People used to save for the future. Then they lived paycheck to paycheck. Then they borrowed from the future for the consumption of today. The they borrowed to pay off their debts. When they couldn’t borrow any more, governments borrowed to bail out the lenders.
Well, emigration wakes are becoming popular again. At least in Ireland.
Several hundred years ago, the Irish used to hold emigration wakes for their friends and relatives leaving for the U.S., as they would probably never be seen again.
Now, with underwater homeowners facing prison for being unable to pay their debts, the Irish are once again holding emigration wakes. The friends and relatives who are off to Australia and the like won’t be able to return for fear of being picked up by police for their debt avoidance.
If you’re surprised that the Irish can go to jail for failing to pay debts, consider that it can happen in Australia – only if you owe money to the government though. (Doesn’t that tell you something about the nature of government!)
And the misery only continues outside of Ireland.
‘We are one shock away from a full-blown [food] crisis,’ according to World Bank President Robert Zoellick. ‘The financial crisis taught us that prevention is better than cure. We cannot afford to forget that lesson.’
But what does the World Bank President think we experienced during the financial crisis? Prevention or cure? Either way, he’s wrong. The crisis is the cure. Preventing it is merely treating the symptoms of the underlying problem.
There is something fundamentally wrong with the world economy. No, a whole series of things. Does the World Bank President think he can paper them over with laws, treaties and interventions? When has that ever worked?
No matter whether you think the government can solve problems or not, the governments of the world – the traditional ‘problem solvers’ – are the source of the instability now. The more money that goes to politicians’ bailouts, the more bailing out will need to be done.
‘Never before has S&P placed the full faith and credit of the United States on “outlook negative”.‘ Now it has.
What will citizens think of their Congressmen when the S&P500 falls because of poor budget management? How did you feel when the various resource taxes were proposed and ASX stocks plunged?
Yes, the irony of forcing you to save and invest for retirement is that suddenly the government is held responsible for any policy that affects the stock market. Not only do taxes matter when you vote. The party’s affect on the ASX200 is factored in too.
But don’t worry, the governments of the world are undeterred and on the case. Yes, having made a mess of their own balance sheets and economies, they have decided to scrutinise each other for financial misbehaviour. And they have decided to bring up one of their favourite political justifications for the crackdown: ‘Too big to fail’. In the name of PR, it has been changed to ‘Too big to ignore‘.
The U.S., Japan, Germany, France, U.K., India and China made the list of unignorables.
The seven ‘economies will face deeper scrutiny from their peers to ensure their policies don’t derail a global expansion that finance chiefs bet is strong enough to absorb recent shocks. Drawing up the list is part of a plan to spot imbalances in individual economies such as large trade gaps, and prescribe policies to fix them before they harm global growth…‘
Yes ‘fix‘ them. But wait – where do they come from? Government policies!
Interest rate manipulation, exchange rate manipulation, tariffs, quotas, taxes, tax breaks … it goes on and on and on.
Why not just leave people alone? What does it matter if a neighbour trades with his neighbour on the same side of a border or the opposite side of the border? To paraphrase a famous newsletter writer (we can’t remember who), ‘nation’s borders cover the face of the earth like a skin disease.‘
Slowly but surely, the skin diseases are killing off their sufferers – the taxpayers. But not without a curious pantomime to entertain in the meantime.
‘We don’t need assistance!’ … ‘We need assistance!’ … ‘We don’t need restructuring!’ … and now the Greeks say ‘We need restructuring!‘, although they still deny making the request.
It’s like a teenage tantrum. Economics guru Nouriel Roubini is the parenting expert:
‘The issue of Greece is not whether there will be debt restructuring, but when it will be done, and whether it will be an orderly market-oriented debt exchange or disorderly like in Argentina.
‘Clean up your room properly or you will go to bed without any dinner!‘
The fact that the entire EU could be at stake adds an element of fascination. Your editor pictures it in the following way (we’ve never been much of a cartoonist):
The EU members are in a lifeboat. Ireland fell out and almost drowned, only to be saved by the helping hands of its comrades. Greece fell out after too much Ouzo and the Portuguese decided to take a dip without knowing how to swim. Everyone’s rush to save Ireland, Greece and Portugal caused the lifeboat to tilt unexpectedly. If the rescuers pull too hard to save their soggy friends, they might capsize the boat. The Germans, seemingly resigned to letting Greece drown, have moved to rebalance the boat, making Spain and Italy sea sick.
The U.S. sales past in an ocean liner, throwing life rings down to the lifeboat, while heading for an iceberg.
David Watts, of CreditSights Inc. reckons a Greek bailout isn’t about Greece. ‘At that point it doesn’t matter how much you’ve saved by restructuring Greece, the fallout from Spain is much greater. The issue comes back to not knowing the ultimate cost.‘
Watts implies that bailing out Greece will make investors fret less about other delinquents. This justification for saving Greece is hollow. Spain might fail regardless of what the world decides for Greece. So you can’t justify a Greek bailout by pointing to benefits to Spain’s interest bill. The same justification was used for the other PIIGS so far and it proved to be nonsense. The same goes for the investment banks in 2008 after Bear Stearns was ‘saved’, but Lehman and the rest followed soon after. When Spain is up for a bailout, analysts will point to the U.S. with the same argument.
If the U.S. loses its AAA rating, banks will be in serious trouble. That’s because regulatory regimes, notably the various Basel rules, reference the ratings agencies ratings in their assessments of whether banks are adequately capitalised. If the world’s ‘risk free’ asset suddenly becomes risky, banks may find themselves in breach of Basel’s capital adequacy requirements. So, despite what you might read from Paul Krugman and Michael Pascoe, it is a big deal that S&P changed its outlook for the U.S.
Have a think about this for a moment. In a way, S&P and Moody’s hold one heck of a lot of power in their hands. Not only can they move interest rates by changing the ratings on U.S. debt, they can move bank balance sheets and stock markets. And how much do you know about them?
The words ‘standard’, ‘poor’ and ‘moody’ aren’t very inspiring when it comes to rating debt…
We went to the S&P website and were appropriately greeted with the following podcast: ‘Australian Property Security Funds Are On The Road To Recovery‘. As is often the case, just when you think you can’t make this stuff up, someone does. You’d think they learned from their colleagues in the U.S., who bravely rated subprime securities AAA until the bitter end.
Even the Herald Sun has picked up on the property bubble’s demise. It ran a front page that consisted almost entirely of the headline ‘Bubble Bursts‘.
‘… how do we maintain or increase Australian [house] prices?‘ asks Robert Gottliebsen at The Australian. The nerve! Who does he think he is to tell the market what prices should be?
But the question doesn’t go far enough for a property spruiker’s liking. If prices merely stabilise, what happens to all those negative gearing investors? Suddenly the capital gains justification for incurring their loss (rental income minus mortgage payments and other costs) is gone. Who wants to own an asset that loses money and doesn’t appreciate in value – an inherent contradiction in the first place?
We remember a Wall Street analyst calculating that U.S. house prices merely had to flatline for the subprime mortgage mess to implode. The negative gearing story could be Australia’s version of that. After all, what kind of investment can be justified on the basis that it loses you money and is therefore helpful with your tax bill? It still loses money.
Let’s finish this Easter edition with a smile. Coming from the comedy corner is the news that West Bengal, India, may be losing its Communist government. Its declining popularity is due to, get this, people ‘can’t find jobs‘. Communists without jobs! It’s priceless. (Pun intended.)
For Markets and Money Australia