Economy Archives - Page 78 of 132 - the patient investor

July 8, 2013

Rude Awakening Awaits Western Economies | WSJ

Michael J. Casey at WSJ interviews HSBC group chief economist Stephen King, author of When the Money Runs Out: The End of Western Affluence:

Mr. King’s thesis….. is that we in the West are in line for a shock when we discover that the high-growth rates to which we’re accustomed aren’t coming back. In the U.S., we’ve been wrongly budgeting for a return to 3.5% average real growth rates that persisted through the second half of the 20th century — an affliction suffered by both policymakers and households that he calls an “optimism bias” — and yet even before the financial crisis destroyed trillions of dollars of wealth the economy was only clocking gains of 2.5% per year. Forget worrying about the post-crisis onset of a Japan-style “lost decade,” Mr. King says. “We have been through a lost decade already. ”Among the reasons for this long-term shift to a slower potential growth rate, he cites the exhaustion of a various one-off productivity gains that boosted growth after World War II: the entry of women into the workforce; the liberalization of world trade; a tripling in rates of consumer credit founded on an unsustainable increase in housing prices; and education. These gains are no longer to be had, he says, but policymakers are blind to that fact and so are burdening the economies of the U.S., Europe and Japan with long-term debts.

While I agree that we are unlikely to see a resumption of the rapid debt growth of the last 3 decades, this should contribute to lower inflation and greater stability, without a credit-fueled boom-bust cycle, that could partially offset the negative effects. I also question whether productivity gains are really exhausted, or if this is a temporary after-effect of low, post-GFC capital investment. There is ample evidence that the global economy is slowing and productivity gains will fall — if one is prepared to ignore evidence to the contrary such as the rise of automation, advances in genetics, nanotechnology, sustainable energy and slowing global population growth — which should alleviate the poverty trap that many countries are still in. The researcher has to beware of confirmation bias, where they gather data to support a preconceived opinion.

July 7, 2013

It’s Time to Levy the Land | naked capitalism

There are growing calls for increased use of land value taxes to replace income taxes and corporations taxes as a major source of government revenue. Yves Smith points out:

Income and sales taxes add to the price of doing business, and hence reduce their supply and competitiveness. Most economists – even Milton Friedman – recommend that the more efficient tax burden is one that collects economic rent – property rent, fees charged for using the airwaves, monopoly rent, and other income that is basically an access charge. If you tax land rent, for instance, this doesn’t raise the price of housing or office space. The rent-of-location is set by the market place……

I agree with Michael Hudson that our income tax system encourages the use of debt, over-use of which was one of the primary causes of the recent GFC:

Our tax system favors debt rather than equity financing. By encouraging debt it has prompted a tax shift onto the “real” economy’s labor and capital. The resulting interest charge and tax shift mean that we’re not as efficient and low-cost producers as we used to be…..

But I have two concerns:

Introducing new taxes without abolishing the old leaves scope for government to increase tax revenues as a percentage of GDP over time. And few things are more inefficient — and more harmful to growth — than government spending.
Focus on land value taxes alone, while neglecting other rent-producing assets such as patents, copyright ownership, rights to airwaves, and even brand ownership may skew investment towards, and inflate the price of, these lower taxed assets.

July 4, 2013

What’s wrong with inequality?

Robert Douglas summarizes the argument against inequality presented by Andrew Leigh, economist and (Labour) parliamentarian, in his book Battlers and Billionaires:

Leigh sees inequality as a socially corrosive force undermining the egalitarian spirit that has been one of the positive defining characteristics of Australian society. He argues that unequal wealth demands attention from our political system and that there are a variety of ways in which it can be addressed.

There has been much hand-wringing from the left about rising inequality, but I believe this is an attempt to frame the political debate along class lines — the rich against the rest — as Barack Obama succeeded in doing, with the able assistance of Mitt Romney, in 2012. Framing the debate in relative terms is shrewd politics. An attempt to distract voters from the real issues:

Is poverty rising or falling?
Is general health, as reflected by life expectancy, improving or deteriorating?

Poverty is a subjective concept, as Thomas Sowell points out:

Most Americans with incomes below the official poverty level have air-conditioning, television, own a motor vehicle and, far from being hungry, are more likely than other Americans to be overweight.

Life expectancy, however, is difficult to fudge.

Inequality, as I said earlier, is relative: we can have declining poverty and rising life expectancy while inequality is growing. In fact when the economy is booming and employment rising, inequality is also likely to be growing. Do we really want to kill the goose that lays the golden eggs? Raising taxes to discourage new entrepreneurs? That is what targeting inequality can succeed in doing: harming the welfare of all rather than improving the welfare of the poor at the expense of the rich.

Instead we should focus on job creation and health improvements. And if that means creating incentives to encourage entrepreneurs, so be it, provided we all benefit.

The fact that inequality rose after the GFC is an anomaly that is unlikely to persist in the long term. The wealth of the masses are predominantly represented by real estate, while the rich hold a far higher percentage of their wealth in financial assets: stocks and bonds. Housing was hardest hit by the GFC and has taken longest to recover, causing a surge in inequality readings. That is not the fault of the rich — apart from a few investment bankers — and in fact we should learn from their experience. Real estate investment may have served us well in the past, but that is likely to change with the end of the credit super-cycle. We will need to concentrate a far higher percentage of our investment in stocks and bonds.

July 4, 2013

Surprise as BOE, ECB Give Forward Guidance | WSJ

New [BOE] governor Mark Carney has already made changes. In a statement accompanying the widely-expected decision to leave both rates and asset purchases unchanged, the BoE said that rising market rates had shifted expectations for the Bank Rate above levels that were justified by the economic situation.

The fact that there was a statement at all indicated a change in policy. The old BOE just announced its decision and left interpretation to the markets.

This was a clear attempt to talk the markets down and it worked.

July 2, 2013

Australian banks: Who’s been swimming naked?

Margot Patrick at WSJ reports that the Bank of England is enforcing a new “leverage ratio” rule:

Top U.K. banks regulator Andrew Bailey told lawmakers that the requirement for banks to hold at least 3% equity against total assets “is a sensible minimum,” and that those who fall short must act quickly, but without cutting their lending to households and businesses.

The Bank of England’s Prudential Regulation Authority on June 20 said Barclays and mutual lender Nationwide Building Society don’t meet the standard and gave them 10 days to submit plans for achieving it.

I hope that their Australian counterpart APRA are following developments closely. Both UK and Australian banks are particularly vulnerable because of their over-priced housing markets. And while the big four Australian banks’ capital ratios appear comfortably above 10 percent, these rely on risk-weightings of 15% to 20% for residential mortgages.

Only when the tide goes out do you discover who’s been swimming naked. ~ Warren Buffett

July 2, 2013

Rudd? Gillard? Australians have bigger problems | IOL Business

“Australia is a leveraged time bomb waiting to blow,” Albert Edwards, Société Générale’s London-based global strategist, said. “It is not just a CDO, but a CDO squared. All we have in Australia is, at its simplest, a credit bubble built upon a commodity boom dependent for its sustenance on an even greater credit bubble in China.”

From William Pesek at Rudd? Gillard? Australians have bigger problems – Columnists | IOL Business | IOL.co.za.

June 30, 2013

Bankers’ political influence cause for concern

I am not sure of the background to this, but it certainly looks as if the big UK banks were able to exert enough political pressure to remove Robert Jenkins from the Financial Policy Committee, the UK’s new stability regulator. Anne-Sylvaine Chassany at FT writes:

An outspoken advocate of tough bank regulation who has worked in banking and asset management, Robert Jenkins left the committee earlier this year after not being reappointed by George Osborne, chancellor.

If bankers’ influence was the cause, it certainly is cause for concern.

via Barclays’ threat on lending under fire – FT.com.

June 30, 2013

Barclays’ threat on lending under fire | FT.com

Anne-Sylvaine Chassany at FT writes of the UK’s Prudential Regulation Authority:

The PRA irked banks when it included a 3 per cent leverage ratio target in its assessment of UK lenders’ capital health. It identified shortfalls at Barclays and Nationwide, the UK’s largest building society, which have projected leverage ratios of 2.5 per cent and 2 per cent respectively under PRA tests.

Outrageous isn’t it? That banks should be asked to maintain a minimum share capital of three percent against their lending exposure — to protect the British taxpayer from future bailouts. My view is that the bar should be set at 5 percent, although this would have to be phased-in over an extended period to prevent disruption.

I hope that APRA is following developments closely. The big four Australian banks are also likely to be caught a little short.

June 30, 2013

Lurking beneath Australia’s AAA economy… | On Line Opinion

Kellie Tranter highlights the unstable position of the big Australian banks:

Australia has had a current account deficit since the 1980s. That means we are spending more than we are earning. We’ve had to sell public assets to balance the current account deficit. Put simply, the surplus on the capital account is flogging off the sideboard to buy the fruit.

Our net international financial position is not strong and our gross foreign liabilities are alarming. Banks are the intermediaries between foreign lenders and Australia’s big spenders. The banks have mediated the private household debt and as a result if there is a worldwide recession, banks could be called to pay up.

Our banks have borrowed short (internationally) and lent long (domestically, for mortgages etc.)…….

I have been sounding off about the inadequate capital reserves of the big four banks — because of low risk-weightings attached to residential mortgages — but Kellie also raises the question of their $13.8 trillion derivatives exposure. She concludes:

If the banks are hunky dory why is it necessary [for the RBA] to set up a $380 billion emergency fund and, more importantly, is it enough in light of possible derivatives exposure?