–Uh oh. China has an inflation problem. Food prices are up 14% in the last year. And the pork in a tasty lunch of sweet and sour pork is 57% more expensive than this time last year. Perhaps it is time to switch to Kung Pao chicken.
–Even that might not help. Consumer prices rose 6.4% in June, according to China’s National Bureau of Statistics. Producer prices were up 7.1%. This is a problem for Australia.
–China’s inflation is a product of its own credit bubble. And its own credit bubble is just one of many global bubbles built on too much credit and too much debt. But whereas the American and European debt problems are financially more remote (or appear to be) China’s credit bubble has a direct impact on the price of Australian commodities, the earnings of major resource companies, and employment in the Australian economy.
–The People’s Bank of China (PBOC) has raised interest rates five times since last September. It’s trying to prevent rampant consumer price inflation, the kind that leads to angry people in the streets. The one-year lending rate in China is 6.56%. The one-year deposit rate is 3.5%. The PBOC is trying to keep more money in the banking system (and out of the economy) by making loans more expensive and bank deposits more attractive.
–China’s bankers might win a battle or two in the war against inflation. But the war is already lost. Trillions of dollars have been sunk into commercial and residential real estate. Much of that “investment” was unproductive speculation. Values will fall. And so will demand for the resources demanded to build all those empty cities and apartment buildings.
–The inflation figure has spooked the Aussie share market. It’s down about one per cent as we write. The horrendous US jobs report was also a reminder that expert forecasts are generally useless/misleading. The US economy supposedly added 18,000 jobs in June, which was 83% lower than forecast by a survey of economists.
–Speaking of the US, we haven’t had much to say about the debt ceiling. The US government actually reached the statutory debt ceiling on May 16th. The ceiling towers at $14.29 trillion. US Treasury Secretary Timothy Geithner has been rearranging the Federal furniture to keep things running until Congress and President Barack Obama agree on a deal to raise the ceiling.
–Blah blah blah.
–Geithner says the borrowing authority of the US runs out on August 2nd. That’s the deadline for the suits on the Potomac to reach some sort of sham compromise that pretends to cut spending while raising taxes. You can expect a deal to get done. You can be sure it won’t be meaningful.
–America’s ruling class is acting from a sense of historical entitlement. It ignores reality, that when you have $14.29 trillion in debt you have a spending problem, not a revenue problem. But the spending problem is really an expectations problem: that you can get something for nothing by borrowing for it. Its political leaders are hopeless, and generally not even well-meaning.
–Even though we just rubbished financial forecasting, we’re going to make one ourselves: the US fiscal meltdown will be the grand daddy of them all. No one is saying what really needs to be said: the State has a spending problem. Too many wars and too much welfare. The whole project of living out of the future’s pocket is coming to an end.
–Amen! The downside is that the day of reckoning in America is going to mean a lot of pain for a lot of people. At least it will mean the end of an inherently fraudulent idea. Which brings us to Italy! Or, as we like to call it today, the latest Greece.
–Italian banks have exposure to Greek debt. They also have exposure to Italian government debt. They are over exposed. And on Friday, Italy’s main stock index fell by 3.5%. Investors punished the banks and priced in the coming collateral damage.
–But the regulators struck back against prices! Consob, the Italian share market regulator, has ordered that short-sellers “must reveal their positions when they reach 0.2 percent or more of a company’s capital and then make additional filings for each additional 0.1 percent. The measure takes effect today and lasts until Sept. 9,” according to Bloomberg.
–Yes. Because it is the short sellers who are to blame for soaring levels of public debt in Europe.
–Rising government bond yields (and falling prices) are the perfectly natural reaction to finances that have become transparently absurd. If you’re a government and you’re trying to prevent pricing information from betraying how bankrupt you are, what do you do? You interfere with the ability of prices to communicate information. You fix the market.
–Bloomberg reports, “On July 5, European lawmakers voted in favour of a ban on short selling of government bonds in the EU unless traders have at least ‘located and reserved’ in advance the securities they intend to sell. The European Union Parliament in Strasbourg, France, also called for restrictions on traders’ use of credit- default swaps to profit from defaults on sovereign debt they don’t own.”
–There are plenty of people who object to short-selling on principle. When you short sell, you’re selling something you don’t own from someone who doesn’t know you’ve borrowed it. You give back what you’ve sold only after you’ve bought back. If you sold it for more than it was worth when you bought it back, you make a profit.
–Short sellers serve the very useful function of exposing bad business models and fraud in the market. Attacking them is a great way of ensuring that fraud continues and is not revealed in prices. If you’re perpetuating a fraud, you’d want to get rid of short sellers.
–In any event, Europe’s bankers are busy giving themselves more time to exit the market before allowing it to fail. This will allow them to buy up assets at post-crash levels. The public will be left with huge debts and bailouts to pay for.
–Apparently none of this—China’s credit bubble, America’s fiscal crisis, and Europe’s debt reckoning—matters in Australia. The government is extremely busy finding ways to raise taxes, raise the price of energy, destroy Australian manufacturing, and waste even more money with new agencies designed to subsidise favoured industries.
–One of Bill’s axioms is that all great empires must find a way to destroy themselves. There is a cousin to this axiom which applies to Australia. The central problem is people of all parties seem to believe that the “way forward” is getting the right government policy. But the government IS the problem. Like a parasitic vine, it’s everywhere, clinging to everything and tearing it down, sucking the life out of the lives of real people and money out of the economy. More on this idea tomorrow.
Markets and Money Australia