the other bank) is when the Government owns 51% of the bank and forces the banks to lend and settle.
Simple as that.
The bankers are doing, at the moment, what makes good bankers, that is, being cautious and prudent.
The Governments of the world want them to go back to be incautious and reckless.
No doubt the music will begin again when reserves banks reach that magical point again where it is easy, close to free money and all the unproductive businesses (and profits) can start again.
Then we have this bloke saying zero rate interest is going to happen.
http://business.smh.com.au/business/zero-interest-rate-a-possibility-20081016-524u.html
Noone asks the Japanese how their little experience with zero interest rate went... whoops a 15 year period in the doldrums. No thanks I would rather have money mean something.
Here is the point.
The reserve banks are to blame, they are the root cause, and provided the incentives for all the unproductive use of capital. Trying to control/manage and thereby corrupting the price signal that money provides through time (I am talking the interest rate) they have corrupted the whole structure of the economy.
That people who are fundamentally opposed to free markets are using Wall Street and Capitalism as the scapegoat is nothing new.
Mostly they are control-freaks who hate the idea that things just work out without requiring government policy or intervention. Otherwise they are peddling a social agenda which takes from the productive and gives to the people who will vote them back into office.
If the local Australian government really wanted to fix things and use their surplus properly, they should give everyone back their money their paid in taxes rather than a select group.
http://www.theaustralian.news.com.au/story/0,25197,24494843-5013946,00.html
The worse advice I have even seen was from Wayne Swan and Lindsay Tanner (who should know better).
Go and spend the payment!!! don't save it, spend it! FFS why not helicopter everyone $1000 dollars so we can all spend it! It will make us all richer won't it.... but wait, don't stop with $1000, what about $10,000 or even $100,000. How about everyone wins lotto courtesy of the government. That seems to be working in Zimbabwe and worked in the Wiemar Republic, and John Law's Mississippi Bubble as well didn't it?
They should bring it forward to have the payments arrive on the first Monday in November (before the first Tuesday ala Melbourne Cup) it will have the same effect.
The words of the late Kerry Packer come to mind...
"if anybody in this country doesn't minimise their tax, they want their heads read".
"the Government wasn't spending it so well that we should be donating extra".
Nice to see my tax dollars at work allowing people to blow it on the pokies, drink and piss it against the wall or spend it on retail goods.... I can do that as well, without having to support the ATO and government bureaucracy along the way. But wait, the politicians don't give a toss either, they are living off the tax money as well.
Have Fun (on my hard earned tax dollars)
Tuesday, March 25, 2008
Housing affordability
Big issue in Australia, especially in large cities is the lack of housing affordability, and rents which are increasing rapidly.
Tonight the SBS insight program skimmed over the issue.
All interested parties are lobbying hard for the Government to step in and "make a difference".
The new PM ol' mate Kev says that is it the number one problem (amongst other number one problems) affecting working families.
By now you should known that I think getting the Government involved is a sure way to make it worse. We even have a classic recent example.
The First Home Owners Grant (FHOG) introduced, had the opposite effect. Damn law of unintended consequences...
Instead of improving the ability for first homeowners all it did was put a fire under the existing demand, $1 Billion per year, leveraged by the banks to 95% (with mortgage insurance) of course and you have $20 Billion dollars looking for a home in property.
But wait, in an unconstrained market, tonnes of entrepreneurs (and investors) would jump in and provide supply for all that extra demand... right?
Like MySpace and Facebook caused a huge increase in the number of social networking sites on the internet.
Housing has some characteristics (not an exhaustive list)
What should and eventually will happen in Sydney and Melbourne is what has already happened overseas. New York is a good example. Everyone wants to live close to work, densities increase and we have apartment blocks and skyscrapers where people demand to live!
At the moment we have everyone wanting to live with a enjoyable traveling distance of their place of work. Most work is concentrated in CBDs, so you can draw a radiating circles around it in terms of travel times and map reasonably accurately where free standing houses are a waste of space and need to be replaced by higher density housing.
You can join the mortgage treadmill or make your asset work for you and get the normal tax deductions of an income producing asset. Living elsewhere for the first 7-10 years of the mortgage is the best thing you can do. Mortgage interest is dead money as well.
The most interesting tidbit I got from the Insight problem was the Federal minister mentioning reviewing fair rental rates. This sounds like rent controls in disguise (similar to the NRMA and ACCC petrol price witch hunt).
Ask New Yorkers what rent controls have done to parts of New York City!
Guess what happens to supply if you limit or legislate the return on investment?
Have Fun
Paul
Tonight the SBS insight program skimmed over the issue.
All interested parties are lobbying hard for the Government to step in and "make a difference".
The new PM ol' mate Kev says that is it the number one problem (amongst other number one problems) affecting working families.
By now you should known that I think getting the Government involved is a sure way to make it worse. We even have a classic recent example.
The First Home Owners Grant (FHOG) introduced, had the opposite effect. Damn law of unintended consequences...
Instead of improving the ability for first homeowners all it did was put a fire under the existing demand, $1 Billion per year, leveraged by the banks to 95% (with mortgage insurance) of course and you have $20 Billion dollars looking for a home in property.
But wait, in an unconstrained market, tonnes of entrepreneurs (and investors) would jump in and provide supply for all that extra demand... right?
Like MySpace and Facebook caused a huge increase in the number of social networking sites on the internet.
Housing has some characteristics (not an exhaustive list)
- It is a long term durable asset.
- Supply is illiquid due to a couple of reasons (see below)
- It is reasonably expensive to build new or replace existing with higher density.
- Zoning laws and associated regulations. Mostly local government related.
- It takes time to build houses and units.
- New land releases are slow and in outlying areas.
- Noone wants to live 2-4 hours commute from their job.
- Existing homeowners: They are the ones wanting heritage listing, facade orders, height and density regulations. Anything which reduces supply when demand is the same or strong will increase the value of their primary asset (their house).
- State Labor Parties: Political donations from big property developers help ease the pain of working in State politics versus the glory of Federal.
- State Governments: Increasing house and land prices equals more stamp duty and more land tax!!
- Local Councils: Increased house and land prices equals more rates. I am sure the power of controlling development goes to the head of some people as well.
What should and eventually will happen in Sydney and Melbourne is what has already happened overseas. New York is a good example. Everyone wants to live close to work, densities increase and we have apartment blocks and skyscrapers where people demand to live!
At the moment we have everyone wanting to live with a enjoyable traveling distance of their place of work. Most work is concentrated in CBDs, so you can draw a radiating circles around it in terms of travel times and map reasonably accurately where free standing houses are a waste of space and need to be replaced by higher density housing.
You can join the mortgage treadmill or make your asset work for you and get the normal tax deductions of an income producing asset. Living elsewhere for the first 7-10 years of the mortgage is the best thing you can do. Mortgage interest is dead money as well.
The most interesting tidbit I got from the Insight problem was the Federal minister mentioning reviewing fair rental rates. This sounds like rent controls in disguise (similar to the NRMA and ACCC petrol price witch hunt).
Ask New Yorkers what rent controls have done to parts of New York City!
Guess what happens to supply if you limit or legislate the return on investment?
Have Fun
Paul
Sunday, March 16, 2008
Abolish Capital Gains
I was reading a interesting article on Institutional Economics regarding capital gains on residental and investment property
Why not abolish capital gains tax completely on all assets. It is a tax on investment.
We increase our capital stock and maybe productivity will increase as well eh?
That would kill the stagnant productivity and lack of infrastructure problems with one stone.
Of course this will never happen, similar to having a flat income tax rather than progressive. People like the idea that rich people get taxed more, and pollies pander to popular feeling.
I have always hated the idea that as I build up a business, at some point the Government is waiting in the wings (if I sell any portion) to take their cut. On the understanding of course that I am currently, presently and until I sell any portion not already being taxed so that the Government can provide the necessary public infrastructure to enable my business to grow.
You could argue if my business are almost completely of an online nature, that somehow the Government is still providing my business with "soft" infrastructure in the form of education.
When in doubt refer to the tax office reports (I noticed they are dragging the chain on releasing new statistics).
The summary, Capital Gains Tax (CGT) made the government $7 billion in 2004-2005. That
is 7% of Personal income tax. 17.% % of Company tax and about the same for GST.
What would $7.9 billion mean in terms of new investment?
In 2004-2005 $79 Billion was spent on new assets, so the CGT was 10% of that. It is not likely all the money would have gone into new assets. That would depend on the companies Return on Assets (ROA). So either it would held as cash, invested or given back as dividends.
Capital gains tax
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=36&H36
OVERVIEW
For the 2004–05 income year:
* net capital gains totalled $25.7 billion, and were reported by 974,284 taxable individuals, 18,657 taxable companies and 75,075 taxable funds
* CGT payable on the net capital gains of taxable individuals, companies and funds was estimated to be $7.0 billion
* 461,713 taxable individuals, companies and funds declared $56.4 billion in total current year capital gains on their CGT schedules. Around 62.3% or $35.1 billion of these total capital gains were sourced from shares.
Personal income tax
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=31&H31
OVERVIEW
For the 2004–05 income year:
* 11.2 million individuals lodged income tax returns
* individuals had total income of $447.5 billion, taxable income of $423.7 billion and net tax payable of $103.6 billion
* individuals claimed $23.8 billion in total deductions, including $11.9 billion in work-related expenses
* 7.7 million individuals were entitled to tax offsets and credits totalling $13.6 billion
* 73.0% of tax returns or 8.2 million were submitted by tax agents, and 11.6% or 1.3 million were submitted using e-tax.
Company tax
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=32&H32
OVERVIEW
For the 2004–05 income year:
* 707,455 companies lodged returns, a 3.4% increase from 2003–04
* companies reported total income of $1,638.8 billion, a 7.3% increase from 2003–04
* total company expenses were $1,486.8 billion, a 5.8% increase from 2003–04
* companies were liable for $40.5 billion in net tax, a 16.2% increase from 2003–04.
For the 2005–06 financial year:
* petroleum resource rent tax totalled $2.0 billion.
GST
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=39&H39
OVERVIEW
For the 2005–06 financial year:
* total net GST liabilities (including Customs collections) increased by 5.3% to $37.3 billion, up from $35.5 billion in 2004–05
* wine equalisation tax liabilities (including Customs collections) decreased by less than 0.5% from the previous year to $663.0 million
* luxury car tax liabilities (including Customs collections) increased by 7.3% to $322.4 million.
Why not abolish capital gains tax completely on all assets. It is a tax on investment.
We increase our capital stock and maybe productivity will increase as well eh?
That would kill the stagnant productivity and lack of infrastructure problems with one stone.
Of course this will never happen, similar to having a flat income tax rather than progressive. People like the idea that rich people get taxed more, and pollies pander to popular feeling.
I have always hated the idea that as I build up a business, at some point the Government is waiting in the wings (if I sell any portion) to take their cut. On the understanding of course that I am currently, presently and until I sell any portion not already being taxed so that the Government can provide the necessary public infrastructure to enable my business to grow.
You could argue if my business are almost completely of an online nature, that somehow the Government is still providing my business with "soft" infrastructure in the form of education.
When in doubt refer to the tax office reports (I noticed they are dragging the chain on releasing new statistics).
The summary, Capital Gains Tax (CGT) made the government $7 billion in 2004-2005. That
is 7% of Personal income tax. 17.% % of Company tax and about the same for GST.
What would $7.9 billion mean in terms of new investment?
In 2004-2005 $79 Billion was spent on new assets, so the CGT was 10% of that. It is not likely all the money would have gone into new assets. That would depend on the companies Return on Assets (ROA). So either it would held as cash, invested or given back as dividends.
Capital gains tax
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=36&H36
OVERVIEW
For the 2004–05 income year:
* net capital gains totalled $25.7 billion, and were reported by 974,284 taxable individuals, 18,657 taxable companies and 75,075 taxable funds
* CGT payable on the net capital gains of taxable individuals, companies and funds was estimated to be $7.0 billion
* 461,713 taxable individuals, companies and funds declared $56.4 billion in total current year capital gains on their CGT schedules. Around 62.3% or $35.1 billion of these total capital gains were sourced from shares.
Personal income tax
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=31&H31
OVERVIEW
For the 2004–05 income year:
* 11.2 million individuals lodged income tax returns
* individuals had total income of $447.5 billion, taxable income of $423.7 billion and net tax payable of $103.6 billion
* individuals claimed $23.8 billion in total deductions, including $11.9 billion in work-related expenses
* 7.7 million individuals were entitled to tax offsets and credits totalling $13.6 billion
* 73.0% of tax returns or 8.2 million were submitted by tax agents, and 11.6% or 1.3 million were submitted using e-tax.
Company tax
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=32&H32
OVERVIEW
For the 2004–05 income year:
* 707,455 companies lodged returns, a 3.4% increase from 2003–04
* companies reported total income of $1,638.8 billion, a 7.3% increase from 2003–04
* total company expenses were $1,486.8 billion, a 5.8% increase from 2003–04
* companies were liable for $40.5 billion in net tax, a 16.2% increase from 2003–04.
For the 2005–06 financial year:
* petroleum resource rent tax totalled $2.0 billion.
GST
http://www.ato.gov.au/corporate/content.asp?doc=/content/81183.htm&page=39&H39
OVERVIEW
For the 2005–06 financial year:
* total net GST liabilities (including Customs collections) increased by 5.3% to $37.3 billion, up from $35.5 billion in 2004–05
* wine equalisation tax liabilities (including Customs collections) decreased by less than 0.5% from the previous year to $663.0 million
* luxury car tax liabilities (including Customs collections) increased by 7.3% to $322.4 million.
Monday, January 14, 2008
Baby bonus is for everyone
When the baby bonus was introduced into Australia there were are large number of naysayers as is expected.
People tend to forget the treasurer at the time (Peter Costello) introduced the bonus as a way to increase the fertility rate, so that the demographic nightmares which will engulf Japan, Europe and China can be lessened or reversed in Australia.
To put it simply. The Government introduced the baby bonus as an investment (in their eyes), the return being that there will be a similar number of taxpayers as there are now to cope with aging population demographic.
So the government GIVES NOW, knowing it will TAKE and TAKE TAXES in the future from these recent newborns.
Now we get the funny and sad bit.
Most major newspapers rang stories on how the RICH suburbs are also claiming the baby bonus. So the Government should means test the baby bonus. This will stop middle-class welfare apparently. Blah blah welcome to Marxist class warfare garbage peddled as an opinion piece.
Wrong, bad idea. Go read the previous paragraph. This is about the next generation of taxpayers remember.
Now go and read the ATO tax reports by postcode for NSW.
The average Kirribilli taxpayer pays an average net tax of $37,000.00!!
Compare this with Liverpool, NSW, which apparently has the most claims for the baby bonus.
The average Liverpool taxpayer pays an average net tax of $8,891.00. That is 4.6 times less than the average Kirribilli taxpayer.
A little arithmetic and little data gathering from public available sources on the net and we find that if anything, the government should be encouraging those $100K income per year "rich" bastards in Kirribilli to have more babies, especially given those children are likely to pay 4.5 times more tax!
Over their working life of 40 years.
Average Kirribilli Taxpayer will pay $1,480,000 in tax.
Average Liverpool Taxpayer will pay $355,640 in tax.
Now you see why the government is not going to scrap this policy (nor means test it) anytime soon.
Cynically the Return on Investment (ROI) for the government is massive. Outlay $5000 dollars now and get a 7112% ROI on the kid in Liverpool, and 29,600% ROI on the kid in Kirribilli!
I thought the idea of paying only on the 2nd child would have merit. However potentially it is worth more (to the government) to continue the 1st child payment and increase the 2nd child payment by 50% and third (the so-called "child for your country") maybe 150%-200%.
If I had time, you could work out in financial terms what the average taxpayer is worth to the government based on those numbers.
People tend to forget the treasurer at the time (Peter Costello) introduced the bonus as a way to increase the fertility rate, so that the demographic nightmares which will engulf Japan, Europe and China can be lessened or reversed in Australia.
To put it simply. The Government introduced the baby bonus as an investment (in their eyes), the return being that there will be a similar number of taxpayers as there are now to cope with aging population demographic.
So the government GIVES NOW, knowing it will TAKE and TAKE TAXES in the future from these recent newborns.
Now we get the funny and sad bit.
Most major newspapers rang stories on how the RICH suburbs are also claiming the baby bonus. So the Government should means test the baby bonus. This will stop middle-class welfare apparently. Blah blah welcome to Marxist class warfare garbage peddled as an opinion piece.
Wrong, bad idea. Go read the previous paragraph. This is about the next generation of taxpayers remember.
Now go and read the ATO tax reports by postcode for NSW.
The average Kirribilli taxpayer pays an average net tax of $37,000.00!!
Compare this with Liverpool, NSW, which apparently has the most claims for the baby bonus.
The average Liverpool taxpayer pays an average net tax of $8,891.00. That is 4.6 times less than the average Kirribilli taxpayer.
A little arithmetic and little data gathering from public available sources on the net and we find that if anything, the government should be encouraging those $100K income per year "rich" bastards in Kirribilli to have more babies, especially given those children are likely to pay 4.5 times more tax!
Over their working life of 40 years.
Average Kirribilli Taxpayer will pay $1,480,000 in tax.
Average Liverpool Taxpayer will pay $355,640 in tax.
Now you see why the government is not going to scrap this policy (nor means test it) anytime soon.
Cynically the Return on Investment (ROI) for the government is massive. Outlay $5000 dollars now and get a 7112% ROI on the kid in Liverpool, and 29,600% ROI on the kid in Kirribilli!
I thought the idea of paying only on the 2nd child would have merit. However potentially it is worth more (to the government) to continue the 1st child payment and increase the 2nd child payment by 50% and third (the so-called "child for your country") maybe 150%-200%.
If I had time, you could work out in financial terms what the average taxpayer is worth to the government based on those numbers.
Sunday, August 19, 2007
US Fed blinks
For all the spin that the US Federal Reserve Bank (the Fed) Governor Dr. Bernanke was different to Mr Greenspan, when push comes to shove they both blinked.
Providing liquidity for banks borrowing from the Fed was not enough apparently to stave off further spikes in overnight/fed funds/interest rate which banks would lend money to each other and borrow from the Federal Reserve. For a reasonable explanation of the process read this article
from the weekend Sydney Morning Herald.
Unfortunately the missing or unstated part of this process of short term lending is the fact that the Fed and the Australian Reserve Bank assets keep ballooning over time.
When any central bank comes out with a interest rate statement, they need to defend that interest rate by injecting credit into the system or withdrawing from the system, depending on the supply or demand for that credit.
The other fun part of this week was the only slight mention of the slight unwinding of the Yen carry trade. Basically the Japanese Central bank has been throwing credit at anyone who wants it and Japanese investors have looked for overseas yielding assets in preference for holding Japanese assets yielding 0.25%-0.50%.
If you are a bank you would be stupid to source your credit from anywhere but Japan. Say you borrow $1 Billion USD equivalent from a Japanese Bank, you can turn around and buy USD denominated assets or even better NZ and AUS denominated assets. Pay interest on %0.5 and collect interest on %6.5-8.5%. So earn a tidy 6-8% p.a. on the borrowed money.
So why does US non-performing high risk loans cause the carry trade to get hammered. Potentially the purchasers of these CDO was mostly the yen carry trade money!
Why, the potential to make a little more margin on the yield pay! Making an extra $10 million for every extra 1% yield per $1 billion borrowed.
Now if this is correct you should see the USD appreciate against the YEN as investors borrow in Yen, sell the Yen and buy USD to buy US dollar assets. Similarly for AUD and NZD assets. The longer term trend reflecting where the investors doing the carry trade believe the highest yield margins exists.
A little interesting thing to come out of this was the media and interviewed analysts saying their was a "flight to quality" meaning a flight to government bonds. If the investors saw this as a longer term issue, they would be buying bonds across the board.
Not so. Look at this table, the short-term bond yields have dropped (as investors demand them and therefore increase the price) more than 70 basis points (0.7%) in a week. So the stampede is/was into short term bonds... wait until the Fed blinks and cut rates like every other time, and let the credit binge continue as before, now the early bond investors can sell their bonds and pocket the tidy 110 Basis point profit, and jump back into the sold down high yield assets.
It will be interesting to see how short term bonds go now. I would expect selling pressure to be intense.
Given nothing has changed in AUS and NZ. There will be money chasing yield again, possibly flowing out of US as they just cut the margin on the yield play from 0.5%.
Tomorrow will be a big up day for both NZ and AUD (and their respective bonds and markets).
Last thing, the CDOs have let bank and non-bank lenders to get loans off their books, by bundling the loans as yielding assets. So plenty of hedge and other fund managers have bought these "assets", possibly in the hedge funds case using borrowed money (from banks). So whilst the banks no longer have the risk of default from the borrowers eg. mortgage borrowers, the larger banks now have the risk of default from the hedge funds.
The idea that there is excessive savings (something the Fed governor wrote about some time ago) is spin at best, a plain lie at worst. It is not excessive savings, it is hot money in the form of credit sloshing around global markets looking not for alpha or beta but whatever asset can yield the most margin.
Not one politician in Australia mentioned that the 11.3% drop in a little over a week was good for Australian exporters, but then really, only people fixated on exports and trade deficits (bad of course) worry about a $AUD 12 Billion annual trade deficit when the GDP is $AUD 922 Billion! That 12 billion is 1.3% of the total GDP. Big woot!
If you use the 2004-2005 Company tax statistics, Australia has a AUD 1.4 to 1.6 Trillion (1000 Billion) economy backed by $AUD 4.4 Trillion in Assets!!
That AUD 12 Billion becomes 0.075% of that sized economy.
What the media and lobby groups play/prey on is that 12 Billion dollars is an extremely large
amount of money for 99% of the population, forgetting the fact that even AUD 1.6 trillion split evenly over the 707,455 companies who were taxed that is only AUD 2.2 million per company.
Of course nothing human is an even split or even a Gaussian bell curve, it is power law curves everywhere.
For all the press about capacity constraints, this has only come about as external demands for products from Australia has caused an capacity used within Australia to be bid away to external uses rather than internal uses.
Have Fun
Paul
Providing liquidity for banks borrowing from the Fed was not enough apparently to stave off further spikes in overnight/fed funds/interest rate which banks would lend money to each other and borrow from the Federal Reserve. For a reasonable explanation of the process read this article
from the weekend Sydney Morning Herald.
Unfortunately the missing or unstated part of this process of short term lending is the fact that the Fed and the Australian Reserve Bank assets keep ballooning over time.
When any central bank comes out with a interest rate statement, they need to defend that interest rate by injecting credit into the system or withdrawing from the system, depending on the supply or demand for that credit.
The other fun part of this week was the only slight mention of the slight unwinding of the Yen carry trade. Basically the Japanese Central bank has been throwing credit at anyone who wants it and Japanese investors have looked for overseas yielding assets in preference for holding Japanese assets yielding 0.25%-0.50%.
If you are a bank you would be stupid to source your credit from anywhere but Japan. Say you borrow $1 Billion USD equivalent from a Japanese Bank, you can turn around and buy USD denominated assets or even better NZ and AUS denominated assets. Pay interest on %0.5 and collect interest on %6.5-8.5%. So earn a tidy 6-8% p.a. on the borrowed money.
So why does US non-performing high risk loans cause the carry trade to get hammered. Potentially the purchasers of these CDO was mostly the yen carry trade money!
Why, the potential to make a little more margin on the yield pay! Making an extra $10 million for every extra 1% yield per $1 billion borrowed.
Now if this is correct you should see the USD appreciate against the YEN as investors borrow in Yen, sell the Yen and buy USD to buy US dollar assets. Similarly for AUD and NZD assets. The longer term trend reflecting where the investors doing the carry trade believe the highest yield margins exists.
A little interesting thing to come out of this was the media and interviewed analysts saying their was a "flight to quality" meaning a flight to government bonds. If the investors saw this as a longer term issue, they would be buying bonds across the board.
Not so. Look at this table, the short-term bond yields have dropped (as investors demand them and therefore increase the price) more than 70 basis points (0.7%) in a week. So the stampede is/was into short term bonds... wait until the Fed blinks and cut rates like every other time, and let the credit binge continue as before, now the early bond investors can sell their bonds and pocket the tidy 110 Basis point profit, and jump back into the sold down high yield assets.
It will be interesting to see how short term bonds go now. I would expect selling pressure to be intense.
Given nothing has changed in AUS and NZ. There will be money chasing yield again, possibly flowing out of US as they just cut the margin on the yield play from 0.5%.
Tomorrow will be a big up day for both NZ and AUD (and their respective bonds and markets).
Last thing, the CDOs have let bank and non-bank lenders to get loans off their books, by bundling the loans as yielding assets. So plenty of hedge and other fund managers have bought these "assets", possibly in the hedge funds case using borrowed money (from banks). So whilst the banks no longer have the risk of default from the borrowers eg. mortgage borrowers, the larger banks now have the risk of default from the hedge funds.
The idea that there is excessive savings (something the Fed governor wrote about some time ago) is spin at best, a plain lie at worst. It is not excessive savings, it is hot money in the form of credit sloshing around global markets looking not for alpha or beta but whatever asset can yield the most margin.
Not one politician in Australia mentioned that the 11.3% drop in a little over a week was good for Australian exporters, but then really, only people fixated on exports and trade deficits (bad of course) worry about a $AUD 12 Billion annual trade deficit when the GDP is $AUD 922 Billion! That 12 billion is 1.3% of the total GDP. Big woot!
If you use the 2004-2005 Company tax statistics, Australia has a AUD 1.4 to 1.6 Trillion (1000 Billion) economy backed by $AUD 4.4 Trillion in Assets!!
That AUD 12 Billion becomes 0.075% of that sized economy.
What the media and lobby groups play/prey on is that 12 Billion dollars is an extremely large
amount of money for 99% of the population, forgetting the fact that even AUD 1.6 trillion split evenly over the 707,455 companies who were taxed that is only AUD 2.2 million per company.
Of course nothing human is an even split or even a Gaussian bell curve, it is power law curves everywhere.
For all the press about capacity constraints, this has only come about as external demands for products from Australia has caused an capacity used within Australia to be bid away to external uses rather than internal uses.
Have Fun
Paul
Tuesday, August 07, 2007
Consumption fallacy
Not much technical stuff here, just my opinion, searchable, indexable, and hopefully readable until the sun burns out.
I don't know how many times I have read articles which maintain the fallacy that
Rather than using goods or barter, in modern economies that requires the use of money, which is the means of exchange i.e. two parties, one labeled the consumer are exchanging goods or services.
Read that again. Two parties are exchanging goods or services in any transaction.
Without the use of force, all transactions or trades (exchanges) are normally mutually beneficial to both parties, and vice versa, the exchange would NOT occur if this was not true.
So production always proceeds consumption. I provide DBA services, and receive money which I use to consume pizza. Money acts the tool to save me bartering fractional DBA services to the pizza man. Similarly money acts as a tool for the pizza man when he uses it buying salami.
Look at it from a different perspective.
Would you rather be the person who produces and sells 10 widgets for $1 each versus the person who produces and sells 10 million widgets for $1 each.
Who has the better purchasing power?
Who has the better consuming power?
Who is the most productive?
Green alternative answer: Who is the most corporately responsible, ethical and carbon neutral?
The only way a party can consume without producing is to
Wondering why dictatorships, socialist and communist societies suck? here's why
Welcome to lowest common denominator, why produce more or better when the products of your effort and skill are distributed without your consultation.
Before I don the flame retardant suit made from 100% asbestos, not being able to produce is a valid reason to be dependent on others. The easiest example of that is children.
So why have children? what service do children provide?
I can think of a couple of reasons:
Have Fun
Paul
I don't know how many times I have read articles which maintain the fallacy that
- The consumer and consumption are the largest part of any modern economy.
- That most people in a developed society/economy exist to consume.
- Without continued consumption the economy is going to crash and burn.
Rather than using goods or barter, in modern economies that requires the use of money, which is the means of exchange i.e. two parties, one labeled the consumer are exchanging goods or services.
Read that again. Two parties are exchanging goods or services in any transaction.
Without the use of force, all transactions or trades (exchanges) are normally mutually beneficial to both parties, and vice versa, the exchange would NOT occur if this was not true.
So production always proceeds consumption. I provide DBA services, and receive money which I use to consume pizza. Money acts the tool to save me bartering fractional DBA services to the pizza man. Similarly money acts as a tool for the pizza man when he uses it buying salami.
Look at it from a different perspective.
Would you rather be the person who produces and sells 10 widgets for $1 each versus the person who produces and sells 10 million widgets for $1 each.
Who has the better purchasing power?
Who has the better consuming power?
Who is the most productive?
Green alternative answer: Who is the most corporately responsible, ethical and carbon neutral?
The only way a party can consume without producing is to
- Use counterfeit money.
- Broadly... live dependent on others. That includes the Government. Taxes are one form of an exchange using force i.e. pay tax or go to jail.
Wondering why dictatorships, socialist and communist societies suck? here's why
Welcome to lowest common denominator, why produce more or better when the products of your effort and skill are distributed without your consultation.
Before I don the flame retardant suit made from 100% asbestos, not being able to produce is a valid reason to be dependent on others. The easiest example of that is children.
So why have children? what service do children provide?
I can think of a couple of reasons:
- Old age care, you are looking after them now and they will look after you then. This is in the face of the fact of government pensions and old age care. But again it takes more than 80 years to change deep ingrained cultural heritage.
- You get to go to the toy shop and buy whatever toy you like!
- Play lego again.
- Experience the joys and sorrow of parenthood, so you can bore your children in your old age with their childhood memories (see point 1).
Have Fun
Paul
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