A new PM likely means new policies, so we won’t be too judgemental… yet. Instead, we will let her do the talking. But we don’t know which quote to choose:
“My name is Julia Gillard and I am not smarter than a Fifth Grader.”
“It’s a great day for redheads,” Australia’s new Prime Minister, Julia Gillard, is said to have proclaimed…
Even Taxes are Pretty in Pink
Ken Henry has redefined himself as the personification of Political Risk. Uncertainty kills economic activity. There is nothing more uncertain than an academic turned bureaucrat with political influence.
And speaking of rose coloured glasses, the Labor government has been criticised for its lack of real world experience. Cushy government jobs cover their CVs. But Ken Henry is different. He has no private sector experience at all, according to the Treasury website.
So it’s fair to say that Ken hasn’t contributed to what Bill Bonner would call the “producing” sector of the economy. Instead, he has been toiling away in the parasite sector, living off other’s taxes.
That’s why Henry has been so cordial about the Resource Super Profits Tax furore. It’s all pink to him. While the RSPT has brought Labor into election losing territory, with marginal seats swinging enough to hit 6s, Ken has been quietly contemplating how he could make things worse.
He managed to do so at a tax conference in Sydney. Yes, a tax conference.
“A super-profits tax should be rolled out for all companies in Australia as a long-term reform.”
Your editor’s reaction to this was an unsavoury one. Deeply unsavoury. But the story only got horrifyingly worse.
Displaying his inclinations, the essence of Henry’s speech was him “complaining about the difficulty in converting academic ideas on tax into practical policy…” according to David Uren of The Australian.
Poor Ken, can’t get his rosy classroom dreams into legislation.
“Dr Henry said yesterday a tax system known as the “allowance for corporate equity” held the most promise.
“… this would allow companies to earn a return on their equity investment, which should be no greater than the government bond rate. Profits higher than this would be treated as a super profit or economic rent, and would be taxed at a higher rate.”
So in Australia, the incentive is to decrease profits! And any clever entrepreneurs, take your idea elsewhere.
Forcing the more productive, intelligent and resourceful people in the economy to bear the weight of those who should be going out of business is just stupid. That hasn’t stopped countries from trying it. But the IMF points out that most countries abandon it. And what would happen to government revenue when the economy slows?
Mr Political Risk has also decided to tell economists to “put down their weapons” and “back the Tax”. This is where the rose coloured glasses come off.
“He said it was ‘unbelievably frustrating, incredibly frustrating’ for people advising governments of both stripes that economists seemed ‘loath to come to a consensus position on anything’.”
It’s no surprise that Henry finds disagreement inconvenient for his lofty ideas. But he goes on to criticize just having a debate on the issue! That’s right, according to your Treasury Secretary, you shouldn’t discuss the RSPT! In fact, your opinion has to be in accordance with government policy, for a while:
“But I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus…. There are times when it would serve the national interest if economists could just call a halt to the war for a while.”
Presumably the “for a while” means “until the legislation is enacted”. Once the law is passed, you can argue all you want…
And the final development in this story is purely an amusing one. If you click on the link here, you get taken to an article entitled “Back the Tax, Henry Tells Economists”. Only that isn’t what the original title was. Here is the link in full: http://www.theage.com.au/business/keep-shtum-henry-tells-economists-20100621-ysek.html
The key words there are “keep-shtum-henry-tells-economists”. Stum (pronounced shtum) is the German word for “shut the hell up”.
Markets and Money would like to congratulate whoever came up with this title. And to whoever changed it, the Gestapo and Mr Henry would be proud.
But all this hullabaloo could be about nothing after all:
“The government will not be adopting that model in Australia,” the [now former] prime minister told parliament …”
Where exactly the Government does plan on implementing the tax remains unclear. Perhaps Germany? That would make it more popular down under.
It seems Henry will have to stick to academic ideas for now. But with a former communist in charge, who knows? Julia might not even stop to think about the precious housing market, which Dan Denning reported has been hit by the RSPT as well.
Lessons in political uncertainty
One of the few places to be on par with Ken Henry’s “uncertainty boom” is the USA. There, the President has put a six month moratorium on issuing deep water drilling permits, as well as calling for exploratory drilling to stop at 33 oil wells. But now “U.S. District Judge Feldman in a separate order today “immediately prohibited” the U.S. from enforcing the drilling moratorium, finding the offshore companies would otherwise incur “irreparable harm.”
Oops, irreparable harm! Six months would destroy the oil industry! But wait…
“Energy companies won’t resume operations until they have “more certainty” on drilling and what the federal government plans to do, Louisiana Governor Bobby Jindal said today during a press conference.”
So they won’t survive stopping, but won’t start until they know whether they are going to go or not…
Regardless, the American Petroleum Institute disagrees with Jindal:
“With this ruling, our industry and its people can get back to work to provide Americans with the energy they need, and do it safely and without harming the environment.”
But Jindal wasn’t finished:
“You can’t just turn this switch on and off,” Jindal said. “Once these rigs leave the Gulf, they may be gone for years.”
All this reminds your editor of a Beatles song. It probably wasn’t about oil, but here goes:
You say yes, I say no
You say stop and I say go, go, go
You say goodbye and I say hello
I don’t know why you say goodbye
I say hello
I don’t know why you say goodbye
I say hello
As you know, what investment doesn’t like is uncertainty. And, as evidenced by what you have just been singing, that is what it is getting.
Jud Bailey, an analyst at Jefferies & Co. in Houston. “Investors, as it relates to the drillers, are for the most part staying away. There’s too much uncertainty, too much headline risk.”
So oil investment suffers. And that bodes ill for the broader highway economy of the USA.
Another one bites the dust
US bank failures continue at a rapid pace. Rapid pace being double that of last year. By the time you read this, the next couple of banks will be joining the 83 on the list so far for 2010.
This news is easy to gloss over and laugh about. Depositors get bailed out by the US’s insurance scheme anyway…
But how did the US end up with such a mess of a banking system? Well, the answer is a long and drawn out one. No doubt you will know that regulation is to blame. But consider this: The safest banking system in history (for depositors) was when there was no regulation at all. Contract and criminal law was about it. There was no central bank and each bank printed as many of its own notes as it liked. Sounds ridiculous, right? So why did it disappear and how did the Americans get it so wrong?
Find out more here.
An update on Europe’s tumour state is due. This article says it best:
“There are a number of things that show we are on a different path eight months after we’ve taken on a government in a crisis,” Papandreou said in New York, where he came for a two-day meeting of the Socialist International, a global organization of social democratic, socialist and labor parties he has headed since January 2006.
We have a socialist in charge of the world’s debt troubled country. Wonderful. No wonder Greek CDS spreads are supposedly at an all time high.
And Greeks have picked up on their future:
“A June 17 poll of 2,100 Greeks showed 52.6 percent believe the country would default.”
But who would have thought they would follow the (formerly) outrageous advice of a German politician and sell their islands?
Government in action
Hugo Chavez is doing his best to imitate the incompetence of western leaders. Sadly, he is also a genuine socialist, so when he stuffs up, it’s big time. And he can’t shift the blame onto the free market.
Venezuelans Troops have been busy “administrating” the poor of their rice and powdered milk, which they had illegally bought at elevated prices. But it turns out that the food shortages aren’t solely due to wealthy elites fuelling inflation and hoarding food (believe it or not):
“[Critics] point to 80,000 tons of rotting food found in warehouses belonging to the government as evidence the state is a poor and corrupt administrator.”
“Fighting back, Chavez says he is in an economic war against the “parasitic bourgeoisie” that tries to convince Venezuelans that socialism does not work by twisting facts and taking advantage of honest mistakes.”
Oh, is that what they were.
The Greenspan Slam
According to the former Federal Reserve Chairman, the buck may soon stop for the US government. Literally.
“Perceptions of a large U.S. borrowing capacity are misleading. Despite the surge in federal debt to the public during the past 18 months – to $8.6 trillion from $5.5 trillion – inflation and long-term interest rates, the typical symptoms of fiscal excess, have remained remarkably subdued. This is regrettable, because it is fostering a sense of complacency that can have dire consequences.”
If the Chinese stick to their implied implications and abandon the currency peg, this would further decrease the demand for Treasuries. That’s because the Chinese would be selling less Yuan to keep its value down. That means fewer dollars in their coffers to invest in treasuries.
But why the deficits anyway? Keynesianism is out of fashion… again.
“Nobody can seriously dispute that excessive public debts, not only in Europe, are one of the main causes of this crisis,” Finance Minister Wolfgang Schaeuble told reporters in Berlin today alongside Merkel. “That’s why they have to be reduced.”
German Economy Minister Rainer Bruederle, at a separate press conference earlier today, said the U.S. must join Europe in “urgently” cutting spending.
“It’s urgently necessary for monetary stability that public budgets return to balance,” Bruederle said. “This is something we should also tell our American friends.”
But Obama isn’t listening:
President Barack Obama, in a letter to his G-20 counterparts dated June 16, urged a focus on economic growth, saying order to public finances should be restored in the “medium term.”
Even the head of “Socialists International” has picked up on the need for austerity. When will Obama? When will he learn what Merkel (and Cameron) already know: “It’s not about growth at any price, it’s about sustainable” growth.
But dissent within the Democratic Party is growing. And it’s worth noting that the Dems can be even more concerned about budgets than rival Republicans. In response to out of control borrowing, they have decided not to pass a budget! (Not a joke.) Pretty soon, they will be following Romania’s lead and asking for donations to pay down the debt. But nobody can surpass Maywood, California, which has fired all government employees (including the police).
Paul Krugman has provided his ever worthless two cents again:
Nobel prize-winning economist Paul Krugman said the U.S. isn’t worried about “loose monetary policy” and said it would be a risk for the euro region to allow Axel Weber, president of the Bundesbank, to succeed Jean-Claude Trichet as head of the European Central Bank, German newspaper Handelsblatt reported
“If you’re looking for somebody who aims at an inflation rate of zero percent while unemployment rises to 13 percent, then Weber is certainly the right man,” the newspaper quoted Krugman as saying.
This is infuriating. It was Paul Volker who rescued the US from its last inflationary bout specifically with the policies that Krugman demonises. He probably considers stagflation to be impossible, despite its occurrence just a few decades ago. (That’s not a long time for an economist.)
Thanks to Raj and the other readers who pointed out my error in last week’s edition:
Raj to Markets and Money Australia,
As a long time reader I must say I’ve always found the perspectives shone on markets and economics by the daily reckoning refreshing at the least, however, I just have one quick comment because of something you said that made me cringe in your article below, and that was:
“Free markets! It’s a government institution – the U.S. Federal Reserve – that is providing the liquidity, via low interest rates and outright buying of government securities, to keep bond yields low. That’s the opposite of free markets.”
The Federal Reserve is as federal as Federal Express, it’s a private institution, every man and his dog ought to know this by now! At first I felt like the one of the only voices saying this years ago but even the popular online media knows this now and I find it a bit shocking that you guys still think the Federal Reserve is a Government Institution.
The popular online media I refer to which covers some of the detail is here.
Indeed, Raj and other readers were right to complain. A more accurate explanation would have been to say that the Federal Reserve is a private bank that has a monopoly power on money creation, granted by legislation.
The question of who it is accountable to and who controls it is an open one.
Thomas Jefferson said in 1802:
“I believe that banking institutions are more dangerous to our liberties than standing armies.
“If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around the banks will deprive the people of all property – until their children wake-up homeless on the continent their fathers conquered.”
We have had the inflationary boom of the bubble years and the deflationary period is upon us. But Jefferson may not have foreseen just how good the central bankers would get at money printing…
Until next week,
Markets and Money Week in Review