March orders for nondefense capital goods excluding aircraft, which economists consider a proxy for business investment, fell 0.8%. The weakness extended to a host of categories, including machinery, computers and primary metals. Economists cautioned that special factors likely made the report appear somewhat worse than the underlying trend. First, the December expiration of a government tax credit for business investment caused many companies to move ahead new orders, which translated into artificial weakness in the early-year figures.
Basel takes aim at Mega Bank – MacroBusiness
Deep T: On the one side we have an Australian housing market which is close to the most unaffordable in the world with mortgage debt at 100% of GDP also close to the highest of any country, yet Mega Bank [the Big Four banks] calculates its minimum capital requirements at 1.6% on residential mortgages which undoubtedly would be close to the lowest of any bank in the world….. Surely, the result the Basel Committee assessment is a foregone conclusion?
Sadly, no. On the other side, however, we have an equally formidable opponent. Do not underestimate the politico-housing complex. The smoke screens will be built and a whitewash is on the cards. Australia has a history of painting a very rosy picture of our financial system and housing market in the face of significant known risk factors.
EconoMonitor » Distributional Impacts of Monetary Policy
…Higher than expected inflation will indeed create some winners and losers:
However, the biggest losers are creditors who are almost by definition wealthy, since people owe them money. If a creditor has lent out $100 million at 2 percent interest (e.g. buying a 10-year U.S. or German government bond) and the inflation rate rises from 2 percent to 4 percent, this creditor has lost an amount equal to 100 percent of his expected income or 2 percent of his wealth. This is a far larger loss than any worker could experience as a result of this increase in the inflation rate.
Who would be the winners?
Also, most workers are debtors to some extent. They are likely to have mortgage debt, credit care debt, student loan debt and or car debt. A higher rate of inflation means that they can repay this debt in money that is worth less than the money they borrowed.
via EconoMonitor : EconoMonitor » Distributional Impacts of Monetary Policy.
Watch out! Is the Fed pushing us into another bubble? – Fortune's deals blog Term Sheet
The Fed’s actions have kept Treasury bond prices high (while keeping the government’s interest costs low), but the fundamentals do not support the high valuations, given the fiscal mess we are in. Sooner or later, the bond bubble will burst. History has shown that a structurally weak economy combined with a fiscally irresponsible government propped up by accommodative central-bank lending always ends badly.
….The biggest beneficiaries of loose money, are our profligate elected officials who refuse to come to grips with budget deficits and an exemption-laden tax code. As long as Treasury can borrow cheaply to paper over the real problems, politicians can demagogue about overspending (GOP) or undertaxing (Democrats) while dodging their responsibility to work together to fix our problems.
Ex-Fed Kohn: 'Huge Risk' US Won't Take Steps On Debt, Deficit By Year End
NEW YORK -(Dow Jones) – There is a real danger U.S. authorities won’t take the necessary steps to fix the country’s debt and deficit problems between the elections and the end of this year, former Federal Reserve Board Vice Chairman Donald Kohn said Monday. “What’s required to put the fiscal deficit on a sustainable path are some difficult decisions having to do with entitlement spending and taxes in the United States,” Kohn said at the Europlace forum……. Kohn added the U.S. political system has become “soap opera-ized” with such a huge gulf between the country’s political parties there is a real risk debt and deficit will continue to grow past the end of this year.
via Ex-Fed Kohn: ‘Huge Risk’ US Won’t Take Steps On Debt, Deficit By Year End.
Warwick McKibbin on Australian interest rates and the fate of manufacturing
Professor Warwick McKibbin from ANU on the Australian economy, interest rates, the RBA and the fate of manufacturing:
Hat tip to Houses and Holes at Macrobusiness.com.au.
Not Exactly a Miracle, but U.S. Debt Levels Are Falling – Floyd Norris – NYTimes.com
Floyd Norris: To get some idea of what needs to be done now — and what the result will be — the McKinsey institute points to two incidents in the early 1990s that got little attention at the time in the United States. Those were the bursting of real estate bubbles in Sweden and Finland. Details differ, but in each country there were two distinct phases of deleveraging.
“In the first,” the McKinsey institute said in an analysis published early this year, “households, corporations and financial institutions reduce debt significantly over several years, while economic growth is negative or minimal and government debt rises.” That is certainly what has happened in the United States.
The second phase is the good part, the institute said. “Growth rebounds and government debt is reduced gradually over several years.”
In this country, the deleveraging process has some way to go, with many foreclosures still pending, but it is at least possible that economic growth is beginning to accelerate. It is clear that the United States has made a lot more progress in cutting consumer debt than has been made in either Britain or Spain, two other countries that suffered from falling real estate prices.
via Not Exactly a Miracle, but U.S. Debt Levels Are Falling – Floyd Norris – NYTimes.com.
Comment:~ Before we congratulate ourselves on escaping from the clutches of the Great Recession, let’s not forget that government debt is growing at an unsustainable rate of $1.2 trillion/year. That is likely to slow sharply after November elections, causing a “double-dip” contraction. The deleveraging process has only just begun.
End of the Age of Entitlement | Joe Hockey
THE END OF THE AGE OF ENTITLEMENT
JOE HOCKEY’S SPEECH TO THE INSTITUTE OF ECONOMIC AFFAIRS, LONDON
…Let me put it to you this way: The Age of Entitlement is over.
We should not take this as cause for despair. It is our market based economies which have forced this change on unwilling participants.
What we have seen is that the market is mandating policy changes that common sense and years of lectures from small government advocates have failed to achieve.
via The Age of Entitlement | Institute of Economic Affairs.
Hat tip to Houses and Holes
Sowing Seeds of the Next Major Crisis – WSJ News Hub
Francesco Guerrera: “Prolonged intervention by the authorities is creating fundamental distortions in the financial markets. They are in my view going to create the next crisis.”
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John Mauldin: Hoisington Q1 Review and Outlook
John Mauldin: Lacy Hunt kicks things off with a bang in Hoisington’s Quarterly Review and Outlook, this week’s Outside the Box:
“The standard of living of the average American continues to fall.”
The reason, in a word: debt. Lacy explains what happens:
“Efforts by fiscal and monetary authorities to sustain growth by further debt accumulation may produce some short-term benefit. Sadly, these interludes fade quickly as the debt becomes more destabilizing. The net result of increased indebtedness then becomes the opposite of what policymakers intend when they promote economic growth by either borrowing funds for increased government expenditures or encourage consumers to borrow with artificial and temporary incentives.”
In other words, you can’t get to real, sustained growth of an economy by growing debt after a certain point — one that, sadly, we have already reached.