Economy XVIII

It has been a while since I put up a thread on the economy, and after the G20 summit on the weekend I thought that we should have a catchup.

Over the past week the following developments have occurred:

  • Pakistan has obtained $7.6 billion loan from the IMF (which is short of the $15 billion they wanted)
  • Seven Goldman Sachs executives have decided not to accept their normal bonuses. For example, the chief executive Lloyd Blankfein will revert to his $600,000 base salary. Last year he took home $68.5 million – so I think he will be OK
  • And it does not look like the US car manufactures will be getting their bailout money any time soon.

And reading the Philippine Star today – there was an interesting comment which quoted a Dani Rodrik article in the Business Standard magazine:

The public guarantees that rich countries’ governments have extended to their financial sectors have exposed more clearly the critical line of demarcation between “safe” and “risky” assets, with emerging markets clearly in the latter category.

Which seems to be exactly what the guarantees were meant to do?

Anyway – over to the blogocrats to discuss matter economic.

joni

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45 Responses

  1. The car-makers will get a bail-out! Bet on it.

  2. They’re saying that if the car industry gets a bail-out, where does it stop? Other industries will have their hands out too, and the government will be on a slippery slope.

    On the other hand, one in 10 jobs in the US are related in some way to the auto industry. So the importance of keeping that one viable is clear.

  3. Where will all this madness stop?

    http://www.theaustralian.news.com.au/story/0,25197,24667525-601,00.html

    Got to keep pushing the sales of foreign owned cars by the over saturated new car dealerships or they will go down…well, let them!

    But the government are determined to keep the greed machine going.

    This no money to finance loans is crap…and I’m getting pretty pissed off being bothered by people that want to give us credit!!!

  4. My standard of living has dropped since retirement. I only have a $99 Kmart TV, no plasma, and my Ford is 8 years old.

    After my visit to the orthopaedic surgeon today I’m going to have medical bills I can’t afford to pay (or more likely, procedures I can’t have done because I can’t afford to pay for them).

    I need a bailout because I didn’t take enough prudential care to enable me to continuing living in the style to which I’m entitled.

    This possible car dealer bailout crap is just unbelievable. An old friend from school owns some of Australia’s largest car dealerships: his lifestyle is the stuff of dreams. I can’t see why it’s the taxpayers’ responsibility to fund this (or most of the others too) ‘bailout’.

  5. There is a reason those two finance companies are pulling out of new car finance and I suspect it’s because the business plan of car dealerships is one of very high risk.

    If this is so then it’s the dealerships responsibility to change the basis on which they run their businesses and not look to the taxpayer for a bailout.

  6. Scaper @ 3

    I tend to agree that it is frustrating to see this kind of bailout, which appears to only entrench the ‘need for credit’ mentallity.

    The problem is, however, if these markets are left to collapse, the pain is going to be tremendous, whereas if they ‘bailout’ these industries, there will be a cushioning. We are going to experience loss anyway, simply through what has already happened, this will hopefully mitigate that effect.

    One can only hope that going forward we will learn from our mistakes, or better yet, legislation is created to ensure that we learn (as history shows that we do not learn from mistakes)

  7. Car dealerships, Real estate agents and many other industries will consolidate or close and I do not think there is an answer to their crisis until the economic turmoil ceases. GE pulling out from the car dealership floor plan lending has had massive ramifications for the dealerships as no other lender I am aware of is prepared to finance floor plans for second hand cars. The financiers left will pick and choose and as a result dealerships will close with no alternative.

    Regarding car manufacturing it is a hard one as any baboon knows that a car made in china or india will be cheaper than one made in the US or Oz. Problem is as companies are permitted to send their operations off shore our standard of living will decline as we are pressured into accepting less and less as income to compete with overseas cheap labour. If you don’t believe me just remember the minimum wage in the US has not been increased by 1c in 8 years. Also in NZ the standard wage is now $10 per hour for many industries.

    Free Trade Agreements are fine if both countries are on level playing fields, but when one works for a bowl of rice and the other works for $20 an hour where do you think companies will send their manufacturing.

    Companies need to understand that their customers are more important than shareholder wealth. If all companies outsource overseas then who the hell will be left earning enough to purchase their products. Despite all their rhetoric companies must have a social aspect to their businesses, after all they make their profits in their own country yet their labour and income and taxes are held offshore. What a wonderful way to destroy the country that created you in the first place.

    We are always told it is more complicated and baffled with bullshit by business and politicians yet the inevitable still happens. I remember being told so strongly by the Bank I worked for that ATMs and Internet would not cost any jobs and fees would never be introduced on those services ( once again a crock of shit ) when in fact front line workes sacked, branches closed and CEO and middle management wages and numbers sky rocketed.

  8. Tom R

    Legislation will not be enacted as there are too many big businesses and politicians feeding from the trough, even through economic downturns. They still exist and draw outrageous salaries and options while the business contracts and the workers are laid off. Would it not be better to lower profits and retain staff to be prepared when things once again improve. As a shareholder I would much rather this scenario than slashing and burning to matain a dividend at the possible risk of destroying the company from within.

  9. This financial crisis reminds me of war: it’s the ordinary people who ‘bailout’ the politicians and the business people, either through their wallets or with their lives.

    Melodramatic? After seeing so many docos on WWI last week and the tremendous waste of life which in the end achieved nothing (except perhaps for future pollies to seek their own glorification from it), I don’t think so.

  10. Shane @7

    Well said!!!

  11. “Shane @7Well said!!!”reb

    Yeah Shane, nice comment…& welcome back.

  12. And it’s not just economic bailouts for failed businesses but environmental and OH&S bailouts, which in many cases have cost the taxpayer far more than any economic bailout.

    Look at Hardies or Orinco for just two of hundreds of examples. Companies can produce long term dangerous goods, have their employees work in hazardous circumstances and pollute sometimes over many decades destroying whole ecosystems (e.g. Botany & Homebush Bay), and who inevitably cleans up and wears the cost, the tax payer, whilst the company either folds, moves on or is bought out with the new owner taking no responsibility.

    I’ve lost count at the number of times this has happened and now that polluting industries might finally have to pay a cost for their long term damage to ecosystems and planet they want exemptions and bail outs yet again. Their being able to pollute with little or no restrictions for so long is what allowed them to become rich and the First World to become wealthy, but at some time there had to be a reckoning and a cost, yet now that reckoning and cost is here they still want a free ride to continue making massive profits on a toll paid by everyone else.

    Again, like the monetary bailouts, enough is enough and things have to change, yet all I see from government after government is more of the same.

  13. Why do we need dealerships that stock floors in this age of the Internet anyway…sure, there should be the demonstration models for test drives but if I was in this business I would operate differently.

    Once a sale has been negotiated then I would order from the vehicle supplier to be delivered to the lot, do the pre delivery and would save myself the interest on floor stock.

    If I could not afford the demonstration models that are sold off for a profit still when a newer model is released I deserve not to be in business.

    When I bought the last new vehicle I did it over the net and had the thing delivered to my house.

    In my opinion if a business can not survive without government assistance then it should go down.

  14. Another comment I read in the papers yesterday is that this crisis is actually just a result of two events:

    1. the normal cyclic downturn in the markets
    2. the subprime crisis

    And it is actually the combination of the events that has cause the fear to be the overriding factor in the market. Normally fear is tempered by greed, but with greed gone, fear can run wild.

  15. Thanks Human

    Good to be back

  16. What a pity the Howard government was not more disciplined as regards spending. Rather than plying middle class voters with handout after handout, the money could have been put aside for when the country really needed it: ie now.

    They brag a lot about having left a “surplus”, but at around 20 billion, it’s a pittance relatively, compared to the almost 400 billion the Liberals let slip through their fingers from the mining boom.

  17. And oil closed under 55 USD/barrel. Continuing it’s price slide.

  18. Shane @ 7

    I fear you are probably correct in this, but, without legislation, we WILL repeat our mistakes, as we always do.

    However, I am remaining optimistic at the present, particularly when I see the actions of the Goldman Sachs executives dropping their salaries (yes, it is kind of condescending of them, but I am unaware of a gesture like this being made recently)

  19. My clients have had to pay higher prices due to the oil spike and I bet they will not be reduced now that the price has come down.

    Greed is still reigning and a total crash is the only thing that will alter the culture.

  20. G’day Shane.

    Wonder what would happen to all those oil companies if the car companies failed and alternative energy power systems were encouraged with subsidies from governments…

    …which makes me think again – why shouldn’t the oil companies bail out the car industry?

  21. TB

    Great comment @ 21.

  22. The problem is, however, if these markets are left to collapse, the pain is going to be tremendous, whereas if they ‘bailout’ these industries, there will be a cushioning.

    Instad of bailing out unsuccessful businesses, why can’t the Govt ‘cushion’ the workforce? Money spent on these bailouts could be used to retrain workers from the automotive industry and prepare them for new opportunities.

    Assistance from the Howard Govt did not save Mitsubishi. Workers were still left jobless. Better the money had been spent on retraining or reskilling earlier.

  23. Regarding car manufacturing it is a hard one as any baboon knows that a car made in china or india will be cheaper than one made in the US or Oz. Problem is as companies are permitted to send their operations off shore our standard of living will decline as we are pressured into accepting less and less as income to compete with overseas cheap labour. If you don’t believe me just remember the minimum wage in the US has not been increased by 1c in 8 years. Also in NZ the standard wage is now $10 per hour for many industries.

    I think the Australian Govt should offer more support to Australian owned businesses, especially those who employ Australians and source raw materials here rather than abroad.

    Build Australian companies rather than multinationals. Protectionism is clearly Ok as we have seen in the bailouts, we just need to redirect it so it benefits us.

    Otherwise our Govts will be extorted for handouts by companies who threaten to move offshore otherwise.

  24. G’day TB

    The oil companies would collapse. There has been a number of times in the past where the US has spruked about alternative energy sources being created. Then the price of oil drops and it all gets thrown away again. I hope this doesn’t happen this time.

    Remember GM bought all of the tramways in the US and then closed them down to force people to buy motor cars. This is why public transport is not big in the US like it is in Europe. GM had an agenda and acted on it destroying the countries perception of public transport forever.

    Alternative energy would be a reality today if governments had stuck to their guns in the 1970s instead of being influenced by the oil companies.

  25. “Otherwise our Govts will be extorted for handouts by companies who threaten to move offshore otherwise”

    Exactly. Just like Gunns Limited!!!

  26. Tracieof FNQ

    Totally agree, problem is all of our companies are looking for cheaper products all the time. For example the bank I worked for sourced eveything from australia however as soon as it was privatised the majority of items were sourced from overseas to save costs. While this may benefit the shreholders in the short term it destroys the countrys economy and manufacturing businesses in the long term and that is what we have seen. Very little is manufactured in Oz these days and we are mainly a service industry country which is to our detriment.

  27. Shane I couldn’t agree more. The question is do we continue to do this?

    It may be cheaper to purchase foreign goods unless you take the environmental impact into account, as well as the xocial impact long term. Not only this but ‘cheaper’ goods is exactly what they are in the main.

    As you say privatisation has cost us our manufacturing industry and we are now mainly a service industry. Even those jobs are not secure, as increasingly service jobs are outsourced. A lesson US workers have learned the hard way.

    The saddest thing for these people is that they do not have the puclic health system, or the social security safety net that we do – they are basically abandoned by their Govt and their people.

  28. TracieofFNQ

    You are correct. I for one do practise what I preach and only buy Australian whenever I can. For example Black and Gold tomato paste at $1 is mad ein China. Leggos is made in Oz at $3 yet I still buy leggos.

    Yes the US has always abandoned its people regarding the necessities of life, that is pure capitalism for you. Just a wrong as communism.

  29. Shane it doesn’t have to be capitalism or communism. How about a whole new system altogether that has none of the negative connotations of the old?

    Fundamental to this new system should be the belief that people (and therefore the environment too) come before profits..

    We buy from Australian owned companies whenever we can, and always support local business. It adds very little to the cost of a weekly shop ($20 – $30 maybe depending on the size of your family) and supports companies who DO pay tax here.

  30. Shane I would just like to add, that I understand why pensioners and such cannot afford to support Australian products, but the cost would no be so high if the Govt only gave Australian business (as I described above) the huge ‘incentives’ it extends to multinationals ot ‘encourage investment in Australia’.

    Why not ‘encourage’ Australians to invest in Australia? I would just clarify this encouragement should also include real pay increases for workers. Cashed up workers WILL spend money.

  31. TracieofFNQ

    I agree, however most people seem to identify with Capitalism or Communism. We certainly need a new ism thats for sure.

    Yes cashed up workers will spend but these days they are being offered less than inflation to keep profits higher than the year before.

  32. Stuntrebism?

  33. lol sounds a bit stunted to me 🙂

  34. Shane yes we definately need a new ‘ism:)

    The reason people identify with ‘capitalism or communism’ is that is the only ‘choices’ offered them by economists, Govt, media and business ie. the establishment supporting the status quo.

    Yes cashed up workers will spend but these days they are being offered less than inflation to keep profits higher than the year before.

    Exactly. Unions need to be more proactive in making better deals for their membership. I am generally a pro union person, but have the uncomfortable feeling that unions ultimately compromised their workers in order to maintain their survival during Howards PM Ship.

    Now they need to do more than rubberstamp employers offers, and make compromises with politicians. Maybe their membership will increase if workers can see they are truly being represented?

  35. Eureka-ism, the people revolting to retake their future from the puppets of greed that rule by the divide and conquer concept!

  36. Yes the US has always abandoned its people regarding the necessities of life, that is pure capitalism for you. Just a wrong as communism. Shane

    Alleluja!

    Reminds me of a couple of catch cry/slogans during the last election…on Blogocracy…

    I prefer to live in a society, rather than survive in an economy

    Prosperity With Integrity!

    …now where did I see that?

    Tracie & Shane , what you are referring to is a form of Free Market Socialism – some areas are out of bounds to the free market system (eg health, child care, education, roads, power, telecoms etc)…

    …if we are not careful China will beat us to the “perfect” compromise model between government and capitalism…

    …most people forget – or don’t know – that all China’s politicians are actually elected and probably represent their constituents more closely than our own politicians…but they have only one party…

    …biggest problem with China is their ongoing, atrocious human rights issues…

    …and of course their plans to covertly dominate the world – via the China towns found in every major city in the world…

  37. “…and of course their plans to covertly dominate the world – via the China towns found in every major city in the world…”

    I’m prepared to surrender…

    If it means I have to live on peking duck, yum cha and wonton noodle soup for the rest of my life, I don’t really mind…

  38. reb

    I can only afford Beef and Black Bean, Sweet and Sour Pork and Sweet Corn and Chicken soup 🙂 Oh and maybe some spring rolls as well.

  39. Don’t get too excited we once picked up the wrong order in Port Moresby (a couple of really good Chinese restaurants there). When we got it home we opened up to find, fish heads and tails, frogs, birds legs (mixed) and a deep fried (we think – rat).

    The Chinese eat anything and everything…

    My Chinese clients used to take me to their local restaurant on the Gold Coast and educate me in the foods to avoid when they took me to China (never eventuated but I had some grat lunches!)

  40. I thought all was going well this week on the offering of credit is concerned then I get an offer from Stratton Finance to offer my a loan to buy a new car!

    Does the government need to offer car dealerships anything?

    joni, I’ll send it to you…there night be a thread in it if you bother to read it.

  41. scaper – I did read it.

    The link is http://www.strattonfinance.com.au/contact-us/finance-focus-newsletter/past-editions/2008-08.aspx

    I understand the need for the business to keep business going, but do they really think that people in this current climate will rush out and buy a new car on credit?

  42. Well it seems that the share market knows no depths.

    It is officially worth 50% of its value as at this time one year ago.

    Which means if you bought in 12 months ago your shares have basically lost half their value.

    Which is a bit of sad situation, particularly if one used equity in one’s home to invest in shares or borrowed to invest.

    No one can say for sure, when the market will rally, but bloody nora, it had better be soon…

  43. Reb – do want to throw up a new thread for the economy or shall I?

  44. It would be good if you could do it joni. I’m feeling a bit tired and emotional today…

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