Australia tops prosperity index

I’d like to thank the honorable Mr’s Howard and Costello for their contributions and stellar leadership

Australia tops prosperity index

Australia has topped the rankings in a prosperity index of more than 100 countries, with its quality of life and economic strength pushing it into number one spot.

The Legatum Institute’s Prosperity Index of 104 nations measures the material health of a country, including wealth, quality of life and life satisfaction.

Australia has topped the 2008 index, ahead of Austria and Finland in that order.

The Dubai-based investment group said Australia bettered other countries because of its strong economic performance, governance and high quality of life.

“(Australia) has reinvented itself as a wealthy, service-oriented economy with good scores on liveability indicators, including health, charitable giving and effective governance,” Legatum said.

“Strong norms or civic participation, robust health, and plenty of leisure time contribute to the high liveability ranking.”

While Asian powerhouses Singapore, Taiwan and Hong Kong scored well economically, their livability dragged down their performance.

A little misleading perhaps? And what was I just explaining to Dave55

I don’t know whether you recall Mark Davis’s guest blog (still haven’t received the free copy yet LOL – many thanks to the Academy), he wrote the following:

“Australia’s ‘age of prosperity’, as Peter Costello calls it in his memoirs, has been underwritten by the mining boom (even as manufactured exports stagnated during his tenure) and massive increases in household debt (now more than $1 trillion — about the same as the annual national output), even as the government has wound down its own debt. The national debt has in effect been privatised while, at the same time, risk has been shifted away from government and business onto the shoulders of ordinary people, in the shape of long working hours, casualisation, and the sort of uncertainty that is written in the fact that Australians take the least holidays of any western nation.”

I, too, am concerned about the transfer of overall debt on to the shoulders of ordinary Australians. Hence the reason I argue the point I do about the levels of personal debt. The risk has been transferred in such a way that I believe will have ramifications for years to come. Homeownership being an obvious one

No cruel jokes about my free book neither?

Psychic Predicts Aliens are coming….Today!

A MASSIVE alien spaceship is to land on Earth TODAY to prove life really is out there, an Aussie psychic insists – and bookies are so worried they stopped taking bets on it happening.

Queensland-based “channeler” Blossom Goodchild says aliens informed her of their plans that a huge intergalactic spaceship will appear over the American desert.
She said they “come in love to help us and our planet move to a new higher vibration of love”.

Well I’m glad they’re keeping someone in the loop. And personally I’m titilated at the prospect of a “higher vibration of love”

Maybe they’re here already.

So fellow blogocrats. Have you every been to see a psychic? If so, how was it? 

Better still, tell us about your alien encounter…..

Perspective: Why ‘Market Fundamentalism’ Has Failed

Very little has been discussed about the origins of the current crisis in a larger economic framework.  So, I went hunting for something that would offer an economic-political perspective and found an excellent article by a  professor of economics in the US, which I think is excellent as and overview.

Senior Scholar L. Randall Wray is a professor at the University of Missouri–
Kansas City and director of research at the Center for Full Employment and
Price Stability.  I think you will find his theory  very insightful , thought provoking  and most of all, more suitable that the outdated ‘free market model’.  The theory he applies comes from the work of economist Hyman Minsky

What We Learned from Minsky

Minsky argued that the Great Depression represented a failure of the small government, laissez-faire economic model, while the New Deal promoted a highly successful Big Government/Big Bank model for financial capitalism.

The current crisis just as convincingly represents a failure of the Big Government/Neoconservative (or, outside the United States, what is called“neoliberal”) model that promotes deregulation, reduced supervision and oversight, privatization, and consolidation of market power in the hands of money manager capitalists.

In the United States, there has been a long-run trend that favors relatively unregulated “markets” over regulated banks that has also played into the hands of neoconservatives. The current financial crisis is a prime example of the damage that can be done by what has been called the “post-regulatory environment” (Thomas 2008).

The New Deal reforms transformed housing finance into a very safe, protected business based on (mostly) small, local financial institutions that knew their markets and their borrowers. Home ownership was promoted through long-term, fixed-rate, self-amortizing mortgages. Communities benefited, and households built wealth that provided a path toward middle class lifestyles (including college education for baby boomers and secure retirement for their parents). This required oversight by regulators, deposit insurance courtesy of the FDIC and the Federal Savings and Loan Insurance Corporation, and a commitment to relatively stable interest rates. Other policies identified by Minsky as “paternalistic capitalism” also helped to build a robust economy: cooperation with unions to ensure rising wages and thus growing consumer demand; a social safety net that also encouraged consumption;student loans that enhanced earnings capacity; and a sense of shared responsibility to take care of the young, the old, and persons with disabilities. Together, these policies reduced insecurity, enhanced trust, and promoted economic stability. Over time, however, the economy gradually evolved toward fragility. The Cold War favored investment in the leading industries, where wages were already high. Inequality grew as other sectors and workers with less education fell behind. Social programs were cut, and trickle-down economics favored the growth of inequality. Policy increasingly turned to promotion of investment in particular, and business in general, to fuel growth—rather than relying on growing consumption fueled by growing household incomes.

Because a large portion of investment in our type of economy must be externally financed, this policy mix increased the importance of finance. At
the same time, the absence of a depression in the postwar period allowed
financial wealth to accumulate, albeit increasingly in the hands of an elite. A
formally “anti-government” bias led to the erosion of many of the New Deal
reforms. In practice, however, the rising conservative ideology never really
embraced a return to the prewar small-government form of capitalism, but
rather merely substituted a meaner “big government” for the paternalistic
government of the early postwar period. Hence, the Big Government/Neocon
model replaced the New Deal reforms with self-supervision of markets, with
greater reliance on“personal responsibility” as safety nets were shredded, and with monetary and fiscal policy that is biased against maintenance of full employment and adequate growth to generate rising living standards for
most Americans. In short, the government was neither smaller nor less interventionist. However, its constituency had shifted away from America’s middle class and toward Wall Street’s money managers.

The model is in trouble—and not just with respect to the mortgage mess, as the United States faces record inequality and destruction of the middle class, a health care crisis, an incarceration disaster, and other problems beyond the scope of this analysis (Wray 2000, 2005).We must return to a more sensible model, with enhanced oversight of financial institutions and with a housing finance structure that promotes stability rather than speculation.

We need policy that promotes rising wages for the bottom half (or even
three-quarters) of workers so that borrowing is less necessary to maintain
middle-class living standards, and policy that promotes employment, rather
than transfer payments—or worse, incarceration—for those left behind.

Minsky always advocated job creation programs so that government would act as an employer of last resort—the only way to ensure that the supply of jobs would be adequate to maintain continuous full employment. Not only would this eliminate involuntary unemployment, but he also showed that it could be used to reduce inequality and poverty, while also ensuring that the government’s budget would swing countercyclically to offset recessionary forces as well as inflationary forces in a boom.

Monetary policy must be turned away from using rate hikes to preempt inflation and toward stabilizing interest rates, direct credit controls to prevent runaway speculation, and supervision and regulation—its proper role.

Minsky advocated support for small banks, and creation of a system of
community development banks—the latter only partially achieved under
President Clinton—as a viable alternative to the predatory lending practices
that did increase the supply of credit to low-income borrowers and
neighborhoods, but which is now resulting in foreclosures and vacancies.28
Unfortunately, we turned American home finance over to Wall Street, which
operated the industry as if it were a casino. The swing toward markets and
away from regulated banking greatly increased risk, while at the same time it
necessarily extended government assurance to the unregulated institutions
for the simple reason that the government cannot allow a financial crisis to
threaten the economy.What Bernanke called “The Great Moderation” is also
known as the “Greenspan put”—the belief that no activity is too risky
because the Fed will intervene if things go bad. Unfortunately, it is Chairman
Bernanke who is left to clean up the mess left by years of lax oversight and
deregulation that operated to the advantage of Wall Street.

Minsky insisted that “the creation of new economic institutions which constrain the impact of uncertainty is necessary,” arguing that the “aim of policy is to assure that the economic prerequisites for sustaining the civil and civilized standards of an open liberal society exist. . . . If amplified, uncertainty and extremes in income maldistribution and social inequality attenuate the economic underpinnings of democracy, then the market behavior that creates these conditions [has] to be constrained” (Minsky 1996). It is likely that the current crisis will make it politically feasible to devise and to put into place such institutions.

PM throws money at economy…

The PM has just announced some new measures aimed at stimulating the economy. Specifically:

– A $10.4 billion “economic security strategy” in response to the global financial crisis.

– December payments of $2100 to pensioner couples and $1400 to single pensioners.

– A $3.9 billion in support for low and middle-income families.

– The $7000 first-home buyer grant will be doubled – and in the case of people purchasing newly-built homes – tripled. 

Now it might just be me, but if house prices in Australia are already grossly over-priced, isn’t doubling and tripling the first-home buyers’ grant only going to maintain already artifically high prices and effectively maintain the bubble?

In addition, I expect that this move will serve to drive prices higher, as more people take adantage of the buyers’ grant, in an environment where there is already a shortage of housing, and in particular “affordable housing”.

Market rallies – where to from here…?

“Trying to pick the timing of a halt to the current carnage is difficult. But I would make the following points. The fall in the current bear market in shares is already bigger than the average for such episodes. The Australian market is more than 40% below its peak; the average bear-market fall is about 33.3%. Also, if measured by conventional price/earnings ratios, share markets around the world are very cheap right now. Price/earnings ratios can mislead; they are only as good as the underlying earnings forecasts. But right now, world equity markets would be fairly priced (neither cheap nor expensive) if earnings were to fall by more than 40% next year. Do we really think that the crisis will be that bad? Remember that this is a very different episode from the worldwide bear market that began in 2000, from a position in which equities were ridiculously overpriced.”

“One rarely sees sustainable recoveries in share markets until economists and analysts start to factor in economic recovery (this process precedes recovery itself by several months), and we are months away from that. So we seem to know the following: markets are cheap right now and there is a sustainable recovery out there somewhere. We just don’t know whether fear and pessimism will become even more dominant in the weeks ahead. That said, there has to be a chance of a short, sharp rally in the coming weeks if market participants come to the conclusion that the market is oversold. I have been wrong on this before, I admit, but my personal view is that it is now ‘too late too sell’.

What about the dollar?

The fall in the currency has been amazing. ‘Fair value’ of the Australian dollar has probably fallen from about 90 cents in July, to about 78 cents now, so the currency has gone from too expensive to way too cheap. This means that it is likely to claw its way back up to the high-70s over the months ahead. This is good news for overseas travellers, but not so good news for investors. The falling currency in recent months has shielded investors with money offshore (and we all have money offshore!) from at least some of the market carnage. A rising $A in the months ahead will subtract from some of the future gains from investing abroad.

Chris Caton
Chief Economist

BT Financial Group

The Intervention

A report has been released into the NT intervention that has found that the relationship between the aboriginal communities and the government is “fractured”.

Some of the findings of the report are:

  • no arrests have been made for child sexual abuse (even though this was the main reason put forward by the Howard government)
  • no increase in school attendance
  • some benefit from the quarantining of benefits

The most glaring comment in the report is that the Racial Discrimination Act should be re-instated, as well as the permit system for entry to lands.

Here is the SMH article on the report.

The question is: where do we go from here to repair the damage?

The $55 trillion question: Will this be the next disaster?

Yesterday we learned that our big banks ignored sub-prime troubles

What I didn’t raise was another article by SMH’s Michael West exposing another major potential liability that banks face, that to date, has gone largely unnoticed.  West writes:

Australia’s Big Four banks are all exposed to the default of Lehman Brothers via credit default swaps (CDS) – a noxious bull-market derivative which threatens further contagion in the ailing global financial system.

National Australia, ANZ, Westpac, Commonwealth Bank and the nation’s biggest insurer AMP are listed on the ISDA’s (International Swaps and Derivatives Association) Lehman Protocol. The five have written “adherence letters” to the ISDA asking the Association to act as their agent in settlement negotiations arising from the Lehman default.

This Wednesday is the deadline for lodging settlement notices for CDS trades and October 20 is the date for settlement.

Little known is the fact that the amount at stake in the credit default swap [CDS] market is actually greater than the world’s annual economic output.

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