Paying the rent in Yuan
Our reserve bank governor got some rare praise from Dan on Tuesday:
“Well you have to give RBA governor Glenn Stevens credit (no pun intended).”
Why the sudden appreciation? (Pun intended.) Well, Glenn came up with a pearl of wisdom in his interview with Channel 7:
“It’s a mistake to assume a riskless, easy, and guaranteed way to prosperity is just to leverage to property.”
Whether the property spruikers take it to heart is another matter. Their “zero the hero” man, Ben Bernanke, continues his quest for global liquidity. But it’s other financiers of Australian property that are in the crosshairs of our readers.
Going by our Markets and Money inbox, suspicion of Chinese property investors bidding up Australian property prices is rampant. Responding to demand, as any free market enthusiast would, Dan discussed it in detail on Tuesday.
But what about the implications? Having our flagship resources industry rely on foreign credit and politically driven Chinese demand is unstable enough. Now our house prices rely on them as well!
But why is Glenn talking down property mania? A cynic, and a Markets and Money editor, would be inclined to scan for vested interests. You don’t have to scan far in this case. A few paragraphs down from Glenn’s earlier comment, one finds the following:
“I’ve got kids that within not too many years are going to want somewhere of their own to live and you wonder how is that going to be afforded.”
That’s right; it’s exactly the problem that featured in last week’s edition.
Who would want to spread their wings and fly the roost when you have nowhere to go? Why not stick with home and let the parents foot the bills? It’s a logical and financially responsible reaction to house prices. Your kids aren’t making it look like they’ve done an in depth CBA (cost benefit analysis), but who knows?
About the best metaphor for the direction the world is heading in comes from Markets and Money veteran Eric Fry:
“The US government – as well as several governments in Europe – is attempting to supplant aspects of the private sector.
“I don’t think that’s going to work. You cannot ever convert a parasite into a host. They are completely different organisms, which perform completely different functions. So right now we have credit contracting rapidly in the private sector, while it is expanding dramatically in the public sector.”
Discovery Channel fans might recall the zombie snails, who are controlled by the parasite that possesses them. Governments are remarkably similar to those parasites. They lead their host to doom as well. Likening fellow taxpayers to snails is probably not favourable, so we will leave it there.
It’s fair to say that the bond vigilantes are casting an eager eye over the scene, just waiting for the first course of escargot.
Bonding with Kevin
KRudd’s draft legislation for amending tax laws contains some spectacularly exciting provisions.
What, dear reader, do you think of having to pay a bond to the ATO?
We won’t bother with a poll. The Australian provides the details:
“Thousands of small businesses could be forced to put up a security deposit for the tax office under Rudd government draft laws meant to target foreign taxpayers and the shonky operators of Australian phoenix companies.”
The draft supposedly contains some provisions that have libertarian blood boiling:
“You commit an offence if the (Taxation) Commissioner requires you to give the security [bond] under section 255-100 and you fail to give the security as required.”
It even includes the words that give bureaucrats around the world wet dreams:
“… or any other means deemed reasonably appropriate by the tax office.”
Administrative justice anyone?
Obama forgets the kids
As the healthcare debate continues to rage on this side of the Pacific, Americans are proving to be a stellar example of how to get it wrong.
The New York Times explains one aspect of the plight of a national takeover of healthcare:
“Because of the new health care law, Arizona lawmakers must now find a way to maintain insurance coverage for 350,000 children and adults that they slashed just last week to help close a $2.6 billion budget deficit.
“Louisiana officials say a reduction in federal money to hospitals that treat the uninsured under the bill could be a death knell for their state-run charity hospital system.
“In California, policymakers estimate they will have to come up with an additional $500 million a year to make necessary increases in payments to Medicaid providers.
“The federal government has to account for states’ inability to sustain our current programs, much less expand,” said Kim Belshé, secretary of California’s Health and Human Services Agency.”
The stories go on.
But even the supposedly good aspects of the law are proving questionable.
One of the main benefits of Obamacare is that insurance companies cannot turn down people because of pre-existing conditions… unless those people are children. They aren’t provided for by the bill, according to Republicans.
Pelosi’s infamous quote is turning out to be true for Democrats.
“We have to pass the bill so you can find out what is in it.”
It seems the Democrats are relying on the Republicans to do the reading and editing of their law for them.
Apart from the administrative bungles being exposed, there are other issues. It stands to reason that many of those who did not have health insurance before Obamacare were in that position for a reason. There are several examples, but let’s take the favourite example of the poor.
If these people are now spending some of their money on health insurance, what will they spend less money on? Perhaps the food and hygiene items that keeps them healthy?
Is it possible that Australians have a unique gene, which causes them to suffer from house price obsession? There seems to be few more plausible arguments.
On Monday, Dan commented on the latest hype:
“President of the Real Estate Institute of Australia, David Airey told the same paper that the increases in sale prices and total properties listed reflected the “surging confidence” in the housing sector. He said that after the financial crisis, Australians were more interested in investing in property than on the stock market.”
Buying high, selling low has worked out well for investors all throughout history…
Meanwhile, at our sister publication, Money Morning, Kris Sayce points out that housing is an unproductive asset.
In other words, buying and selling houses doesn’t really get the economy anywhere. They serve a purpose, but don’t create anything. Building new ones sort of does further the economy, but only in the same way that buying a tulip does.
Both housing and tulips have been caught up in manias that ended in panics. But is it the panic, or the mania that is to blame?
19th century economist John Mills (not to be confused with John Stuart Mill) expressed his opinion clearly:
“Panics do not destroy capital; they merely reveal the extent to which it has previously been destroyed by its betrayal in hopelessly unproductive works.”
So, if he had it figured out, why have we still got it wrong? It’s because modern policy makers confuse indicators with goals. They want house prices to keep rising to make people feel prosperous.
But in a market, the reason prices rise is because people want more houses. It’s an indicator to developers that more houses are needed. A rise in prices indicates the market is out of equilibrium and profits are there to be made. Once more houses are built, prices will come down again.
But there exists an institution, infamously known as government, which stops the equilibrium from emerging. It creates laws to limit supply, so the price can’t fall. The weird thing is that people in Australia seem to want it that way.
But eventually, the distance between the market price and equilibrium will become too great. There is no reason why people should want to spend more of their income on housing than earlier generations.
The confusion of goal and indicator is also what leads to the free market being blamed for the crisis. If government policy is directed at improving indicators (thereby making them goals), they cease to indicate anything related to reality. This is known as Goodhart’s Law.
Meanwhile, it seems the indicators themselves are flawed.
An excellent illustration of the property media in action comes from the 5 Minute Forecast:
Bloomberg: Home Prices in 20 U.S. Cities Rose 0.3% in January
Home prices in 20 U.S. cities unexpectedly rose in January, indicating the housing market is stabilizing as the economy expands. The S&P/Case-Shiller home price index climbed 0.3% from the prior month…
MarketWatch: U.S. Jan. Case-Shiller Home Prices Fall 0.4%
Home prices in 20 major U.S. cities fell a not-seasonally adjusted 0.4% in January compared with December, according to the Case-Shiller home price index released Tuesday
It’s not just property mania that is full of statistical flim flam. Check out the latest “Climate Change Error“, although there has probably been another one since I wrote this.
Not Happy Jan!
Social unrest throughout Europe is turning into a serious concern. Put yourself in their shoes. Here is what they might be thinking:
“The bankers caused the crisis, they are getting bonuses higher than ever after being bailed out by our taxes, and now us workers are taking a hit in the form of wage deflation and government budget cuts.”
It really wouldn’t be difficult to stir up a frenzy, and there are plenty of people with an incentive to do so.
Is this the time for a resurgence of unions?
“Union workers across Europe are walking off their jobs as workers protest pay cuts. Britain has been hit especially hard, with newspapers labeling the bout of strikes the ‘spring of discontent’.”
Person of the year is clueless
“An economic puzzle Bernanke can’t solve” is the title of a Reuters article that caught our eye. Of course, the Austrian School of economics has the solution, and has had it for a very long time, but let’s get to that later. First, what is the problem?
“If the U.S. economy is growing rapidly, why isn’t it creating jobs?”
This could aptly be named the paradox of Keynes.
Obviously, there is a concern that the stats are rubbish, but let’s not go there.
Just in case Bernanke is reading this, here is the answer to his puzzle, provided by Peter Schiff in the Wall Street Journal:
“Governments cannot create, but merely redirect. When the government spends, the money has to come from somewhere. If the government doesn’t have a surplus, then it must come from taxes. If taxes don’t go up, then it must come from increased borrowing. If lenders won’t lend, then it must come from the printing press, which is where all these bailouts are headed. But each additional dollar printed diminishes the value those already in circulation. Something cannot be effortlessly created from nothing.
“Similarly, any jobs or other economic activity created by public-sector expansion merely comes at the expense of jobs lost in the private sector. And if the government chooses to save inefficient jobs in select private industries, more efficient jobs will be lost in others. As more factors of production come under government control, the more inefficient our entire economy becomes. Inefficiency lowers productivity, stifles competitiveness and lowers living standards.”
Peter Schiff’s article was from 2008, while the Austrian School of Economics theories he uses are much older. It seems they have been vindicated, but still not recognised at the Federal Reserve.
Out of left field
Renowned professor James Lovelock has come up with some cracking climate change comments. For those of you thinking this is outside of our scope, think again:
“It may be necessary to put democracy on hold for a while.”
Humans are “not clever enough”.
The last comment we’ll mention here is one that is particularly amusing, as it contradicts the first:
“You need sceptics, especially when the science gets very big and monolithic.”
Being sceptical in a dictatorial regime isn’t good for your health.
Markets and Money Week in Review