Economy XXIV – the return of Keynes’ deficits

The LA Times is reporting that the US deficit could reach $2 trillion USD in 2009 in a return to Keynsian economic.

In a measure of how quickly its options are shrinking, the United States is about to embrace an economic theory that was widely thought for most of the last generation to have been discredited: the idea that great bursts of deficit-funded government expenditure can jolt an economy back to growth.

Of course, any attempt in Australia to go into deficit will be portrayed as a bad move by the opposition, but it may be the only thing that the federal government can do. If deficits are not the answer – what is?

Now that businesses in Australia are getting back into action, we may start to see what the future is for the Australian economy. Last week the ABS released the November retail figures that showed a 0.4 percent rise where most were predicting a fall of 0.1% – and this is before the governments stimulus package (which I point out that I received no handouts!).

 

CommSec’s Savanth Sebastian says should the December figures due out next month also be favourable, retailers will not have to consider laying off staff before March.

“Keep in mind that further tax cuts and the Government’s infrastructure package will come through in the next couple of months and that will all help to alleviate the stress and try to improve sentiment, because in this environment it’s about improving confidence and improving sentiment,” he said.

 

John Mc has been posting his thoughts, and others have been giving their thoughts. I actually cannot remember hearing from the federal finance ministers lately, and so my questions are simple:

Where is Rudd? Where is Swan? Where is Tanner?

And what are they doing to save us from the worst of this financial crisis?

joni

(PS – I think we are up to number 24 in this series).

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27 Responses

  1. Reports are saying that the ASX could lose over 1.5% tomorrow in response to the weak US employment figures.

    THE Australian stock market is likely to open lower tomorrow after disappointing US employment figures saw Wall Street weaker on Friday.
    “It looks like the market is going to be down on Monday with ongoing concerns about the economic outlook and the depth and duration of this global recession,” AMP Investments chief economist Shane Oliver said.

    “We will probably be off about 70 to 80 points or 1.8 per cent.

    “While gold and oil were down on Friday, the only other thing that might help us, is that we had some gains in other precious metals.”

    Oh dear – still not time for me to check my super.

  2. Government as employer of last resort? At least they’re getting onto the right track, however, the damage done by the free market ideology will take years to correct.

    Perspective: Why ‘Market Fundamentalism’ Has Failed
    https://blogocrats.wordpress.com/2008/10/14/ts-meltdown/

  3. The emphasise people like Keynes and Minsky supported was the that economics is a social science. Sometimes it can’t be simply about self-interest and the profit motive. Allowing the so-called ‘invisible hand’ a ‘free hand’ with little or no government intervention was always doomed to end badly.

    Soros was right in my opinion, when he said:

    “Communism sought to abolish the market mechanism and to impose collective control over all economic activities. Market fundamentalism seeks to abolish collective decision-making and to impose the supremacy of market values over all political and social values. Both extremes are wrong. We need to recognise that all human constructs are flawed. Perfection is beyond our reach. We must content ourselves with the second-best; an imperfect society that opens itself open to improvement. Global capitalism is badly in need of improvement.

    Capitalism and democracy do not necessarily go hand in hand. There is some correlation: rising standards of living and the formation of the middle class tend to generate pressure for freedom and democracy: they also tend to support greater political stability. But the connection is far from automatic. Repressive regimes do not relax their grip on power willingly, and they are often aided and abetted by business interest, both foreign and domestic. We can see this in other countries, particularly where natural resources such as oil and diamonds are at stake. Perhaps the greatest threat to freedom and democracy in the world today comes from the unholy alliances between government and businesses.”

  4. Joni

    “Of course, any attempt in Australia to go into deficit will be portrayed as a bad move by the opposition, but it may be the only thing that the federal government can do. If deficits are not the answer – what is?”

    The Howard Government didn’t exactly prepare for the scenario where the market and economy would need government stimulation, hence they didn’t really leave that much of a surplus to deal with this type of crisis. Hence, the size of any deficit we’re forced to go into (note, this is not really an option it’s a necessity) will be related to the fact that billions in surpluses made during the boom years were squandered.

    The states have also been guilty of mismanaging their surpluses as well.

  5. groovy avatar John!

  6. Nothing will fix the current situation until fairness between managment and workers incomes are re established. The change is this area over the last 15 years is one of the mani reasons we are in our current situation.

  7. John Mc. I would dearly like to know when exactly were Howard and Rudd given a warning of the dire state of the world economy and the possible consequences of same.
    Was the ‘inflation’ prophecy of doom by Swan a precursor of what was to come, did Swan have intimate knowledge of the impending monster financial crashes in the US which he did not disclose to the Australian public.
    All academic now perhaps.

    ‘the states have also been guilty of mismanaging their surpluses’- JMc
    Well, yes, perhaps, but then that statement would raise both an ideological question and a philosophical one as to how budgets are managed.

    Shaneinqld:
    Prepare for a rough ride. Derelict ‘credit’ policy of financiers et al is what brought us to today’s crunch. The writing was on the wall, and had been for some time.
    The new mantra will be for citizens of the world to accumulate ‘assets’ fully paid for and therefore wholly owned, not ‘incorrectly used’ credit cards, credit facilities.

  8. Toiletboss

    The avatar is very symbolic – it’s how Bush really feels about the US and the rest of the world, in my opinion.

  9. OB

    Agree with credit policy of financiers causing the credit crunch have stated that all along however when the income of the average workers does not keep up with costs and the top gain all the actual wealth this means the actual wealth ( not preceived wealth from borrowings) has tilted too far in favour of the very few.

    Whereas our economy relies on the majority earning a good wage not just management to purchase goods and services.

  10. Oftenbark

    ‘the states have also been guilty of mismanaging their surpluses’- JMc Well, yes, perhaps, but then that statement would raise both an ideological question and a philosophical one as to how budgets are managed.”

    It certainly does and it challenges the level of competence and understanding that politicians really have about long term capital allocation and economic management .

    It’s my view that federal and state relations are dysfunctional and that both tend to work in opposition with each other. In business some would call it ‘stove – pipe mentality’

  11. Oftenbark:

    “The new mantra will be for citizens of the world to accumulate ‘assets’ fully paid for and therefore wholly owned, not ‘incorrectly used’ credit cards, credit facilities..”

    True. For “luxury” consumer goods et cetera..

    But who has a lazy $500,000 lying around to buy a house?

    Or even just $200-$300K?

    Getting into debt is just a fact of life.

    Of course, the populist catch cry of the moment is that the finance industry will need to be more heavily regulated.

    I doubt that this will make much of a difference as “the Banks” will always compete for market share and will climb all over each other to get customers.

    I think we will witness further consolidation of the banking industry in Australia, with one of the big four either going under or merging with one of the others.

    “regulation” isn’t preventing the Banks from increasing the Credit Card interest rates, while interest rates are falling, so it really makes you wonder just how much power or influence the regulators really have.

  12. Oftenbark

    “Prepare for a rough ride. Derelict ‘credit’ policy of financiers et al is what brought us to today’s crunch. The writing was on the wall, and had been for some time.
    The new mantra will be for citizens of the world to accumulate ‘assets’ fully paid for and therefore wholly owned, not ‘incorrectly used’ credit cards, credit facilities.”

    Couldn’t agree more, and it was the job of government regulators to keep lending and borrowing within tolerable limits instead of cheer-leading like the Howard Government have done.

  13. In 2006 Costello proudly boasted that miners and banks were extremely profitable and contributed more than their fair share to government coffers. I guess the dream run had to end sometime. Not the best news for the government I’d imagine now that the Chinese have greater bargaining power.

    Steel mills chase 40% price cut
    Jamie Freed
    January 12, 2009
    http://business.smh.com.au/business/steel-mills-chase-40-price-cut-20090111-7edd.html

    CHINESE steel mills are prepared to demand a 40 per cent iron ore price cut and the introduction of quarterly pricing as part of their bargaining during benchmark pricing negotiations with Rio Tinto and BHP Billiton.

    “The demand for a drop of 40 per cent [in 2009 benchmark prices] is not unreasonable as China’s domestic steel prices have dropped even below the 2007 level,” a Beijing analyst told Platts, a metals trade publication.

    The Herald understands at least one large iron ore miner is privately expecting a 30 per cent fall in the benchmark price.

    Australian miners received an 85 per cent increase in the iron ore price last year, including a small premium over Brazilian ore to account for the cheaper cost of shipping iron ore to China from Australia than Brazil.

    But many observers expect the so-called freight premium to evaporate this year now that there is only a $US2.90 a tonne difference in shipping ore from Australia to China compared with Brazil to China. The Brazilian miner Vale is likely to argue the higher quality of its ore makes it worth the extra shipping costs.

    Vale and Rio Tinto, the world’s two largest iron ore miners, have slashed production by 10 per cent since November in response to a lack of demand.

  14. John McP @ 10: I agree entirely with your comments at 10 John. This subject has had me scratching my head for years, nearly drawing cranial blood. In a consumer driven economy, governments with huge budget surpluses are thrown out of office. Our last state Labor WA govt is the perfect example of budgetary decision making designed to Labor being re-elected. $2 billion WA budget surplus, government thrown out.
    JWH $22 billion budget surplus, government thrown out.
    In other words, self serving d***heads, with little if any experience in business where ‘decisions’ and ‘consequence’ go hand in glove.
    Which simply goes to prove how stupid our pollies are.

    Reb. Placing the family home in hock for business purposes is something many Australians do, as at times there really is no other way to progress. But then, the lending institution has collateral, a promise of the business loan being used for profitable purpose, ensuring that repayments are met and made, on time.

    On the consumer side of things, banks will indeed play their game for market share, but then that market share must be in a market where ‘profit’ outweighs ‘bad debt’ by 1,000,000 to one.
    You know what irks me Reb. We have discussed this before on this blog.
    The “Harvey Norman’ marketing machine, the ‘Phone plan for 15 yearolds, signed contract for 24 months’
    The ‘5% interest on a credit card facility for the first 6 months, 23% thereafter’.
    What it gets down to Reb is that some world institutions have so much money, that they become the third (lending) party in what may ordinarily have been a one-to-one deal. Thats where ‘market share’ then comes in. We have a lending race.
    However, the lending, as was the case with Freddie and Fannie, is afforded to people with no collat, questionable part-time jobs, and general inability to repay.
    You know how it works Reb.

  15. Oftenbark
    “In other words, self serving d***heads, with little if any experience in business where ‘decisions’ and ‘consequence’ go hand in glove. Which simply goes to prove how stupid our pollies are.”

    I don’t think I could have said it any better. Absolutely! 100%! no debate, spot on, this is the reality and no fantasy etc etc

  16. Just wondering about The “Harvey Norman’ marketing machine, the ‘Phone plan for 15 yearolds, signed contract for 24 months’ Oftenb because anyone under the age of 17 cannot legally enter into a contract without parental consent (and this is iffy if it can be proven to be to the detriment of the child). Certainly a 17 year old can enter into a contract if proven to be for the benefit of the child, but under that age, then to my understanding there is no contract.

  17. As I understand Min, most Aus students aged from around 10-11 years up have a mobile phone, at times on contracts entered into by parents and other elders, according to ABC nightlife radio show. Obviously mum and dad pay the bill.

    The Harvey Norman marketing machine is reference to the fact that HN provides credit through either his or a third party financier.
    The same applies in part to the motor vehicle sales industry. The customer’s ability to pay is almost never the final consideration. The first consideration is to finance one who normally would not be allowed credit by old standards. HN receives ‘rebates’ from appliance companies, and no doubt, similar companies also receive some part commission of the ‘financing’ deal.
    Often said that Ford USA were more interested in selling finance than keeping up with motor trends and technology.
    IMHO, sales based on false economies. Once the client walks out with the goods on credit, the financiers and debt collectors take over. The chickens have come home to roost.

  18. Children cannot legally enter into a contract/offered credit etc and especially, they cannot sign a contract. So therefore me thinks, Harvey Norman is aiming at parents of the sub-teens. Mum and Dad of course will be responsible if they signed their children up to any plan.

    My kids were all provided with mobiles, with $20 credit. Now they all have to pay for it themselves [loud cheering from Min and hubby household].

    And I couldn’t agree more Oftenbark, yes the chooks have come home to roost. And your excellent example, that car salesmen earn more from selling credit than from the sale of the vehicle.

  19. OB:

    “The Harvey Norman marketing machine is reference to the fact that HN provides credit through either his or a third party financier.”

    Indeed they do. “Financing” the purchase has absolutely nothing to do with HN, it is performed by a completely different finance company, therefore there is no risk to HN.

    Once the ‘interest-free’ period has past, an interest rate of approx 27% kicks in and is backdated to the original purchase date of the item. Which means that some people who are tempted by “no interest, no repayments and no deposit until 2012” often find themselves in for a rude awakening when they get their first bill in 2012.

    I wouldn’t all be suprised if HN recieve a kick-back from the financier…

  20. Hahaha Min.
    I have not yet sold a car or had my brain removed.
    When I do, I shall apply and be accepted, without doubt, as a member of the Collingwobbles Football Enterprise Incorporated.

  21. “And your excellent example, that car salesmen earn more from selling credit than from the sale of the vehicle”

    I’d also argue that motor vehicle companies are now more dependant on the money they make from the regular service fees than they are on the original sale price of the vehicle.

  22. reb,

    From past experience working for insurance companies, the person selling the “interest free” loans or extended warranties get commission on the transactions – and I am sure that the companies would get large chunks of commission too.

  23. Yeah, ta Reb. Common knowledge, one may have thought.
    When in private business, one must understand fully how ‘money’ works, who wins, who loses.

    Exactly the point I was making. Finance corporations with too much cash, entering a neverending spiral of fast lending to those who can least afford to purchase. It’s just a nasty little game, of high stakes.
    Consider that those unfinancial buyers of household goods will or may never ‘own’ the product they take home, making the household debt to asset ratio look like the proverbial ‘financial basket case’.

  24. Oops. Apologies Min. My bad. Carry on.

  25. This is interesting given it preceded the actual crash.

    Jim Puplava, host of the Financial Sense News hour (www.financialsense.com) conducted a very interesting
    interview with Doug Noland, financial markets strategist for David Tice & Assoc, (www.prudentbear.com) on
    April 21, 2007.

    “Noland, author of the Credit Bubble Bulletin, believes we are currently experiencing “the most reckless credit expansion in history!” and that “the U.S. and global credit system has become a Ponzi Finance Scheme.” Noland finds the current “data extremely alarming…the most reckless credit expansion in history…liquidity like we’ve never seen before… unbelievable what’s happening…we have credit excesses virtually everywhere” and believes that “1929 (is the) only time even remotely comparable.”

    The following figures for year over year change in money supply seem to back him up; Russia….up 42%,
    China…up 18%, India…up 17%, Australia…up 14%, Brazil…up14%, Denmark…up13%, Europe…up
    12%, etc.

    Noland lays much of the blame on deregulation which is allowing undisciplined credit systems around the world to inflate, as well as the U.S. current account deficit which is “throwing dollar liquidity out to every place in the world… credit systems can inflate as much as they want without having to worry about weak currencies” in a kind of dangerous race to the bottom. But even more worrying is the realization that a huge part of this credit expansion is now outside the banking system. Noland points out that Wall St is now driving and perpetuating the current credit excesses in the form of a huge Merger and Acquisition Bubble and a Securities Lending Boom, which has sprung up to replace slowing Mortgage Credit. “The numbers have now got so huge…an unbelievable amount of liquidity.”

    It is clear the U.S. credit system is inflating dramatically despite M3 having been dropped to try and hide this fact), and that this inflation is being recycled through the Central Banks. As the U.S. current account deficit expands it is now sending nearly a trillion dollars of new finance out to inflate credit systems around the world. And Wall Street, with its new “flexibility and aggressiveness in this contemporary financial system” is providing much of the impetus as it keeps on increasing the leverage on new-style securities in a chase for high yield.

    Noland believes the Federal Reserve no longer has a lot of control of the credit system through bank loans, but that we are now at the mercy of unfettered Wall St securities-based finance…that Wall St can now circumvent attempts at tightening by the Fed. He has no doubt that Wall St is well and truly convinced that (like his predecessor Greenspan) “Bernanke will not pop bubbles…they (the Fed) will aggressively ease if there is any systemic threat. The financial sector is driving the real economy, not vice versa.” And why shouldn’t Wall St feel safe? It seems clear they are even being assisted whenever there is some kind of systemic threat by the clandestine manoeuvrers of the Plunge Protection Team (aka The Working Group on Financial Markets) which was formed by Ronald Reagan in 1987 following the stock market crash.

    Jim Puplava has studied the balance sheets and debt structure of the top five brokerage firms on Wall St and
    is amazed at their total liabilities, and alarmed at the equity base supporting it all (especially when their mindboggling
    derivatives books are added in)…(it’s) “one of the most frightening things I’ve seen in my 30years in the business!” Puplava was referring to how Wall St firms have ratcheted up debt to equity to anastounding 22 to 1 over the past five years. During the past twenty-five years (most of which was under Alan Greenspan’s stewardship) he has noticed how the credit structure has evolved, from junk bond financed
    mergers and acquisitions in the 1980’s, to the technology equity bubble of the 1990’s, morphing into the subprime
    real estate bubble this century, and now the private equity driven M&A bubble.

    Puplava’s wit led him to joke…:If they keep expanding the credit at this rate, they’re going to have to start
    chopping down all the trees” as the printing presses work overtime. Little wonder that Puplava sees nothing
    but inflation as far as the eye can see, culminating in a devastating hyper-inflation before an all engulfing
    recession/depression.

    Hyman Minsky (1919-1996).

    Wikipedia has this to say about Hyman Minsky;

    “British economist John Maynard Keynes had written about unstable financial markets, but Minsky was the first to explain how this instability developed and interacted with the economy . Minsky wrote in 1974, ‘…the financial system swings between robustness and fragility and these swings are an
    integral part of the process that generates business cycles’.
    Disagreeing with many mainstream economists, he argued that these swings, and the booms and busts that can accompany them, are inevitable in a free market economy, unless government steps in to control them, through regulation, central bank action and other tools that in fact came into
    existence in response to the Great Depression. He opposed the deregulation that characterized the 1980’s.”

    Minsky believed the three types of finance firms could choose from (depending on their risk tolerance) were hedge finance, speculative finance, and Ponzi finance. He described how in a protracted period of good times the markets moved through several phases…from Easy Credit to Over-trading; to Euphoria
    (dare we say “Irrational Exuberance?”), to Insider Profit Taking near the end of the Ponzi Finance Scheme, and finally Revulsion as the stream of new players dries up, panic sets in, and the Ponzi scheme collapses and rapidly self destructs.
    Minsky would have, no doubt, shaken his head in disbelief at the position the Federal Reserve now finds itself in. After having been in bed with Wall St for so long it remains to be seen how the Fed will extricate itself from this delicate relationship when the crunch finally comes.

    If foreign investors finally cry “enough is enough” and dump the increasingly worthless U.S. dollar, will the Fed at last be forced to step back in to somehow try and shut down the runaway credit expansion we are now experiencing? Will it punish a profligate Wall St to stop the American economy being wrecked? If it doesn’t, will the American currency, people and economy still be afforded the special status and
    consideration they received during the last century if the rest of the world suffers from the fallout?

  26. Has anyone else noticed that we seem to be leading Wall St these days.

    Our ASX goes up and the nexy day the DOW goes up, ours goes down and the next day the DOW goes down. It used to be the opposite.

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