Dear reader, this week’s weekly update only features four days worth of analysis and snide commentary. So if Europe dissolves on Friday, or China dumps treasuries on Thursday night, you won’t discover that below…
Build America Balance Sheet Bonds
On Monday, Dan wrote about the disappointing lack of government debt in Australia…
By that he meant that there isn’t enough outstanding government issued bonds to go around that fulfill the new Basel requirements. Think about that for a moment. You’ll have a situation where capital requirement laws institutionalise the ownership of government debt on bank balance sheets. During a sovereign debt crisis! Imposed by politicians who brought on the sovereign debt crisis!
It sounds too outrageous to be true. But it makes perfect sense. Politicians want their colleagues to have a secured source of funding. Just force banks to buy their bonds. But will you buy it?
As a Markets and Money reader, you’d hope not. But maybe you like funding murderous insulation schemes and foreign wars?
Bank of America gets Wiki-whacked
Yes, Wikileaks is hinting at Bank of America’s instability. In a pair of Tweets, Wikileaks front man Julian Assange suggested avoiding the bank, telling readers to go someplace “safer”. Of course, BofA has suspended payments to Wikileaks, so it’s possibly just a spat.
But then again, if Wikileaks did have a juicy database full of revelations about the nefarious ways in which BofA runs its business, what would be the effect of publishing them?
It’s not like banks have nothing to hide. And in the marketplace, people can choose to move their money elsewhere (although you should check your own bank agreement to see what the rules are on actually withdrawing your money from the bank when you want it… it may not be as easy as you think). And capital controls by the government are another way of restricting your ability to move your money as you choose.
For BofA, business will move elsewhere as negative revelations emerge. (Or loan fraudsters will know where to go for their liars loans.) Of course, the entire banking industry isn’t likely to differ much from BofA. But there are other alternatives for Americans to park their money. Think outside the box. What asset can you hold as an alternative to cash, which will hold its purchasing power? Hint: What do you get at the Olympics, when you come in first place?
Lying the truth
A Freudian slip has occurred over at Reuters news service. Columnist James Saft may feel the following quote misrepresents him and is taken out of context. But it’s a real beut:
“You can lie to your creditors or you can lie to your taxpayers.” Ermmm… No!
It gets better: “Private money is quite happy to keep funding a bankrupt entity but only so long as the moral hazard play, the implied guarantee from on high, is still in force.”
Hahaha. Yes, and this is argued to be a free market. Of course, all these quotes are funny because they are true. And over in the US, we see what happens when the lying is uncovered. Dan Heinz, Comptroller of the State of Illinois, features in a mini documentary on the state of State finances in America.
Here are some excerpts as best as we could transcribe them: “… hundreds of thousands [of people] waiting to be paid by the state… They borrow in order to get by until the state pays them… Pretty much anybody who has any interaction with state government, we owe money to.”
There are also stories of police having been turned away from gas stations because the state doesn’t pay its bill on time… if it does at all. (Next time you try to outrun the Sherriff, keep that one in mind.)
America is losing it. That’s the point the documentary makes, with star analyst Meredith Whitney at the forefront. She sees some massive defaults in municipal bonds within 12 months. Whether the businesses and employees who are already owed billions will get paid is a frightening question.
Lowering the bar draws fewer fans
The problem with low interest rates is that they can easily double. And that means mortgage payments can double. Debt that needs to be rolled over can quickly incur a substantially higher rate. Debt funded consumption can suddenly become unaffordable at the higher interest rate.
All this is why low interest rates can do a lot of damage to investment, instead of stimulating it. If you’re a bank or a lender, you don’t know how reliant your counterparty is on the low rates, so you don’t lend them money. Instead of being a benefit, the lower rate you earn makes lending money to potentially risky borrowers less worthwhile anyway.
Sound abstract? As you will have read, banks aren’t lending in countries with low interest rates. The new central bank money used to depress interest rates never makes it into the real economy. Instead, banks just deposit it right back with the central bank as reserves…or they invest it in the stock market.
And voila! There’s one explanation for why stocks rally when the underlying earnings picture for companies in the economy isn’t improving.
We’re on the road to … Texas
Aside from skewing employment data, the US census has provided an enlightening twist. Apparently more and more Americans are following their lucky stars to Texas (where the stars at night, are big and bright, clap clap clap clap, deep in the heart of Texas). And the people going to Texas are leaving the very states which carried Barack Obama to his Presidential election victory in 2008.
Now among progressives, Texas isn’t supposed to be quite as delightful as model city program idol Detroit. But apparently its comparative economic outperformance is quite a draw. The point worth noting is that Americans are voting with their feet – literally. Electoral boundaries will have to be redrawn, supposedly to the benefit of Republicans.
The press is giving some of the PIIGS a hard time at the moment. Bond fund giant PIMCO reckons the Eurozone will crack and splinter unless the debt troubled nations take leave from the Euro. Portugal Ireland and Greece were singled out in particular. The European Commission is threatening the same nations with fines for exceeding government deficit-to-GDP caps.
But why is Europe in such a mess? Is it the Euro’s fault? Are the deficits just too big? Is the debt too big? Is the welfare state too expensive? Are taxes too high? Are the unemployed too cosy?
Markets and Money veterans will recognise the answer. Hint: What do all the questions above have in common? Government. At least the solution is clear then. Less government. Of course, the chances of getting a majority of politicians to reduce their own power is pretty slim. The other way it could happen is if you get an outright revolution. As the French will tell you, that could also reduce government by a couple of hundred heads.
With the UK’s new record borrowing coming in under a supposedly austere government, one gets the impression that things are changing awfully slowly in Europe. That means bond markets remain the place to watch for any trouble.
Economic facts and fallaciousness
- The bank failure count for the year has hit 157 in the US. More may be occurring to cap off the year as you read this. It’s the smaller regional ones for now. But next year, it could be the bigger ones.
- Here’s an economic problem you don’t want to face: “A lack of toilets costs India more than $50 billion a year.” We’re not sure if Bloomberg intended it to be toilet humour, but the fact is certainly a serious one.
- The National Inflation Association reports: “We are now at a point where if the U.S. government taxed Americans 100% of their income, the tax receipts generated would not be enough to balance the budget.“
- According to the UK-based Centre for Economic Performance, “in richer countries, an increase in government consumption of 1pc of GDP on average produces only a 0.4pc of GDP in the short term.” So spending money might prevent a technical recession, but it appears to destroy growth. Got that you Keynesians?
From cold to freezing to ice age
Melbourne’s summer weather features a temperature less than half of what a Queenslander is used to. So, in the spirit of things, it’s time to giggle at the global warming enthusiasts – always a heart warming activity.
As your editor heads towards Heathrow on the day you receive this, you will be relieved to know that “Snowfalls are now just a thing of the past” for Britain. That’s because “Global warming, the heating of the atmosphere by increased amounts of industrial gases, is now accepted as a reality by the international community.” Dr David Viner, from the climatic research unit (CRU) of the University of East Anglia reckoned that “Children just aren’t going to know what snow is.”
That was the consensus in 2000. Since then…
2001 – “An unusually heavy snowfall occurred last week over London as well as over much of the United Kingdom and Ireland.”
2002 – “Winter snow scene”
2003 – “In January 2003 we were treated to a rare sight in London: worthwhile amounts of snow!”
2004 – “Yes, it really did snow in London! And it was bloody cold.”
2005 – “It’s amazing. This morning, there was still snow in Central London. In March. Not since 1960 or 1961 has it snowed so many days in a row in London, they say. It’s freezing, of course, but beautiful. So much for global warming…”
2006 – “Snow squall in London”
2007 – “Lots of luvverly snow in London today!”
April 2008 – “Snow in London”
October 2008 – “London – Snow”
2009 – “The heaviest snow since 1991 transforms the capital. Snow in London is a rare occasion, to be greeted with wonderment and awe, even when we’re talking about less than 1cm of the white stuff sprinkling the ground for a few hours.”
Wonderment and awe will not be your editor’s reaction to a flight that gets cancelled. But maybe we will have to get used to it. A mini ice age is the prediction of one weather forecaster with a track record to be reckoned with. Even the mayor of London is giving him a mention.
Of course, the EU has responded to the crisis with a constructive suggestion: “EU threatens snowbound airports with regulation.” Yes, that’s what you get for disagreeing with Government weather forecasts. More laws!
According to this article, weather could be the least of our worries. Apparently, forgetful people have been boarding flights with 6-inch hunting knives and .40 caliber guns. Yes, with a rumored “failure rate of up to 70 percent in identifying banned items“, airport security has us worried for the first time.
Then again, maybe those people boarded on the day when airport security was off work. You haven’t heard of that day? U.S. Homeland Security Secretary Janet Napolitano explains: “What I say to the American people is that . . . thousands of people are working 24/7, 364 days a year to keep the American people safe.”
Anyway, we will report back on our experiences of austerity in Europe in mid January. Until then, Merry Christmas and a happy new year enjoy your festive season.