Peter Wilby at The Age has come up with one of the most enraging reads ever read. There is so much wrong and outrageous about this article that we can’t even get to the point of analysing it. We have just provided some of the highlights, not that they do the article justice. It’s about the recent decision by various billionaires to donate portions of their wealth to charity:

“The filthy rich, or some of them, have shown they have a heart.

“But let’s be clear. Money paid to charity is exempt from tax; the US Treasury already loses at least $US40 billion ($A43.7 billion) a year from tax breaks for donations. So billionaires, not the democratically elected and accountable representatives of the people, get to decide on the good causes.

“Of course, the poor also contribute to charity, but most don’t get the tax breaks because they don’t pay income tax.”

Wilby continues with his tax line:

“… two-thirds of US corporations contrive to pay no federal income tax at all and that transfer pricing alone deprives the US Treasury of $US60 billion annually. Such sums, which pile more taxes on the poor [which don’t pay income tax remember] and reduce funds for government projects that advance the public good, dwarf what the 40 billionaires propose to give away.”

The monthly US fiscal deficit dwarfs the annual figures Wilby mentions. Heck, the Pentagon’s “lost” funds for Iraq’s reconstruction dwarf the 60 billion in lost tax.


Let’s play “spot the tautology” in this article:

“A likely record $6 billion-plus profit from the Commonwealth Bank this week will reignite concerns that the country’s largest banks are bolstering their bottom lines at the expense of customers.”

Expense of customers…? How dreadful! We have to pay for the services we choose!

If customer’s agreed with the fears Danny John outlines in his article, they would go to another bank. Of course, the government restricts the number of banks they can go to significantly with all sorts of laws, but there is still some competition.

In other businesses, when people pay excessively for goods or services, the company is lauded and treasured. Cars and handbags are a good example. BMW is lauded for its quality and luxury. Lancel for … ummm … being French…?

Anyway, with banks, any big profit is due to excessive risk taking, greed and all at “the expense” of customers. Why is that so?

Strangely enough, Commonwealth Bank’s answer is that their costs are so high that they have to make a huge profit. (According to Danny John anyway.)

“CommBank is expected to argue that its profit margins remain under pressure as consequence of its wholesale funding costs that remain high despite an easing in the tightness of available credit. The cost of borrowing internationally is about a full percentage point higher than it was before the global financial crisis.”

This seems like a mildly flawed argument. Last time we checked, higher costs translate to lower profits. We must have it wrong.

When the results did come out, the Commonwealth Bank’s bankers’ worst fear was realised:

The bank reported its cash profit rose 40 per cent to $6.1 billion. That’s “almost $700,000 an hour”. At that speed, their costs must be going through the roof, which is why CBA shares fell 3% on the news. It all makes sense.

Anyway, you can find Dan Denning’s analysis of the issue here.

More people who can’t count, according to Debra Jopson at The Age, are Julia Gillard and Penny Wong:

“Almost one-third of the 900 billion litres of water which the Prime Minister, Julia Gillard, and the Water Minister, Penny Wong, have said will be returned to the rivers of the Murray-Darling Basin does not exist, according to official figures.”

Perhaps they plan to stimulate it into existence?

Step into the ring

The public debt debate raged onwards rather civilly between Hockey and Swan on Monday. But there is something that stands out in the media’s analysis:

“Swan went for his characteristic relentless jabs – head down, mouth fixed, left, right, left, right into the Hockey stomach. Hockey was more inclined to lean back in the flurry of blows and add a pirouette or two before landing an opportunistic lob across the ear.”

Sorry, this is the relevant part:

“[Swan] did a decent job of putting the federal debt into perspective. The federal debt would peak at 6 per cent of GDP, Swan explained, “which is like someone who earns $100,000 borrowing $6000″. Entirely manageable, in other words.”

The issue with this is that government lives off other people. It doesn’t run its finances separately and doesn’t “earn” the GDP. This would imply a 100% tax rate.

It’s taxpayers who take on the government’s debt. And Australian taxpayers are already of the most leveraged in the world. The government’s debt is piled on top of this huge personal leverage.

But only some Australians actually carry the government’s debt burden.

“The number of families paying no tax or with benefits that outweigh the tax has increased by 276,000 in four years to about 42 percent, The Weekend Australian reports.”

Those are 2008 figures. We couldn’t find out what is meant by “families”. But let’s assume that half of Australians pay net taxes. It’s probably less after adjusting for various things.

The Australian Office of Financial Management reports “Total Commonwealth Government Securities on Issue – $153,232m”. Divide that by half of Australia’s population and you get $14,250. Coupon rates sit around 6% for the most part. That’s 855 dollars in interest payments which each taxpayer has to find each year. That in turn sounds suspiciously like Kevin’s $900 giveaway. Add the principal repayments and things get out of hand.

The point is that public debt is important, even at the low levels Australia is at for now. If these are the boom times, then the budget should be heavily in surplus to provide for any upcoming trouble. Big spenders cannot call Keynes’ philosophy out when it favours them and deny it when Keynes would advocate a budget surplus.

Land of stimulus and bailouts

The bailouts continue flowing in the US. It seems nobody is spared. House buyers, car buyers, mortgage buyers, derivative traders, scientists studying the effects of yoga on hot flushes, scientists studying apes with cocaine habits, car makers, insurance companies, banks, depositors, …

We can now add state governments to the list. At a bill of US$26 billion. That’s much more impressive than mortgage giant Freddie Mac’s latest request for US$1.8 billion to cover its 6 billion loss. There has been some outrage, as part of the money used to bailout irresponsible states will come from cutting the wildly popular food stamps program (41 million Americans use it).

But what is unique about the state government bailout is that the bill which puts it into effect doesn’t have a name (at time of writing). “Congress’ official Web site calls it the ‘______Act of____,’ and the Library of Congress’ Thomas Web site displays it as the ‘XXXXXX Act of XXXX.'”

House Republican Leader John Boehner has come up with the following suggestions:

— Save Our ‘Stimulus’ (SOS) Act

— ‘Recovery Summer’ Bailout Act (Cash for Flunkers)

— Delivering Unions a Major Boost (DUMB) Act

— Helping Election Expenditures, Hurting American Workers (HEEHAW) Act

— Democracy is Strengthened by Clearly Leveraging and Optimizing Special-Interests’ Effectiveness (DISCLOSE) Act

— Holding Union Bosses Over Until Card Check Act

— Rescuing Incumbent Democrats Is Costly (RIDIC) Act

— Summertime Cash for Union Bosses Instead of Spending Cuts for Taxpayers Act

— Frivolous Act of Ineffective Largesse (FAIL) Act

— Naming These Things Hasn’t Gotten Us Anywhere, So Why Bother? Act

Some of the names ring a bell after a recent examination of the last rounds of stimulus:

“The jobless rates in the states had little to do with where major portions of the stimulus package were distributed. Some states with the lowest unemployment rates received some of the highest per-capita spending for stimulus projects.”

And so on and so forth…

So the states have a lifeline for now. But who will be bailing out the US government when the time comes?

The Fed. And the time is now:

“The Federal Reserve on Tuesday said it would begin funneling proceeds from its maturing mortgage bonds into longer-term government debt…”

So Much for the Invisible Hand

Would you like to guess what time of day the fed made its announcement?

All this is why Dan sees inflation before too long.

Double dip, or skinny dip?

Poor Bernanke can’t get a moments peace. “Trouble ahead” say economists at the San Francisco Federal Reserve:

“The probability of another recession over the next 18 to 24 months is higher than that of expansion, researchers said in the latest issue of the regional Fed bank’s Economic Letter.”

The bond market, interpreted by David Rosenberg, agrees:

“Since hitting its most recent high yield of 4.01 percent on April 5, the 10-year Treasury bond has slid more than 1.20 percentage points, a metric that signaled in 1990, 2000 and 2007 that a steep drop in stocks was only two months away.”

And oil seconds the notion:

“Crude oil tumbled the most in five weeks in New York after the Labor Department reported the productivity of U.S. workers fell in the second quarter, a sign the economy is struggling to recover.

And in the UK, the “D” word has come out to play. In fact the choice doesn’t even include avoiding an economic slum:

“Bank of England warnings have intensified debate over whether the UK economy will face a double-dip recession or period of depression.”

Back in the US, even the ghost of quarters past has his say too:

“Q2 GDP Growth Could Be Revised To Just 1% After Trade Data”

So it took the ambiguous Fed announcement (discussed above) to revive Tuesday’s markets. Bernanke has answered “yes” to the question “to print or not to print?” Dan Denning discussed how on Wednesday.

Bloomberg describes the developments as “[the] Fed Embraces Japan-Style Tools With Floor on Securities”.

Mr Market described them with large losses on Wednesday and Thursday. Guess who happened to be short at the time?

Property Outlook

Ominous news for the Aussie property bulls:

“The survey showed 60 per cent of investors believe Australia has a property bubble as a result of housing shortages, low interest rates and speculative fervour.”

Uh oh. Melbourne has just freed up land for development, Glenn Stevens is on an interest rate raising rampage, and speculative fervour no longer includes the majority.

But wait, the majority might be wrong (again). The bubble may have popped already, The Age reports:

The Bubble May Have Popped Already

Nothing better to do

“Multnomah County’s top elected official apologized Thursday for health inspectors who forced a 7-year-old girl to shut down her [lemonade] stand last week because she didn’t have a food-safety permit.”

“With the district in a financial crisis and hundreds of its members facing layoffs, the Milwaukee teachers union is taking a peculiar stand: fighting to get its taxpayer-funded Viagra back. The filing is the latest in a two-year legal campaign in which the union has argued, so far unsuccessfully, that the board’s policy of excluding erectile dysfunction drugs discriminates against male employees.”

“Thirty thousand people showed up to receive Section 8 housing applications in East Point Wednesday, suffering through hours in the hot sun, angry flare-ups in the crowd and lots of frustration and confusion for a chance to receive a government-subsidized apartment.”

People fainted and some had to go to hospital, all just to get the application form. The Huffington Post described it as “Third World America“. The Ed Show reporter said it was “disgusting”. He also pointed out that there are “0” public housing units available. It’s just a matter of getting onto a waiting list.

Reuters reports that an Iranian media organisation, which goes by the name of Farce (we’re not sure about the spelling), has released footage of mass graves dug for any unfortunate invaders of Iran.

“A third of Colorado Springs’ 24,512 street lights have been switched off to save power”

Measuring success

Successful economies of the GFC, as Pascoe reports, are as follows:

Fortune magazine lists a sample of five economies that are doing relatively better [than the US]. The list of course starts with Australia – and then goes on to Columbia, Peru, Singapore and Uganda.”

Hooray, we sit amongst Columbia, Peru and Uganda! The whole world should follow our collective lead.

For the Austrians

Those who follow the Austrian School of Economics, tremble and quake:

Businesses Bunker Down
Take This Job and Shove It

Until next week,

Nickolai Hubble.
Markets and Money Week in Review

Nick Hubble
Nick Hubble is a feature editor of Markets and Money and editor of The Money for Life Letter. Having gained degrees in Finance, Economics and Law from the prestigious Bond University, Nick completed an internship at probably the most famous investment bank in the world, where he discovered what the financial world was really like. He then brought his youthful enthusiasm and energy to Port Phillip Publishing, where, instead of telling everyone about Markets and Money, he started writing for it. To follow Nick's financial world view more closely you can you can subscribe to Markets and Money for free here. If you’re already a Markets and Money subscriber, then we recommend you also join him on Google+. It's where he shares investment research, commentary and ideas that he can't always fit into his regular Markets and Money emails.

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I did the sums on the ‘6% of GDP is $6,000 for $100,000 earnings’ line. From the 08/09 budget papers, government revenues were 24% of GDP at 28.9 billion, and expenditures were $32 billion. This works out at about 27% of GDP. So, going from the ‘100,000 GDP’ line, what we actually have is someone earning $24,000, spending $27,000 and maxing out a $6k credit card on worthless junk to maintain a standard of living. Instead of 6% of GDP it should be reported as 25% of government revenues. I’ve no idea why no other journalist has done this simple… Read more »

Hubble: “If customer’s* agreed with the fears Danny John outlines in his article, they would go to another bank. Of course, the government restricts the number of banks they can go to significantly with all sorts of laws, but there is still some competition.”

There certainly will be, soon, on new loans. New regulations will allow bank customers to shift their business _without penalty_ in future. :D

* Academia may have allowed you to escape too soon, Nic. ;)


Dear Nickolai,

COLOMBIA not Columbia(Does not exist as a country)

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