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blue skies

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  1. Didn’t I say that Kevin would get the bullet, well now he has and we have a Barren Taffy Chick running the show.

    Unless there is some amazing PR it looks like curtains for the tax raisers. What’s the betting super profit tax gets chopped as well ?

    Hard to remember just what you say, your comments are so numerous.

    Mr Rudd was dropped for the simple reason the he would not win the comming election.

    One possitive off spin will be a harder line on boat people and a soffening of the carbon thingy.

    That is the price Miss Gillard will have to pay the power brokers

    The Government knows tax revenue will drop with the comming global down turn.

    Super taxs will come make no mistake.

  2. Have aussies ever had a bubble burst before?

    1890 This was a property bust not unlike the current situation. Melborne was the worst affected. Banks were guttered.

    1930 Global Crash a share market crash, property drops were a after afect.

    Late 1999 interest rate increases peaking at 18% crushed borrowers and froze the economy.

    2010 a 10% drop by years end and it is just the start of 10 years of drops.

    In my street 18 months ago when property had dropped 10% it sold for $370 000

    6 months ago the same property sold for $470 000

    It is now for sale $500 000

    When it sold for $470 000 it was rented out for $350 per week making the owner $18 200 gross per year.

    The interest he would pay on a loan of $470 000 say 7.5% = $35 250 + water and shire rates $1 500 + repairs $500 Rental agent fees + $1 500 Total = $38750

    He is loosing a minimum of $38750 less the rent $18200 gives a Total loss of $20,550.

    Given that the risk is that Australian property will fall is it any wonder he is trying to sell?

    One seller will quickly turn to 10 than 100 . 1000 soon it will be that the same forces that drove prices up will work in reverse.

  3. Here Comes the U.S. Housing Market Double Dip

    Housing-Market / US Housing Jun 22, 2010 - 09:42 AM

    By: Justice_Litle


    Best Financial Markets Analysis ArticleThe housing market double dip is coming... along with an unpopped Australian bubble just waiting to burst.

    Remember when "safe as houses" was a legitimate expression? Now it's a bit of an ironic joke. What counts as no joke at all, however, is the chaos investors will face when the second wave of housing market turmoil hits.

    There has been such a grand buffet of top-down troubles to choose from – collapsing eurozone, overheating China, the BP oil spill – that global real estate markets have been back-burnered. Based on the way things are unfolding, though, they will soon come back to the fore.

    Aussie Aussie!

    Before we talk about "second waves," let's talk about first waves. There are yet a few housing bubbles in the world ready to pop in grand style – with vicious outcomes to count on when they do.

    Take the land down under, for example. Australia has long been known as "the lucky country" for its beautiful climate and abundant natural resources. But the Aussies won't be feeling so lucky when their bubble goes kablooey...

    The Australian housing market is a "time bomb," says legendary investor and renowned bubble-spotter Jeremy Grantham. "You cannot possibly miss it," he adds, further noting that "sooner or later, the rates will go up and the game is over."

    Grantham's logic is irresistibly simple:


    The price of housing is typically in the range of 3.5 times family income.


    Australia's home prices are now trading at an average of 7.5 times, i.e. superbubble territory.


    Real estate bubbles are the same because they are all "unique and different."


    That is to say, the bulls always advance "special" reasons why such and such bubble won't pop.


    Without fail, the "special case" bubble always pops anyway. By the keen-eyed measure of Grantham's quantitative asset management firm – which runs $106 billion at last count – every major asset bubble in all of recorded history has burst.

    And thus, if Grantham's expectations play out in accordance with the unblemished track record of historical norms, Aussie home prices would have to fall more than forty percent (!) to revert back to long-term trend.

    By various measures, China, Canada, and the U.K. are also home to unpopped housing bubbles of disconcerting size. They, too, will burst. And unlike the U.S. housing bubble and bust, these latter burstings will appear against a backdrop of spent stimulus and gargantuan government debt burdens, making it that much harder for Keynesian-minded politicians to ride to the rescue with checks they can't cash.

  4. This is part of Elders say, O yer they are gona loose money big time.

    Trading results

    In a Trading and Operational Update lodged with the ASX today, Elders advised that market conditions (principally persistently low prices for key farm supply lines, coupled with subdued activity levels in real estate, New Zealand and live export volumes to Indonesia) meant that earnings from Rural Services operations for the June quarter and FY2010 would be substantially lower than anticipated.

  5. Yawn, another blow in comment that means nothing

    Elders ELD one of the biggest may even be the biggest Agricultural company in Australia has slashed its earnings forcast because of down turns in that sector.

    The result is that there share price is in free fall. something like 50% ? just to day from memory.

    So there you have the out look for Australian agriculture.

    It is a highly indebited company that now finds its self in trouble.

    Interest rates on the up.

    Its assetts falling in value.

    Its income falling.

    Come to think of it sounds like three quarters of the ASX.

  6. Very poetic, but what a load of rubbish. The oil was nice, but we managed to run a whole empire before we even knew it was there. We have a lot of immigrants, but the USA was formed from immigrants from all over the world and is now the world's no.1 economy. Times will be tough, but I don't subscribe to your logic or outcomes.

    Great brittan was broke before North Sea Oil turned its fourtunes arround.

    The empire days are long gone.

    The USA is the new Rome.

    The oil they had is all but gone used to populate and industralise.

    Just like Rome of old the slaves (immigrants) are now in the majority.

    And just as Rome was no1 before is fell, so is the USA.

    I wonder if China in 20 years will open its doors to the unemployed?

  7. Australia's Riskiest Asset – Housing

    Your editor has barely touched the housing bubble recently.

    We must be losing our touch.

    So, after a pause it's time to get back on the horse.

    Money Morning reader Michael sent us a media release from the Real Estate Institute of Australia (REIA). The headline was, "No housing bubble in Australia".

    The headline doesn't surprise us, we'd expect that.

    We were tempted to take their word as gospel and give up our claims that Australia is facing the mother of all house price crashes.

    But we resisted the temptation. Instead we decided to take a look at what the REIA had to say. The following selected quotes caught our attention.

    Here's the first one:

    "What we are experiencing in the housing market is normal growth for house prices. If Australia was in the midst of a so-called housing bubble, then we have been there for some time. REIA's data highlights that historically, median prices, compared to income, have been relatively stable for the past ten years, taking into account normal fluctuations."

    And now for the second:

    "Over the period Dec 1996 – Dec 2009, median house prices increased from around $160k to around $500k; a trebling in thirteen years steadily."

    It then prints the following table which completely contradicts the first quote:

    Source: REIA

    Although the REIA has presented the data rather cleverly. You look at the "House Prices Quarterly Average Growth Rate %" column and then at the "Median Family Income Quarterly Average Growth Rate %" column and you could be forgiven for thinking that the numbers are pretty similar.

    Or at least that the difference is so small it's negligible.

    The problem is they aren't. Not when you factor in compounding over thirteen years.

    To show you what I mean, take a look at the chart below:

    Source: Based on REIA numbers

    Importantly, take a look at the following chart which shows the ratio of median house price to median household income:

    Source: Based on REIA numbers

    The ratio of house price to median household income has increased from around five-times income to nine-times income.

    In simple terms house prices are much, much higher today when compared to household income than they were fourteen years ago.

    But the key fact is that it shows how irrelevant are the claims made by spruikers about dual income households having pushed up prices.

    The reason that fallacy is disproved is that if it was merely a second income pushing the prices up then the ratio would be relatively constant.

    Put it this way, if there are two people living in separate homes each with an income of $30,000 and they each own a home worth $60,000, then it's a ratio of two-times income.

    If they then move in together and can now afford a house worth $120,000 then it's still a ratio of two-times household income.

    In 1996, according to the Australian Taxation Office (ATO), the median household income was $31,374. By March 2010, according to the average growth rates indicated by the REIA, that average median household income is $57,138.

    Now look, we're just going by the numbers provided by the REIA and the ATO, but there's absolutely no way that anyone could come to the conclusion that property prices aren't out of whack at the moment.

    The number of income earners that comprise the household is irrelevant. What we're comparing is the total household income in 1996 with the total household income in 2010 and then measuring the ratio against the median house price for those periods.

    The result is that thanks to easy credit – not more women entering the workforce – house prices have tripled in fourteen years whereas incomes have barely doubled. Importantly, the impact on the ratio of house prices to incomes has blown out to nearly nine-times incomes from five-times incomes in 1996.

    In fact there's a reasonable argument to suggest that the spruikers are putting the cart before the horse. House prices haven't risen because more women are entering the workforce, instead women are forced to enter the workforce due to the housing bubble.

    Households need two incomes to afford a house, whereas in the past one income was enough.

    But what we love most about the REIA press release is the comment that, "What we are experiencing in the housing market is normal growth for house prices...", followed by the statement that "Over the period Dec 1996 – Dec 2009, median house prices increased from around $160k to around $500k; a trebling in thirteen years steadily."

    Ha, ha... a steady trebling in prices in just thirteen years. Apparently that's "normal growth" for something to treble in value in a short period without it being a bubble.

    I mentioned above the excuse put forward by spruikers about two-income households. That because more women are now in the workforce that helps to explain rising house prices.

    But hold the front page. Late breaking news is that they had two-income households in the US, UK and Ireland as well. I know Australia is supposed to be different, but we're not unique when it comes to having two people in a household working.

    Two income households didn't stop the US, UK and Irish property collapse. And it won't stop the Australian property collapse.

    It's just another shameless attempt by the spruikers to have you believe that somehow Australia is different. Yet time and again their myths are exposed as being baseless.

    But Michael Pascoe over at The Age has been doing some of his own mythbusting. Or rather he believes Reserve Bank of Australia (RBA) deputy governor Ric Battellino has been busting myths.

    The reality is of course that Battellino has done no such thing. He's merely confirmed the existence of Australia's housing asset bubble, and how risky the Australian housing market is.

    So risky in fact, that in our view Australian housing is Australia's riskiest investment right now. I mean, we know for a fact that Australian residential property is historically just as risky as shares, but thanks to the massively inflated bubble it's now streets ahead on the risk scale.

    In a speech on 15th June Battellino said:

    "First, at the same time as the household debt ratio has risen, so too have the assets held by households."

    Battellino then claims that if you exclude housing assets and just look at financial assets, these are also higher compared to the 1990s and so by that comparison there isn't a housing bubble.

    Well, that's clearly a false argument. Because who's to say there isn't also a bubble in "financial assets"? There has been a massive bubble, and plenty will tell you that the financial asset bubble is yet to pop – we're one of them.

    He's obviously trying to dismiss the fact that easy credit by the RBA and the retail banks have helped to inflate the bubble to epic proportions.

    Frighteningly, Battellino makes another grave error. It's this:

    "Second, the available data suggest that the increased debt has mostly been taken on by households which are in the strongest position to service it. For example, if we look at the distribution of debt by income, we can see that the big increases in household debt over the past decade have been at the high end of the income distribution. Households in the top two income quintiles account for 75 per cent of all outstanding household debt."

    We'll argue that one.

    In fact we'd say the opposite is the case. It isn't necessarily a good thing that the top two income quintiles have 75% of the debt. It just means that the wealthier you are the more leveraged you can become.

    It doesn't mean that they're any more capable of honouring those debts.

    As an example, a small business operating a milk bar might be able to get a loan for two-times annual profits – as an example. That's 1:1 leverage.

    A massive Wall Street bank on the other hand can get leverage of 100 to 1 or more. Now, remind me, which caused more strife when things went pear-shaped a couple of years ago? Which was taking huge bets on inflated asset prices?

    And no, don't say it was the cumulative effect of lots of small bad debts. That was part of it, but the ultimate cause was the cheap and easy money accessed by the investment banks who were able to leverage up and take massive punts on the performance of those smaller debts – ie. Subprime loans.

    To illustrate what I mean, take a look at any home loan calculator and punch in a few numbers. If you earn $30,000 per year with no other debts and no dependants, the Commonwealth Bank will lend you $78,107 to buy a house, or 2.6-times income.

    Change that to $300,000 per year and the Commonwealth Bank will lend you $1.5 million, or five-times your income.

    The more you earn, the more you can borrow. You don't need to be a rocket doctor to figure that one out, just a bit of common sense.

    But it's also the power of leverage. Something which Battellino doesn't seem to understand.

    Look at it this way. What's the maximum loss the Commonwealth Bank can take if the low income earner defaults? $78,107.

    What's the maximum loss the bank can take if the high income earner defaults? $1.5 million. A loss that's almost twenty-times larger.

    Or to put it another way. A 10% drop in property values means the low income borrower takes a $7,800 loss if he or she is a forced seller, or 26% of his or her income. If the high income earner takes a 10% loss on the property that's a $150,000 hit, or 50% of his or her income.

    Do you see what I mean?

    The spruikers are pretty good about pointing out the benefits of leverage when prices are soaring, but they go strangely quiet or provide misleading numbers when it comes to the risks.

    Claiming that high debt to income levels are fine because it's all the rich dudes that are doing the borrowing is absolute nonsense. Yet it's lapped up by the likes of Pascoe, who wrote:

    "What also helps is the analysis of who has taken on the bulk of the extra debt – people who can afford it."

    Yeah right.

    But what the debt figures wouldn't show is the unseen debt liability. Battelino had this to say – which unsurprisingly Pascoe lapped up:

    "If we look at the distribution of debt by age of household, we see that the increased debt has mainly been taken on by middle-aged households. The proportion of 35-65 year olds with debt increased significantly through to 2008, as households have been more inclined to trade up to bigger or better located houses, and to buy investment properties."

    And – we could add – a big portion have also used their homes to go guarantor for sons and daughters on a housing loan for the 100% loans and interest only loans provided by the banks.

    In other words, not only are the 35-65 year olds taking out more debts which those in their age group wouldn't have taken out thirty years ago, but they're compounding it by using the inflated valuations to guarantee the debt on the inflated value of another property!

    Doesn't that ring any alarm bells for the spruikers, the banks and the mainstream press?

    Clearly not. The housing bubble continues to grow, while the spruiking lies are getting more and more desperate.



  8. Banks, borrowing, bonds and Britain’s budget

    Jun 21, 2010 13:14 BST

    -Laurence Copeland is a professor of finance at Cardiff University Business School and a co-author of “Verdict on the Crash” published by the Institute of Economic Affairs. The opinions expressed are his own. Join Reuters for a live discussion with guests as UK Chancellor George Osborne makes an emergency budget statement at 12:30 p.m. British time on Tuesday, June 22, 2010.-

    George Osborne must be thankful to Don Fabio and his boys for ensuring that Wednesday’s tabloids will have other things to think about than the Budget, because it is going to be one of the toughest ever.

    There is every indication the advance billing is more than just news management. The pain is going to be frontloaded for two reasons.

    First, if anyone thought the electoral cycle was dead, the run-up to the last election should have disabused them.

    The old wisdom is still valid: get the pain in early, keep the goodies for later, when the next election is in sight. In the present case, it is reinforced by the more Macchiavellian consideration that the more blood is spilt on Tuesday, the less attractive will be the prospect of an early election and hence the stronger the bonds holding the coalition government together.

    The more important reason for cutting the deficit drastically at the outset is the message it sends to the markets that we are not going to exploit our position outside the Eurozone to inflate away the debt.

    Given our history, it will take more than a single budget, however tough, to convince them – it will certainly take far more than that to convince me! – but Tuesday could be a good start all the same. We will know how well the budget has restored our credit by looking at the impact on sterling and on the money and bond markets.

    One of the remarkable features of those markets in the last year or so has been the relationship between long and short rates, the term structure, as economists call it.

    At the short end, the government and the banks can borrow at a rate of 0.5 percent or less – higher than in the U.S. or Japan, where rates are near zero, but nonetheless some of the lowest rates ever seen in Britain – whereas for long term loans (20 years+) the cost is 4 percent and more.

    The difference between those two numbers, the so-called term spread, is exceptionally large and it reflects a number of factors, of which the most important by far is the expected inflation rate over the next twenty years.

    Now there are two aspects of this phenomenon which are largely ignored in media comment.

    First, as regards government borrowing, it is often said that the UK has the advantage over other countries with similar debt burdens, because so much of our borrowing is long term, which means that our bonds need refinancing (“rolling over”) at less frequent intervals.

    In that respect, the liquidity risk of Britain’s debt is lower than almost any other country’s – but the other side of the coin is that the inflation risk is greater.

    We benefit from the longer maturity (or more precisely longer duration) of our national debt, but we pay for the privilege in the form of higher long term rates and a greater current interest burden on our budget.

    The second point relates to the banks (yet again!). The basic bread-and-butter business of banking is maturity transformation – which means short-term borrowing (in the form of deposits of one kind or another) and long-term lending (advances, personal loans, mortgages), so as to enable their customers, the nonbank public, to do the opposite.

    Bank profits are generated by the gap between these rates, so with short rates at all-time lows, there has never been a better time to be a banker.

    They can borrow short term at 0.5 percent – the same rate as the government because in effect they are the government (which owns some of them and underwrites the rest) – and lend at………….20 percent on credit card borrowing, 8 percent on a personal loan, even on mortgages they can charge 4 percent or 5 percent.

    Margins like these are unprecedented.

    The irony is that, after inflicting economic damage on the country on a scale second only to Germany’s former Nazi dictator Adolf Hitler, Britain’s banks now find themselves in charge of a money machine.

    The faster the authorities print money – quantitative easing, as it is now called, currency debasement as it used to be known – the lower it drives short rates and the higher it pushes long rates, thereby widening the margin between borrowing and lending rates.

    The relevance of the budget in this regard is that the more the government has to rely on the bond markets, the higher it drives long rates, which also serves to widen the margin (the term spread) generating bank profits.

    In fact, it is no exaggeration to say that the government (via the Bank of England) prints money, lends it at near-zero rate to the banks, who often prefer to lend it back to the government at 4 percent rather than to the cash-strapped small businesses that ought to be the backbone of the economy.

    Why is this merry-go-round tolerated?

    Essentially, because it is the only way to pump the money into banks required to rebuild their depleted reserves and in addition, it is hoped, to provide sufficient funds for them to restart lending to the corporate sector.

    As far as the taxpayer-owned banks are concerned, we ought in theory to be rewarded for our largesse when they are reprivatised at some future date. For the remainder, we are simply providing a gift to shareholders, who, without the government bailout, would have been wiped out altogether in 2008.

    (In both cases, the calculation has to be adjusted to allow for a few billion to be creamed off in pay and bonuses for top management, who will shamelessly attribute the turn-around in the fortunes of the banks to their own expertise).

    On another banking-related issue, this week’s Economist suggests that the government’s new 0.2 percent levy on the banks may make a small contribution to balancing the budget.

    If correct, this is worrying. The whole point of the levy, we have been told, is to provide a fund to cover the cost (or a part of the cost) of a future bailout of the banking system.

    If it is ever to be a true insurance scheme, it should be kept out of the budget calculations altogether – otherwise it will from the very outset become just another unfunded, open-ended government commitment.

  9. Poverty is dreadfull.

    I do not welcome it.

    However that is what is comming.

    Poor Poor people of the UK your oil fields are failing your leaders squanded the wealth.

    You are now a nation of people from all over the globe, the fabric that was your strength is no more.

    All that is left to export is people, but not the convicts no , your best and brightest.

    Just like Polland all that remain will be the old and cripled.

  10. America's economic cliff-hanger

    Wall Street put on a classic nail-biter performance last night, soaring at the outset over China’s move to free up its currency, only to plummet as fears over European debt resurfaced, before reaching unsatisfying denouement at the close.

    But while we’ve now come to expect hugely volatile trading sessions where strong reversals can happen in a matter of hours, some analysts argue that these wild gyrations are pointing to the huge uncertainty clouding our economic future.

    John Hussman of Hussman Funds says that the US economy is in a real “cliff-hanger” situation. In fact, if this were an action novel, we’d be at the point where our hero – the US economy – was hanging over a steep precipice, clutching onto a rock of uncertain strength. We readers would be hoping that things would turn out well for our hero, but we’d be fearing the worst.

    As Hussman notes, “it's possible that things will resolve sufficiently well, but we have to consider the possibility that they will not”.

    Hussman says the latest reading from the Economic Cycle Research Institute (ECRI) reinforces this uncertainty.

    The ECRI weekly leading index – which points to where the economy is heading – fell last week to a -5.7 per cent annual growth rate. The decline in the ECRI index is worrying, because it suggests the economy is rolling over. But, at the same time, it’s too early to start predicting a recession, because the decline in the index hasn’t lasted long enough.

    Hussman also believes that the US sharemarket market is at a crucial inflection point, now that it has rebounded from its recent oversold condition.

    He sees two possible outcomes. The first, relatively benign development is that “a further recovery in market action would most likely create modest further demand from already well-invested speculators and trend followers, and modest offsetting supply from already defensive value-oriented investors, allowing a dull but moderate continuation of upside progress.”

    But there’s another, more worrying possibility – “a deterioration in market action would likely trigger a substantial amount of liquidation by speculators, into a market where fundamentally-oriented investors would require large price adjustments in order to absorb it. “

    But David Rosenberg, chief economist at Gluskin Sheff, is more confident in predicting how the story is going to end.

    He argues that there’s only been one previous occasion when a fall in the ECRI to -5.7 per cent failed to signal a recession. And that was back in 1987, when the US Federal Reserve was still in a position where it could cut interest rates to stimulate economic activity.

    What’s more, Rosenberg notes that “a -5.7 per cent print accurately signalled a recession in the lead-up to all of the past seven downturns”.

    In any case, Rosenberg points out that the steep drop in the ECRI is likely to mean that US economic growth will be much slower than most economists are forecasting in the second half of this year.

    At present, the consensus forecast is for 3 per cent real GDP growth in the second half of the year. But Rosenberg notes that whenever the ECRI dips to between -5 and -10, the average growth rate in the next six months is 0.8 per cent.

    Rosenberg points out that in early 2002, the consensus forecast was for 3 per cent growth in the second half of the year, and instead economic growth came in close to zero.

    “So right now the choice is really either a 2002-style growth relapse or an outright double-dip recession – pick your poison. “

    He adds the uncomfortable reminder that back in 2002, disappointment over economic growth undermined the US sharemarket.

    “If memory serves us correctly, the S&P500 went on to do the inexplicable and make new lows before the year was out.“

  11. Steve Keen

    The US double-dip is under way

    The market was again ‘shocked’ by news late last week that US CPI had fallen. Why was this a shock? Because economic commentators continue to stick to the US growth story that emerges if you ignore what’s happening to money supply and debt.

    In my last article I explained why Fed Chairman Ben Bernanke only thinks he can reflate the US economy – the data from the Great Depression (a period he supposedly knows a great deal about) shows clearly how little impact Fed policy had on markets undergoing massive post-bubble deleveraging.

    Sadly, the data is saying the same thing again – only for this crisis, in which the Fed has already quantitatively eased at four times the pace seen during the Depression, things look much worse.

    Most commentators still have faith that Bernanke has things under control. Adam Carr summed up the prevailing wisdom pretty neatly last week after the unexpectedly low CPI print: “…this is not deflation, we’re not even close and it won’t take much to see a sharp turnaround. That said, we know that the Fed isn’t going to tighten any time soon. A ‘healthy’ dose of unanticipated inflation is the target here.”

    He’s right to say that Bernanke’s goal is a ‘dose of inflation’. If only that could be achieved – inflation is not pretty, but it’s better than the deflationary bust that’s underway.

    So at the risk of repetition, keep in mind when looking at the charts below that Bernanke’s Fed has already taken unprecedented steps to increase the money supply, backed up by US government stimulus spending to keep prices positive and kick-start growth. The Fed doubled MO money supply between August and December 2008 and has continued easing since then – the idea being to kick-start borrowing/lending and get companies growing once more. Yet the data shows it has all but failed.

    The first chart below compares the deleveraging process during the Great Depression and during the current crisis, with the starting point being the peak of the respective credit bubbles (for it was bubbles that caused both, not some accident of Fed policy as many, including Bernanke, claim). This data took my breath away the first time I put it into a chart – I thought rapid deleveraging was underway (the two blue lines), but not that rapid.

    As I have previously explained (Why a fifth of our income is vanishing, May 25), during a credit bubble a large part of GDP is funded by increasing debt year after year. When individuals and businesses decide that’s a bad idea, and start paying down debt to return to healthier balance sheets, aggregate demand plunges and prices fall. The bad CPI print last week was the first sign of what’s to come.

    As the percentage of GDP funded by debt vanishes (the lower of the two blue lines on the chart above), the Fed prints large sums of money to lend out at zero interest rates to encourage borrowing, and the government pumps up demand with stimulus spending.

    The upper blue line shows that this process has had some success in slowing the fall in debt-funded aggregate demand (ie. the government’s borrowing and spending has made the overall decline less steep) – but remember that the Fed is trying to create some inflation, not just slow the pace of the rapid deleveraging that will lead to deflation.

    Whether you look at the private fall in debt-funded demand, or the government-slowed fall, both indicate that, compared to the Great Depression, we are not only coming off a more-indebted base, but the plunge in debt-funded demand will be deeper, and potentially longer, than the long, painful slump in the 1930s.

    The second chart shows the two versions of reality on offer right now (though before long, the rosy version will become impossible to maintain). In the past 20 years, aggregate income in the US (non-debt-funded GDP growth – the red line) grew steadily and only dipped when the GFC hit with full force after the Lehman Brothers collapse. But over the same period, total aggregate demand grew more rapidly (the blue line) as increasing amounts of debt were taken on and spent in the economy.

    [Click to enlarge the image]

    click the image to enlarge

    Now, with the debt-funded component falling off a cliff, it will not be long before the non-debt-funded aggregate demand also starts to fall – if individuals and companies will not borrow and spend, the ‘incomes’ of the businesses that did so well in the bubble years must fall. That’s the ‘double dip’ the US economy is inevitably heading into. The terrible truth is that the US economy will not start to grow in any meaningful, sustainable way until the long, painful deleveraging process in complete.

  12. Emergency budget to ‘save’ Britain from fate of debt-stricken Greece

    By Business Reporter

    Monday, June 21, 2010

    THE biggest threat to Britain’s economy is its huge budget deficit, and an emergency budget tomorrow will save the country from the fate of debt- stricken Greece, British finance minister George Osborne said yesterday.

    Measures expected to be included in the budget include a pay freeze for Britain’s six-million-strong public sector, a £3 billion (€3.6bn) bank levy and welfare benefit reform. Other plans include payroll tax breaks for new businesses and reform of public sector pensions.

    "You can see in Greece an example of a country that didn’t face up to its problems, and that is the fate that I want to avoid," Osborne told the BBC.

    "I’m absolutely clear, I don’t want the question even asked, ‘Can Britain pay its way in the world?’ I’m going to prove on Tuesday that we can," he said, adding that the budget’s austerity measures would be staggered over five years.

    Britain’s budget deficit is at about 11% of national output and reducing the deficit is the centrepiece policy of the new coalition government, made up of the centre-right Conservative Party and centre-left Liberal Democrats.

    Tomorrow’s budget is expected to be the tightest in at least 30 years and with public sector job losses and deep pay and benefit cuts expected, the plan is likely to stoke public discontent and strain the fledgling ruling alliance.

    Osborne indicated capital gains tax – a tax on the sale of assets such as real estate and shares – would rise, despite vigorous opposition from senior Conservative politicians.

    The levy is currently 18% and some workers switch their income revenue, which is taxed at between 20% and 50%, to capital gains to pay less tax.

    "Here is a tax where at the moment we see massive income tax evasion, we see people shifting their income... and that’s not fair given the current situation, so we’ll deal with that," Osborne said, without saying by how much the levy will rise.

    He also raised the prospect of unilateral action to impose a bank levy, aimed at clawing back some of the billions paid by the state to bail the financial sector out after the 2008 financial crisis.

    One of the few sweeteners expected in the budget is a payroll tax holiday for the first 10 employees hired by new businesses outside of Britain’s southeast, government sources said.

    The maximum a business can claim per employee will be £50,000 (€59,833) a year for those earning less than £44,800, in a three-year scheme costing £900 million and meant to boost the economy in less prosperous parts of Britain.

    Read more: http://www.examiner.ie/business/emergency-budget-to-save-britain-from-fate-of-debt-stricken-greece-122923.html#ixzz0rUv42yof

  13. Here is a simple fact money goes to were it does best.

    If we have deflation than holding cash is best because the buying power of your capital is incressing.

    If we have inflation and the Government is unwilling to rase interest rates (that is how it seems just now) than if you hold cash you will be wiped out.

    If the Government is willing to fight inflation with high interest rates that holding cash will be a winner as share prices and property will come down.

    I am betting that infation will not come , but! The Government are only people who make mistakes like all of us. I have not much trust in there ability to get things right.

    Remember they sat on there hands at the leed up to the GFC

  14. And another thing.... whilst I am in rant mode... I actually wish the stock markets were recovering and it was looking more like a bull than a bear-trap... if the market was rising on good economic data I probably would stick most of my house buying fund into shares and carry on renting for a few more years...

    Like all of us who missed the market rise the past 15 months... yes, it is obvious now that QE would go into shares but how many of us could afford to risk our hard-earned money in such uncertain times... the situation is now no clearer as to where the markets are going... if anything, after the bull run of the past 15 months and looking at falling consumer sales, falling confidence and rising unemployment, the situation is more uncertain...

    But then, maybe it is different this time re commodities, re the rise of China and several billion extra consumers in the World :unsure:

    Well let me tell you

    I got into the share market at what I thought was a great bargain and rock bottom.

    Only to see my capital reduced by 30%

    O the agony

    After the governtment intervention the shares started there up ward trend

    I got out happy with the smallest of profits.

    One thing for sure if the market crashes once more

    There will be no quick fix

  15. The GFC has a long way to run.

    I recon we are now at the "return to normal" stage.

    All my long life I have watched Greedy people going into big debt with the expectation that inflation will wipe away most of the capital that they will have to repay.

    I have see the life savings of my father and mother reduced to a token of the personal sacrifice that it took to earn it.

    The big question that troubles me so much that I am now having only a few hours sleep every night is Inflation Or Deflation?

  16. Sometimes things are fine... until they are not.

    It will be like that with our foreign debt. Decades of it being fine and then a month of it coming back to bite us like a hungry bronze whaler. The shape of what is swimming in the water can be seen by looking at the price some European countries are having to pay to borrow money – Greece pays 9.5 per cent, while Germany only pays 2.6 per cent for the same 10-year money in euros. In the end, all Australians are going to have to pay higher interest rates just like those countries and there is nothing the Reserve Bank is going to be able to do about it.

    The thing about the foreign debt is that we don’t individually owe it, we do so collectively. Because we owe it collectively, we think we can avoid worrying about it. This phenomenon is called the “tragedy of the commons”, where everyone does what is in their self interest and ultimately squander a shared asset at a huge cost to all. We are doing that with our perceived creditworthiness. The tragedy of the commons usually applies to collective ownership; Australians have made it a problem of collective “ownership”. We are on the edge of having worn out our ability to borrow from foreigners at attractive rates. One day this will be Australia’s lesson in the tragedy of the commons. Like all things collective and unpleasant we are woefully ignorant about it.

    The best way to understand the size of the problem Australia has with its foreign debt is to focus on the fact that each of you, and me as well, has borrowed about $30,000 from the Europeans, Yanks, Poms and other foreigners. That means every family has a debt, owed to people we don’t even know, that in almost all cases represents our second biggest financial liability and we spend our lives forgetting it exists. It might not be as big as my mortgage but my share of the foreign debt, and that of my kids, is certainly enough to have me focused. The standing of Australia’s foreign debt is at the whim of events that are completely outside any democratic framework to which I am a party. The fiscal policy of a set of peripheral EU nations and the outcome of the EU crisis has more impact on the price we pay for our foreign debt than any other factor. That situation is the direct consequence of over 25 years of deregulation and it should frighten us all.

    Of the foreign debt we owe a little under $100 billion is denominated in euros. Right at the moment, as you might have heard, European banks are a little short of money. So my guess is the Europeans are going to want to put the price up for continuing to lend the money to us or want immediate repayment.

    I think you should ask yourself the question, “If I had to come up with $150,000 quickly, do I have it lying around for me and the kids?” How would I feel if I had to pay 10 per cent interest on this debt? Well there is going to be a day very soon when we all will have to find over $666,666,666,666, together or possibly pay 10 per cent to keep the loan outstanding. Don’t those two numbers look like they come from the devil? Doesn’t the current $654 billion level our net foreign debt reached at the end of the March quarter look very scary? It is an especially big number to be hidden in broad daylight and not talked about when it grows by billions and billions each year.

    So here's a primer on our foreign debt extracted from the Federal Government Research Paper No 30 2008-09.

    How much has our foreign debt it grown? Between 1976 and 2008 net foreign debt increased from $3 billion to $600 billion and during that time from 4 per cent of GDP to 53 per cent of GDP.

    How do we borrow it? Our government, Reserve Bank and industrial companies all borrow a small amount. The vast majority is borrowed via our banks getting it from whoever will lend it to them wherever they can find it but the vast majority is borrowed in the European interbank market.

    What currencies is it borrowed in? In 2008 over 60 per cent of the debt was denominated in foreign currencies – about 30 per cent in US dollars, 12 per cent in euros and the rest a mix of sterling, swiss francs, yen etc, while 40 per cent is borrowed in Australian dollars.

    When the government asked the banks whether they were worried about the 60 per cent borrowed in foreign currencies, I’m sure they were much relieved to hear that: "To eliminate or reduce exposure to such risk, many Australian enterprises engage in hedging activities, predominantly through foreign currency derivative contracts.” That is a quote from the research paper. I think after the subprime crisis we all know how well hedging works in a crisis.

    Why do we need to borrow foreign debt? Because it funds our current account deficit which is the result of us spending more on imports, plus the interest on the debt we already have, than we earn on exports and our loans abroad.

    What amount is borrowed short term? 37 per cent of loans were due within 90 days in 2008.

    Now, it is not a news flash to say that we have a current account deficit or that we have a large foreign debt but it is, as Ross Gittens said, “deeply unfashionable to talk about Australia's foreign debt”.

    The other thing that is relevant is how much the nature of our funding for our financial imbalance with the rest of the world has moved from equity to debt. In 1980, 71 per cent of net investment was equity and only 29 per cent in debt. In 2008, debt accounted for 87 per cent of net investment and only 13 per cent was equity. This is a direct consequence of the abolition of exchange controls. The downside of that abolition is that we have allowed ourselves to move from a state where we used foreign capital to fund income earning projects directly to a world where foreign capital funds an unrealistically high standard of living by preserving an unsustainably high exchange rate. We need to export more and import less and we need to be forced to do it over the long term rather than being lulled into a false sense of security by the kindness of strangers that can only come back to bite us.

    I have written about the Henry tax review before and think it is a fantastic attempt to give us a framework for tax reform, but I regret that the terms of reference did not include dealing with our foreign debt. Maybe the resource super profits tax is productive for taxation and government debt, however, I think it could easily reduce the attractiveness of Australia as a home for foreign investment and therefore reduces the range of options we have for addressing our foreign debt. It will cause yet more foreign debt and less foreign equity.

    Another important issue about our debt is that the share of it owed by the Reserve Bank and the general government has fallen from 35 per cent in 1980 to 3 per cent in 2008. This has lead to a political approach that says it is not the politician’s problem and in a narrow sense they are right. The private sector owes 92 per cent of the debt and the private financial corporations share has risen from 7 per cent to 74 per cent. On our behalf our banks have borrowed about the same amount as Greece did – and we say we don’t have an issue.

    Even if the shark doesn’t bite today, ultimately keeping our foreign debt growing at 18 per cent per annum is unsustainable. It has been growing for so long and so little has happened that those who say the foreign debt alarmists are scaremongering are able to convince themselves, and virtually all of Australia, that they are right.

    However, the situation is not that simple.

    Interest rates on cash in Australia are 4.5 per cent, while in the US they are .25 per cent. Despite the interest rate differential the Australian dollar is vulnerable. Finally the funding squeeze that is on in Europe is going to have a flow on in the interbank market as spreads for all credits blow out. The price we are charged for our foreign debt is going to rise.

    I started with sharks and I want to finish with turkeys. Currently we are like a flock of turkeys, who every day go to the foreign debt markets to get fed the foreign debt we need to keep alive and every day we get what we need. Every day the strength of the argument for foreign debt being a great diet increases, another day goes on in 'party Australia' without a problem.

    Every day we get fatter and happier. Until ‘CHOP’ it’s the day before Christmas and the foreigners who have fed us for so long take our fat and happy head off.

    Hmmm the direction for interest rates is up. Make no mistake we are going the same way as Ireland

  17. Housing market a 'time bomb', says investment legend

    THE Australian and British housing markets are the last two bubbles left in the wake of the financial crisis, and it is only a matter of time before they crash, warns legendary US investor and co-founder of global investment management firm GMO, Jeremy Grantham.

    Mr Grantham famously reported a year before the global financial crisis: "In five years, I expect that at least one major bank (broadly defined) will have failed and that up to half the hedge funds and a substantial percentage of the private equity firms in existence today will have simply ceased to exist".

    He said yesterday that Australia had an unmistakable housing bubble and that prices would need to come down by 42 per cent to return to the long-term trend.

    "You cannot possibly miss it," he said.

    "The price of housing typically trades about 3.5 times of family income and in bubble it goes to 6 or . . . 7.5 (times).

    "Australia is having one now. You are at near 7.5 times family income . . . which suggests you are twice the size that you should be."

    GMO is one of the biggest investment management firms in the world, with about $106 billion in funds under management, and is considered to be an authority on asset bubbles.

    Mr Grantham, who is in Australia to meet with GMO clients in Sydney and Melbourne this week, said any bubble could be an exception to the rule.

    "Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different," he said.

    As an example, he cited the British housing market bubble of 1989. At the time, he said people dismissed the bubble because there was no more rezoning, creating a land shortage and as such, they believed prices would rise forever.

    "Seven years later, in 1997, they hit the lowest multiple of family income since the record books started in 1945. It's always the same old argument, they are not making any more land."

    In Australia's case, Mr Grantham described the housing market as a "time bomb" just waiting for interest rates to increase and become impossible to support.

    Since last October, the Reserve Bank of Australia has raised the official cash rate six times. The rate is now 4.5 per cent.

    If the Australian housing market did not return to the normal multiple of family income, he said "it will be the first time in history."

    "Sooner or later, the rates will go up and the game is over."

  18. Grantham on the Australian Housing Market

    Published in June 17th, 2010

    Posted by Steve Keen in Debtwatch


    Jeremy Grantham pricked, if not the housing bubble itself, then at least the bubble that property market spruikers live in, with the quip that:

    “Bubbles have quite a few things in common but housing bubbles have a spectacular thing in common, and that is every one of them is considered unique and different.” (Housing market a ‘time bomb’, says investment legend: The Australian June 16, 2010)

    How true that is. Before Japan’s bubble burst in 1990, we heard that Japan was different: the “Rising Sun” was eclipsing the USA and house prices reflected this growing wealth (and—didn’t you know? —there was a land shortage in Tokyo!). Before the USA’s bubble burst, there were land shortages in all the States with price bubbles—especially California. There were probably even Tulip shortages in Amsterdam, four centuries ago.

    Those other bubbles duly burst, despite their “unique” characteristics, under the weight of the same force: too much debt was taken on by speculators seduced by the groupthink that house prices always rise. When the rise in house prices made the entry costs for new players prohibitive, debt stopped growing and house prices collapsed.

    This is the other thing that all housing bubbles (and share price bubbles, for that matter) have in common: they are all driven by borrowed money, and they can only be sustained so long as rate of growth of debt outpaces incomes. Once that stops, the engine of unearned income that enticed speculators in breaks down—since the only way that we can all appear rich without working is if we spend borrowed money.

    Of course, we all know that spending borrowed money is a surefire route to ultimate poverty. The great tragedy of an asset bubble however, is that it’s someone else’s increase in debt that makes us appear wealthier when your house sells for more than you paid for it. In effect, the housing market “launders” the debt money, making it appear real.

    Any doubt that borrowed money is what has driven house prices into the stratosphere in Australia is dispelled by the data: despite all the hooey about Australian lenders being more responsible than those in the USA, mortgage debt in Australia rose three times faster since 1990. Having started with a mortgage debt to GDP ratio that was just 40% of America’s, we now have a higher ratio than the USA—and ours is still increasing while theirs is clearly falling.

    Notice however that our ratio was lower than the USA’s—and was falling too—before the government brought in the First Home Vendors Boost. As it has always done, that government intervention in the market set off a price bubble—the government in this sense is as responsible for the house price bubble as the banks are.

    The government pulls this trick because it makes it look good for a while: the bubble pulls in yet more private sector borrowing, and the spending makes the economy boom. But when the grant ends and the borrowing slows down, things don’t look so rosy.

    That’s one way to describe the housing market right now. The boost caused the number of buyers to explode last year, and now the number is fizzing: there were just 46,000 home loans taken out by owner occupiers in April, a cool 25% down on the same month in 2009. Actual demand (and that’s people with cash in their hands to buy now, not the hypothetical future demand concepts touted by the property spruikers) is therefore falling below actual supply.

    As the stock of unsold houses mounts up, it is only a matter of time before the bubble bursts.

  19. Last Dance for Investors,

    The mainstream media has picked up on the fact that property 'investors' are now the only people left in the market;

    Investors ignore rates and surge into real estate


    New finance figures from the Bureau of Statistics show that while lending to buy homes in which to live slipped a seasonally adjusted 10 per cent in the first four months of this year, lending to real estate investors climbed 11 per cent.

    In the past year, lending to investors surged an exceptional 30 per cent nationwide, and by an extraordinary 44 per cent in Victoria.

    If anyone ever needed a clearer signal of a Ponzi scheme about to fall apart, I've never seen one.

    I posted this comment because it made sence to me.

  20. Victoria sees record number of homes up for auction as clearance rates fall

    * By staff writers

    * From: news.com.au

    * June 14, 2010 7:08AM


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    House auction

    Rising interest rates and changes to foreign investment rules are said to have impacted auction results. Picture: Angelo Soulas Source: The Daily Telegraph

    REAL estate auction clearance rates plummeted to a 52-week low in Melbourne on Saturday, with the dramatic slide attributed to rising interest rates, changes to the foreign investment rules and the downturn for the long weekend.

    Of the 135 reported auctions in Victoria's capital city, just 59 sold under the hammer, while there was a total clearance rate of 59.9 per cent.

    According to Australian Property Monitors figures, the weekend results in Melbourne were down 22.9 per cent from the same Saturday last year.

    Sydney's clearance rate of 61.2 per cent was also modest, down 8.8 points from the auction results of the June long weekend last year, The Australian reports.

    However, the cooling market has not put off winter sellers, with a record number of homes for auction in Victoria next weekend, The Herald Sun says.

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    * City living: Sydney rates badly

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    Real Estate Institute of Victoria spokesman Robert Larocca said 1000 properties would be auctioned this coming Saturday and Sunday.

    "This is a record for Melbourne in winter ... the sheer number of properties has affected the clearance rate," he said.

    REIV's figures for Victoria showed the clearance rate for the Queen's Birthday weekend was 77 per cent, up from last week's low of 70 per cent, but down on highs of about 85 per cent earlier this year.

    Mr Larocca said more expensive areas of Melbourne had been affected by a reduction in demand, while there was less change in the lower to middle market.

    National property consultant Neal Ellis, from Preston Rowe Paterson, said changes to foreign investment rules related to residential real estate, implemented in April, had affected sales in both the top-end and lower-end markets.

    "Over the last five to six weeks all the agents are saying that things have started to slow down, there has been a lot more property on the market as well, so it's probably not being absorbed at the same rate," Mr Ellis said.

    Brisbane's clearance rate hit a 52-week low, with just 11.8 per cent of homes being cleared at auction on Saturday, down 47.6 per cent from the same weekend last year.

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