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The world turned upside down

December 10th, 2008

Among news items of interest:

* The US Treasury briefly paid negative rates of interest on three-month bills (it’s now paying a more sensible zero).
* The outgoing Republican Administration in the US is about to nationalize General Motors perhaps proving the old adage, “what’s good for GM is good for the US”
* The Canadian Parliament has been prorogued until late January, precluding any legislative action against the economic crisis, but giving the Harper minority government another couple of months in office.

Any of these stories would have seemed unbelievable a year ago.

Categories: World Events Tags:
  1. Spiros
    December 10th, 2008 at 17:29 | #1

    The linked story says that it is the incoming Democrat administration that may nationalise GM.

  2. Martin
    December 10th, 2008 at 17:45 | #2
  3. Michael of Summer Hill
    December 10th, 2008 at 17:55 | #3

    John, it has been reported that labour costs in the auto industry is around 10 percent of the total manufacturing costs. The question begs as to what is really going on in the industry.

  4. rog
    December 10th, 2008 at 18:41 | #4

    #1, a minor detail!

    In prosecuting an argument it is not necessary to be factually correct, more important to logically appealing

  5. carbonsink
    December 10th, 2008 at 18:53 | #5

    Talking of the world turned upside down, I was hoping someone could explain this chart to me.

    I mean, that’s a pretty long timescale (100 years) and nothing like this has happened in that period.

  6. December 10th, 2008 at 19:07 | #6

    carbonsink,
    This one shows it well, too. The great inflation, something approaching steadiness over the last few years and now this.
    I am far from being one to argue that base money is more than a useful guide, but that is ridiculous.

  7. carbonsink
    December 10th, 2008 at 19:21 | #7

    These numbers aren’t just outliers, they’re in another galaxy. The Great Depression is a mere blip by comparison.

    I’m not qualified to say whether change in base money is significant or not, but on those numbers, I sure hope its not significant!

    I found the chart here: Mish’s Global Economic Analysis

    Where you will also find a chart of the M1 Money Multiplier crashing. i.e. banks hoarding, not lending

  8. Sinclair Davidson
    December 10th, 2008 at 19:33 | #8

    carbonsink/Andrew – plausible explanation here.

  9. TerjeP
    December 10th, 2008 at 21:00 | #9

    If you’re willing to lend money to the US government at negative rates of interest then it means your expecting to make a capital gain by holding US dollar denominated debt (ie deflation) or you’re scared silly by all the alternatives (presumably cold hard currency as well).

  10. TerjeP
    December 10th, 2008 at 21:01 | #10

    p.s. The gold price somewhat suggests we are in deflationary times.

  11. jquiggin
    December 10th, 2008 at 21:15 | #11

    #1 Spiros, the linked article is written in a slightly misleading way. While the Obama team has a significant influence, and will have to live with the outcome, the deal is set to go through in the next couple of days and to be signed into law by Bush.

    #3 Rog, your comment is accidentally self-referential.

  12. rog
    December 10th, 2008 at 21:43 | #12

    It makes some sense to nationalise GM, it may be the only way to salvage what is left after being ravaged by socialism

    http://www.washingtonpost.com/wp-dyn/content/article/2007/09/26/AR2007092600155.html

  13. iconoclast
    December 11th, 2008 at 00:02 | #13

    carbonsink,
    the spike in the monetary base indicates that the fed. is merely supplying liquidity to an extremely illiquid market.

    The adjusted monetary base consists of cash plus bank reserves on deposit at the fed. Banks must hold a portion of their assets as liquid assets in order to meet the demand from depositors for their money. If they go below the threshold, the fed. demands they promptly increase their liquid assets.

    The fed. is stepping in, expanding their balance sheet and providing this liquidity, via the various alphabet soup facilities recently put in place.

    The fed. is taking the illiquid assets held by the banks, and in exchange, providing the banks with MZM [money of zero maturity] instruments, such as t-bills.

    These instruments are liquid and are fungible to cash (but not quite), whilst they have the full faith of the u.s. fed. reserve behind them and thus tradable on the capital market.

    They are, therefore, not injecting new capital into the market and monetising the debt, as some have been led to believe.

    In this way the fed. is injecting liquidity into the capital market, without providing new cash.

    The base money, in this way, is expanding although at the same time the change in monetary base velocity has literally collapsed, from a 1-year moving average growth rate of 4% to -2%.

    This is definitely not inflation, rather deflation.

  14. iconoclast
    December 11th, 2008 at 00:18 | #14

    Further to my previous post, the fed. is moving towards a policy of quantitative easing, although not yet stated officially. They appear to want to grow the money supply (M2) by beginning with the purchasing of GSE debt and securities. This is, I suspect, to counteract the countervailing collapse in the monetary base velocity.

  15. Ikonoclast
    December 11th, 2008 at 06:00 | #15

    I’d just like to note I am not “iconoclast” and he is not I. “Iconoclast” talks details of money policy which are out of my knowledge and purview.

  16. TerjeP
    December 11th, 2008 at 06:05 | #16

    the spike in the monetary base indicates that the fed. is merely supplying liquidity to an extremely illiquid market.

    The gold price is falling which would suggest to a supply side gold bug such as myself that there is definitely a need for the extra liquidity as indicated by the M0 charts. A fiat gold standard (ie a fixed exchange rate with gold) at this point would see even more currency being put into circulation, although I’d also argue that the US wouldn’t have got itself into this situation to the same extent if they’d been running a gold fix.

    Also at the beginning of December gold went into backwardization for the first time in history suggesting that there is some sort of difficulty in meeting the demand for bullion (ie a delivery problem). If demand is so strong and yet the price is falling in price this suggests that US dollars have been rising in value (deflation).

    Everything about gold says to me that increase the currency base is the right response at this point in time.

    p.s. There has been a lot said about the backwardization of gold. Don’t believe all of it.

  17. TerjeP
    December 11th, 2008 at 06:06 | #17

    p.p.s. Central banks should be selling gold at this point in time. That’s what reserves are for.

  18. Ikonoclast
    December 11th, 2008 at 06:25 | #18

    In these times of imminent eceonomic depression and imminent dangerous climate change, there is only one macro policy which would make sense. There ought to be a major government investment (deficit funded) in renewable energy. In Australia’s case, this ought to amount to many billions up front, say $20 billion to pick a number out of the hat.

  19. jquiggin
    December 11th, 2008 at 06:41 | #19

    I don’t know about “only one” policy, but it is a policy that makes sense.

  20. December 11th, 2008 at 07:22 | #20

    A good quote (dramatized and embellished by mymemory) from Nomura strategies analyst, heard this morning on Fran Kelly on way to work:

    “The Bush administration has a achieved what legions of socialists and communists have failed to achieve after generations of political struggle: the nationalization of the commanding heights of US capitalism.”

    They have also made paying to invest in government debt look like a good deal as compared to investing in blue chip corporate securities and equities.

    Lenin must be splitting his side laughing. Talk about giving them enough rope!

  21. carbonsink
    December 11th, 2008 at 07:35 | #21

    Ikonoclast @ 18:

    There ought to be a major government investment (deficit funded) in renewable energy

    I agree that would be an excellent policy, but why stop at $20 billion? If the US can find $100B US dollars for one company (AIG), surely we could find $100 billion to rebuild our energy infrastructure.

    We need bold vision, not endless delay, more green papers and white papers. Why aren’t we taking the lead at Poznan instead of being a holdout? Doesn’t Rudd realise the blood money (sorry ‘mining income’) has dried up, and he’s no longer beholden to Big Coal?

    iconoclast @ 13:

    the spike in the monetary base indicates that the fed. is merely supplying liquidity to an extremely illiquid market

    My biggest concern about the current strategy of relaxing monetary policy, providing liquidity, and large fiscal stimulus, is that it merely attempts to reinflate the debt-bubble/consumerist economy, and doesn’t move us to a more sustainable world, both economically and ecologically.

    Again I recommend everyone look at this chart before they dismiss current events as a run-of-the-mill recession.

  22. Hermit
    December 11th, 2008 at 07:40 | #22

    Perhaps the world is an intermediate state between order and randomness
    http://en.wikipedia.org/wiki/Edge_of_chaos
    which some say is needed to produce overdue change.

    I second the proposal to spend $20bn on renewables and efficiency measures. After all that’s only the Christmas retail boost times two, the difference being that in the future we’ll still be reaping the benefits.

  23. rog
    December 11th, 2008 at 07:44 | #23

    If you compare the business plans of the Big 3 US auto makers with those of Toyota you can see that despite quotas and trade restrictions the Big 3 have been falling for some time whilst the Japanese non unionised businesses have succeeded.

    Toyota is now No1 car brand in the world.

  24. smiths
    December 11th, 2008 at 09:56 | #24

    i believe lower c iconoclast that you are dead wrong,

    if they are not actually monetising the debt then why has the national debt exploded at exactly the same time that they are performing this liquidity magic,

    deflation is temporary, in the depression the money supply was linked to gold and they couldnt inflate their way out of the crisis,

    but they sure as hell are this time,

    and i reckon inflation will be rampant within two years

  25. smiths
    December 11th, 2008 at 10:44 | #25

    The following is intended to address operational questions about the program announced by the Federal Reserve on November 25, 2008 to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs) Fannie Mae, Freddie Mac and the Federal Home Loan Banks.

    Will these operations be reserve neutral?
    No, these operations will be financed through the creation of additional bank reserves.

    http://www.newyorkfed.org/markets/gses_faq.html

    monetising debt?

  26. smiths
    December 11th, 2008 at 11:27 | #26

    The Federal Reserve is considering issuing its own debt for the first time, a move that would give the central bank additional flexibility as it tries to stabilize rocky financial markets.

    Government debt issuance is largely the province of the Treasury Department, and the Fed already can print as much money as it wants. But as the credit crisis drags on and the economy suffers from recession, Fed officials are looking broadly for new financial tools.

    http://online.wsj.com/article/SB122888021757894023.html

    we are getting mugged by reality,

    it does seem though that some people are taking a very long time to understand that

  27. carbonsink
    December 11th, 2008 at 11:48 | #27

    we are getting mugged by reality, it does seem though that some people are taking a very long time to understand that

    Yep, I couldn’t agree more, especially the mainstream economists…

    the Australian economy has still a reasonable chance to avoid a recession through 2009.

    - John Edwards, chief economist HSBC, after today’s unemployment figures were released.

    Alan Kohler gets it though: China cracks

    It is the final shoe to drop for global recession and spells the end of the super-cycle. There must now be serious doubt about whether the crash in commodity prices since July is a short-term correction.

    For Australia this is an unmitigated disaster. It virtually ensures that we will spend much of next year in recession.

    Australia is partying on the beach while the economic tsunami rolls in from the US via China.

  28. O6
    December 11th, 2008 at 12:14 | #28

    Rog,23, Are BMW, Volkswagen, Citroen-Peugeot and Daimler also ‘non-unionised’, as you put it? I’d have thought not, and yet they are not in need of nationalisation. Could it be that Detroit has got it wrong for 25 years: bringing in rebadged small cars to meet average fuel economy limits and selling them at break-even (at best) while making profits from big cars and 4WDs, and hence not learning that the world had changed?

  29. Ubiquity
    December 11th, 2008 at 12:32 | #29

    I liken the financial crisis to the fate of the Titanic. They were not only short a few life boats but poorly prepared for the unthinkable.

    No different to the AGW movement over enthusiatic unclearly thought out proposals.

    I suggest they all go back to the drawing board, go to “Clinical Trials” at wikepidia and launch AGW solutions on this basis.

    http://en.wikipedia.org/wiki/Clinical_trial

    Just as Drug companies are accountable for the therapeutic poisons they want to market, so should the AGW movement and the government be accountable.

    Moderation and strategic contingencies should be part of the solution. I am fortunate that I had contingencies for the financial crisis but dodging the melodrama of the AGW movement and the pandering government officials may be more difficult.

    Yes I know climate disaster is iminent and even I dread the fact that the the poms might have to migrate to Australia.

  30. Ikonoclast
    December 11th, 2008 at 12:43 | #30

    We certainly need a visionary “Future Policy” and we are not getting it from Mr Rudd’s government to date. They seem slow, ineffective and lacking in policy imagination to me. They also seem to be too “Howard-like”. The spending sop to buy pensioner favour is straight out of Howard’s book.

    Pensions (and the uneplyment benefit) need to be lifted to a better living rate. A better on-going rate would be of more paractical use to pensioners than a one-off bonus which fails to commit the Government to paying better pensions permanently.

    Perhaps in this case they could have announced the bonus (for initial stimulatory effect) and an extra rise (double the CPI) for pensions in March 2009 plus a lift to unemployed benefits so that they match pension rates from March 2009 also.

    Then, as disccussed, a long term investment needs to go into renewable energy. Subsidies, implicit and explicit, for fossil fuel use need to be progressively removed.

    It would not mean the end of the coal industry ovewrnight. Quality coal will still be needed for steel making. Thermal coal can be progressively relieved of the power generaion task instead becoming the Carbon feedstock for the fertilizer and plastics industries as oil runs out.

    I could go but I won’t here. What we need is a full transition plan with contingency uses and substitutions on the way through to a pure renewables and no fossil fuels economy.

  31. smiths
    December 11th, 2008 at 12:51 | #31

    what is agw?

  32. sdfc
    December 11th, 2008 at 13:44 | #32

    Terje

    Why should central banks be selling gold Terje? That would be deflationary.

    Anyway, the problem is not with the money base, as we know it has grown around 70% in just a few months.

    Unfortunately the increase in the base remains as excess reserves with the Fed. We have seen something similar in the past few years with the Japanese experiment with quantitative easing.

    As with the Great Depression, the problem is with the multiplier due to the financial crisis.

  33. rog
    December 11th, 2008 at 15:15 | #33

    In the US VW has struggled for market share.

  34. TerjeP (say tay-a)
    December 11th, 2008 at 15:32 | #34

    Sdfc – you are right. My comment advocating that central banks should be selling gold makes no sense. I retract it.

  35. iconoclast
    December 11th, 2008 at 17:36 | #35

    TerjeP@16:
    The gold price is falling because:
    1. the environment is deflationary and not inflationary. Gold is a hedge against inflation of fiat money.
    2. Funds are flowing into treasury paper not gold. The yield on this paper demonstrates the immense demand.
    3. Unless central banks allow further banks to collapse without guaranteeing depositors funds, then the counter party risk in holding fiat money is not present. Recent events demonstrate that this is definitely not on any central banks agenda.
    4. Backwardization is rare in gold, okay, it has occured. It does occur, from time to time, to other metals as well, so what.

    carbonsink@21:
    What you are referring to does not demonstrate that the fed. has thrown reason out to the wind, and commenced a precarious relaxation of the money supply, well not in earnest and not yet, at least. The steps taken are to supply steralised liquidity into an illiquid market, period.

    The spike is larger than any other in it’s history, however, the U.S. economy is also significantly larger than at anytime in it’s history. In comparing the size of the spike of the monetary base in 2008 to that of 1929 provides an incomplete picture, one *must* also relate this to the size of the nations economy now, 2008, and then, 1929.

    The economic turmoil that we are now living through is, by no means, a run of the mill economic downturn, that is for sure!

    The idea of them trying to inflate the bubble is long gone.

    The proposed fiscal policies are an attempt to put a floor under aggregate demand, so as to prevent it from entirely collapsing. This is not trying to re-inflate the bubble, the U.S. is past that stage.

    They are attempting to stop the deflationary death spiral. Traditional monetary policy is no longer effective, they have hit the zero bound on the short end of the yield curve. They are now intending to use other more exotic means in their monetary arsenal, such as quantitative easing, pioneered by the Japanese with little success, which for a start, will be to purchase GSE debt and securities held by the GSEs’ *without* the counterveiling sterilisation that they have been performing to date.

    Futher, they are likely to begin to move towards targeting the longer end of the yield curve as an attempt to bring down the yield of long dated maturities as an attempt to put a floor on mortgage defaults, as well as, purchasing corporate paper and even intervening and purchasing in the equity market.

    There is no magic bullet here that will stop debt deflation or avoid a deep and severe recession. Although, the measures being used are an attempt, at least, to diminish the pain and duration. To what extent they will succeed will be written by historians.

    To adjust to a more economically and ecologically sustainable world, we will need to seriously think about population growth control measures and an economic model that does not function on the premise of incessant compounded growth; it is otherwise an oxymoron.

    smiths@24:
    The exploding debt does *not* infer that this debt, in total, has or is to be monetised. The government has the option of also fiscalising a large portion of this debt, where by future generations of U.S. citizenry will be obliged to take on the burden of paying this debt down.

    To believe the U.S. will simply use monetary policy to innocently monetise the entire debt, as a means out of this mess, is nonsense. A policy of that nature, perceived by the capital markets would precipitate a collapse in the U.S. dollar.

    The Chinese have already lectured the U.S. administration, as recently as last Thursday, that they must stabilise their economy, boost their savings rate and protect Chinese investments. The U.S. will likely use a combination of fiscalisation and monetisation to get themselves out of this chasm.

    The monetisation of some debt does not infer rampant inflation.

    From the fed. reserve board, bureau of economic analysis HIMCO.
    Q3 2008: V=GDP/M, GDP=14.4 trillion, M2=7.7 trillion, V=1.87
    Q1 2008: V=GDP/M, GDP=14.17 trillion, M2=7.6 trillion, V=1.85
    Q3 2007: V=1.9

    They are at present expanding M2 at a rate of about 7+% to counteract the collapse of the monetary base velocity. Whether this growth is too little or too large, we will have to see. History tells us, the Japanese did not succeed.

    It must be understood that growth of the money supply does not directly infer inflation. The other variable, just as important as the money supply, is the monetary base velocity. Both matter. To look at one, whilst ignoring the other leads to conclusion that are just wrong, period.

    One concurs that by fixing the currency to a gold standard would have likely averted the disaster that has beset the world. However, we would have had to live with significant credit rationing and timid economic growth. This, however, would have benefited the already prosperous nations and prevented the poorer nations, whose people live in abject poverty, little possibility of improving their living conditions. The gold standard would certainly have put the brakes on world economic growth that we have experienced for the past thirty odd years, and coincidentally guided the world’s environmental mismanagement on to a lesser unsustainable trajectory.

    simths@25:
    That is what I stated in my post@14. The fed. is moving towards a policy of quantitative easing, although not yet stated officially. They have commenced with the purchase of GSE (fannie mae et al.) debt and securities. A policy of quantitative easing implies monetisation of debt; that is it’s raison d’être. Refer to above, as to why those purporting hyperinflation is just around the corner, are merely hyperventilating. After twenty years in an economic malaise Japan did not hyperinflate. It is not, however, out of the real of possibility, although, it is far less likely than likely. The more likely outcome being a long and bleak economic malaise.

  36. carbonsink
    December 11th, 2008 at 18:20 | #36

    The spike is larger than any other in it’s history, however, the U.S. economy is also significantly larger than at anytime in it’s history. In comparing the size of the spike of the monetary base in 2008 to that of 1929 provides an incomplete picture, one *must* also relate this to the size of the nations economy now, 2008, and then, 1929.

    Huh? The chart is the percentange change on the year before!

  37. MH
    December 11th, 2008 at 18:31 | #37

    Re #13 – Other data suggests the TARP funds are actually being parked by the banks they were given to into? you guessed it, FED treasury paper and deposits, so the Paulson plan lent to the banks, who lent the money back, claim a credit and then the government pays interest offsetting the repayment costs of the banks they lent to, looks like an almighty scam to me. The looting of the US treasury continues. The the Bush administration saves Kevorkian and others by saving GM, a company that produces what it’s consumers do not want to produce what and when? AT the least the Canadians have not pretended they know what to do so suspended democracy hoping it all goes away. Somehow it will all muddle through then the oil price will recover as demand v limited supply hits again then it all hits the wall again.

    Add investing in rail transport and local communities to that of renewables as the only feasible polices to spend our taxes and go now! The Americans seem to think their tax system will provide like some sort of magic pudding, all that borrowed money has to be paid back sometime.

  38. iconoclast
    December 11th, 2008 at 18:58 | #38

    carbonsink@36:

    Yes, it’s a massive injection of liquidity predominately *sterilised*, and consequently a large percentage change. Nothing unusual about that, that is what you would expect.

  39. iconoclast
    December 11th, 2008 at 19:17 | #39

    MH@37:

    Well it is, what one can call reverse seneorage, one why to recapitalise the banks.

    Well, I suspect that after the sugar money runs out GM will be put into bankruptcy. Given that the Pontiac brand is high on the agenda of being given the chop, does not at all bode well for Holden-GM in Australia.

    The next question that follows from fiscal stimulus is how do we then wean ourselves of these massive stimulus packages.

    A very good analogy, which I have come across, that distills this problem clearly–it is all very well and good for us to build pyramids of Italian marble, and in return for our trade partners to build pyramids of Australian granite but how do we eventually redirect our resources back to a true market economy?

  40. TerjeP (say tay-a)
    December 11th, 2008 at 21:50 | #40

    The gold price is falling because:

    1. the environment is deflationary and not inflationary. Gold is a hedge against inflation of fiat money.
    2. Funds are flowing into treasury paper not gold. The yield on this paper demonstrates the immense demand.
    3. Unless central banks allow further banks to collapse without guaranteeing depositors funds, then the counter party risk in holding fiat money is not present. Recent events demonstrate that this is definitely not on any central banks agenda.
    4. Backwardization is rare in gold, okay, it has occured. It does occur, from time to time, to other metals as well, so what.

    Iconoclast;

    1. Yes. I think that is what I already although with a slightly different slant.
    2. Yes.
    3. Yes. Although if more banks did collapse the effect on currency would be to make it more valuable. ie more deflationary.
    4. I thought my point was clear. Backwardization is indicative of delivery problems. That suggests strong demand. However gold is falling in value so that supports the deflationary thesis.

    I think you are using tones that suggest we disagree on these points. However if you re-read what I said (except for the comment I retracted) then I think you will find there isn’t much difference between what I said and what you are saying.

  41. Ian Gould
    December 11th, 2008 at 21:52 | #41

    “The US Treasury briefly paid negative rates of interest on three-month bills ”

    This is less surprising than it seems at first given that real US official rates have been negative for some time.

  42. iconoclast
    December 11th, 2008 at 22:12 | #42

    TerjeP@40:

    point taken.

  43. iconoclast
    December 12th, 2008 at 00:02 | #43

    Ian Gould@41:
    The FOMC instructs the open market desk at the Fed. Reserve Bank of New York to keep the actual Fed. funds rate close to the target Fed. funds rate.

    However, since mid November the open market desk of the Fed. Reserve Bank of New York was not succeeding, or rather, it appears, they have not been trying, because the discrepancy has been too wide.

    The actual Fed. funds rate has been trading very inconsistently below the target rate. These departures are traditionally very small and transitory. This is not accidental, something has happened at the Fed. Reserve that has not been publicly announced. There has been a policy shift, but it has not been announced to the market. There is a requirement by law that policy changes be announced by the FOMC!

    The Fed. Reserve has also been paying interest on bank reserves as an attempt to bring the actual Fed. funds rate back to the target rate. However, only authorised deposit taking institutions can access this interest on reserves facility. The GSEs’ for example can not, and so they have been lending their funds at rates lower than the target rate.

    The actual Fed. funds rate has been dipping below zero for short periods of time, but has in general been near zero compared to the target Fed funds rate of 1%.

    They may formally announce this policy shift on December 15-16.

  44. plaasmatron
    December 12th, 2008 at 08:30 | #44

    looks like the USD just turned the corner against the euro. All those debts have now been paid off in USD, demand is begiining to reflect the reality again. The quickening…

  45. smiths
    December 12th, 2008 at 12:08 | #45

    Funds are flowing into treasury paper not gold.

    gold jumped $27 over night

    The gold markets have also been in turmoil. Traders say it has become extremely hard to buy the physical metal in the form of bars or coins. The market has moved into “backwardation” for the first time, meaning that futures contracts are now priced more cheaply than actual bullion prices.

    http://www.telegraph.co.uk/finance/economics/3703565/Fear-triggers-gold-shortage-drives-US-treasury-yields-below-zero.html

  46. TerjeP (say tay-a)
    December 12th, 2008 at 12:50 | #46

    Smiths – it would seem that some of the mints can’t make the bars quick enough.

  47. smiths
    December 12th, 2008 at 14:37 | #47

    absolutely terje,

    there is not a mint in the world that can keep up with demand for physical gold

    but mainstream media view at the moment is that its not happening and forget about it

  48. Nick K
    December 12th, 2008 at 16:24 | #48

    Ikonoklast says “Pensions (and the uneplyment benefit) need to be lifted to a better living rate. A better on-going rate would be of more paractical use to pensioners than a one-off bonus which fails to commit the Government to paying better pensions permanently.”

    In the whole ‘debate’ about increasing the pension (it can hardly be called a debate, considering that a proper debate usually involves hearing both sides of an argument rather than merely having one side make demands), issues of intergenerational equity have largely been ignored.

    Because of the ageing population, existing pensioners and those about to reach retirement age are generally likely to receive far more benefits than what it would have cost these same people to fund government programs for the elderly during their working lives. At the same time, younger generations of workers are being saddled with an increasing tax bill in order to fund various benefits for retirees that they are unlikely to receive themselves when they reach retirement age (while also having to fund their own retirement through compulsory super).

    Increasing aged pensions would only exacerbate these inequities. Yet these issues are barely even being raised in what passes for a ‘debate’.

    The welfare state, plus associated changes in society like the divorce revolution, family breakdown etc. have pretty well destroyed traditions of intergenerational solidarity. So it’s not surprising that it’s now every man for himself.

  49. Nick K
    December 12th, 2008 at 16:34 | #49

    Another reason why raising the age pension significantly would be bad policy is that because Australia has a means-tested aged pension, this can have the effect of reducing incentives to save for retirement as well as encouraging people to draw down their retirement savings sooner.

    The Howard government’s decision to allow everyone 60 and over to cash out their entire superannuation tax-free will exacerbate these trends, making it easier for people to stop working at 60, cash in their super and blow it all, before going back onto the government pension.

    Making the aged pension more generous would only increase the incentives for people to do whatever is necessary to qualify for the pension, thereby exacerbating the perverse incentives already in the current system. It would further undermine the policy direction of encouraging more private provision to deal with the costs of ageing populations.

    Unless you want to increase pensions and also abolish the means test. In which case, this would cost a fortune and be unsustainable.

  50. iconoclast
    December 12th, 2008 at 16:48 | #50

    smiths@45:

    Let’s not get all too excited.

    Gold only recently pulled back by $50USD in one day as well.

    Let’s put things into context.

    And yes, the bulk of funds are still landing on treasury paper.

  51. TerjeP (say tay-a)
    December 12th, 2008 at 17:18 | #51

    Does the US dollar ever go into backwardization?

  52. TerjeP (say tay-a)
    December 12th, 2008 at 17:19 | #52

    According to wikipedia the Aussie dollar did relative to the Japanese YEN in 2006.

    http://en.wikipedia.org/wiki/Backwardation#Examples

  53. TerjeP (say tay-a)
    December 12th, 2008 at 17:20 | #53

    Treasury paper is a form of futures contract. The underlying commodity is currency.

  54. iconoclast
    December 12th, 2008 at 17:33 | #54

    TerjeP@51

    I’d say it did, given all the swap facilities that have been set up by the U.S. Federal Reserve Bank with Central Banks world wide.

    TerjeP@53
    I concur.

    The treasury paper is also backed by the full faith of the U.S. government, which also has fiscal authority.

  55. Ikonoclast
    December 12th, 2008 at 18:22 | #55

    Nick K @ #48 and #49 makes some interesting counter arguments to my points about the age pension but his arguments don’t hold up. Perhaps the key point Nick K makes is as follows.

    “Making the aged pension more generous would only increase the incentives for people to do whatever is necessary to qualify for the pension, thereby exacerbating the perverse incentives already in the current system.”

    The first part of that statement contains the phrase “making the aged pension more generous”. This is a disingenuos rhetorical device using an emotive word “generous” in a construction which presupposes that the current pension is already generous.

    The current single pension rate is $281.05 per week. The current married rate is $469.50 per week for the couple. I have expressed these pensions in weekly terms although they are more commonly quoted in fortnightly terms. If you think in terms of weekly budgets of groceries, rent (or rates and house maintainence), utility bills, owning a car (or other transport costs) etc. you may start to realise this is scarcely “generous” by Australian living standards.

    The key argument pensioners would make, I think, is that the official CPI (which is applied to pensions) has not reflected the real inflation in the basket of goods that pensioners typically purchase in the last 8 years or so.

    The latter part of Nick’s statement contains some truth. This relates to the argument about “exacerbating the perverse incentives already in the current system.” The point I would like to make here is that there are many (and much worse) perverse incentives in our economic system. Why not deal with them first if we are concerned about perverse incentives? Negative gearing, trust dodges, fossil fuel incentives and corporate welfare are four big ones which need to be rooted out of our system.

    The way to remove (or keep out) pereverse incentives from the pension system is to;

    (a) keep the pensions income and assets test.
    (b) make (keep?) superannuation contributions compulsory.
    (c) remove the option to take superannuation as a lump sum (i.e. offer super only as a cpi indexed annuity)
    (d) moderate rule (c) and allow part lump sums only where hardship or severe financial disadvantage can be demonstrated.
    (e) set the super age to 60.
    (f) keep the age pension age at 65.

    I don’t agree with setting the super age at 65. Let those who wish to go, go and let those who wish to stay on, stay on. This will open up employment for younger people. It’s a fast changing work environment. Not all people over 60 can keep up, quite frankly.

  56. billie
    December 12th, 2008 at 18:43 | #56

    Why should the super age be raised to 60?

    For the last 2 years you have been able to access you super if you are dying before you reach age 55. When my partner died at age 42 we could access the savings in super or collect a disability pension for the 2 years it took to die or access unemployment benefits – so had to live off savings.

    Many professional workers find they are unemployable if retrenched after age of 45 or 50 and they have large sums in super. They have to work for Bunnings or Jims Mowing until they can access their super.

    Paradoxically if Australia didn’t have an employer based super scheme employers wouldn’t have an incentive to retrench older workers and there would be one less reason to discriminate against older workers.

    And because the United States has employer based pension plans Congress is unwilling to bail out the car companies because GM has 3 pensioners for every worker. Remember in May GM announced it wouldn’t pay the health insurance of its pensioners who I had assumed were former executives not realising that the former process line workers also were part of the health insurance plan.

  57. Ikonoclast
    December 12th, 2008 at 19:18 | #57

    I guess the argument is that superanuation is for retirement income. A line needs to be drawn somewhere. Age 60 seems a reasonable compromise and it seems fair to expect under 60s to work in most cases. Rules exist currently (I understand) which allow super to be accessed before retirement age in the case of severe illness or hardship.

    As a sideline I will mention a current “urban myth” which seems prevelant. Namely, that the bulk of octogenarians will happily enjoy their super benefits while living an active lifestyle.

    This is a myth on two counts. Firstly, most market linked supers run the capital down so it usually runs out at about age 80. (Not to mention the fact that market linked supers are now taking such a hammering that they may never recover to pre 2008 crash levels for those within 5 years of retirement.)

    Secondly, have you looked at any octogenarians lately? While a small minority retain sound minds and sound physical health, the majority are suffering either senile dementia or significant debilitating physical problems or both. Good quality of life in the 80s is rare. Pray you die by 80 my friends. Personally, I will be making sure I do.

  58. rog
    December 12th, 2008 at 19:31 | #58

    All you need to enter a low or high care aged establishment is $250K for the bond, for many places you can also draw against the bond for extra benefits as life expectancy is low once you are in these joints.

    Lets face it, you cant take it with you.

    Make sure you give your family some “gifts” more than 5 years before you enter the waiting rooms otherwise those govt spendthrifts will means test you.

    So spend up now whilst you can still remember the occasion.

  59. MH
    December 12th, 2008 at 20:15 | #59

    ” A common feature of all these earlier troubles was that, having happened, they were over. The worst was reasonably recognizable as such. The singular feature of the great crash of 1929 was that the worst continued to worsen. What looked one day like the end proved on the next day to have been only the beginning. Nothing could have been more ingeniously designed to maximize the suffering, and also to ensure that as few as possible escaped the common misfortune.” J K Galbraith ‘The Great Crash: 1929″.

  60. MH
    December 12th, 2008 at 20:23 | #60

    A final Xmas note. Always worthwhile to return to some earlier texts. Extracted from Galbraith’s work on the Depression, five elements that caused the Great Crash:

    (1) The bad distribution of income.
    (2) The bad corporate structure.
    (3) The bad banking structure.
    (4) The dubious state of the foreign balance.
    (5) The poor state of economic intelligence.

    Eerily familiar.

  61. December 13th, 2008 at 11:40 | #61

    I recently described some constructive things that could be done about age pension entitlement etc. here (see also this article of mine).

  62. Nick K
    December 13th, 2008 at 22:43 | #62

    Ikonoklast says “The first part of that statement contains the phrase “making the aged pension more generous”. This is a disingenuos rhetorical device using an emotive word “generous” in a construction which presupposes that the current pension is already generous.”

    This is a fairly nit-picking criticism. You can examine with a fine tooth comb every last word I use for signs of my evil intent if you wish, but I would prefer to focus on more substantive issues. Firstly, the word “generous” is hardly an emotive word. And the concept of generosity is relative. Things can be slightly generous, not that generous, etc. But any payment that is obligation-free can be said to be generous in some sense. In order to qualify for an age pension a person must only be aged 65 or older, fall within the income and assets tests, and have been legally resident in Australia for at least 10 years. There is not even any obligation for a person to have worked a certain number of years of their working lives in Australia.

    “The key argument pensioners would make, I think, is that the official CPI (which is applied to pensions) has not reflected the real inflation in the basket of goods that pensioners typically purchase in the last 8 years or so.”

    I would be interested to know if there is any evidence to show that the consumption patterns of pensioners is more geared towards items that have increased in price more than the official CPI, compared to other groups. But this sounds to me like a pretty typical example of the difference between economic reality and economic perceptions. Psychologists who study economic behaviour have found that people generally have difficulty assessing net gain and loss. Instead, losses tend to register more heavily than gains. This shows up in people’s perceptions of price rises. If the cost of some things rise, such as petrol or food, people tend to notice it and complain about it. Yet if other items either don’t rise or fall in price, people don’t factor that in as much (for example, how much does a DVD recorder cost today compared to eight years ago?). That is why people often believe that the official inflation figures underestimate price rises.

    “The current single pension rate is $281.05 per week. The current married rate is $469.50 per week for the couple. I have expressed these pensions in weekly terms although they are more commonly quoted in fortnightly terms. If you think in terms of weekly budgets of groceries, rent (or rates and house maintainence), utility bills, owning a car (or other transport costs) etc. you may start to realise this is scarcely “generous” by Australian living standards.”

    It may be the case that aged pensions don’t seem like much compared to an average salary. Yet this ignores a whole lot of other factors:
    - the benefits to pensioners of tax breaks, concessions, discounts, cheap medicines, extra allowances and payments that a typical worker does not get
    - working-age people often have much higher expenses than pensioners, like paying a mortgage, child care, school fees, transport, raising a family etc.
    - pensioners are more likely to live in parts of the country where the cost of living and average wages are lower than the national average
    - community-rated private health insurance (which many countries don’t have) means the elderly generally get far more benefits than what they have to pay in premiums
    - Australia’s current artificially inflated house prices mean that older generations who bought their homes more cheaply in the past have a more valuable asset from which to draw down equity (while their house value is exempt from the pension asset test), while younger homebuyers have to pay more and take on bigger mortgages. This is a vast intergenerational wealth transfer that many pensioners have benefitted from.

    When you take all these things into consideration, the notion that pensioners are really that hardly done by compared to most of the population is grossly exaggerated in my opinion.

  63. Alanna
    December 14th, 2008 at 19:57 | #63

    I cant help but think the Christmas retail boost is so short term and likely to be dissipated only into the profit margins of large oligoploies who are busy shedding labour anyway notwithstanding any short term $100 spending spree. I think its a reasonable initiative to use tax cuts to stimulate spending but I would prefer to see some deeper stimulus as in infrastructure spending – try buying out some of the major private sector infrastructure providers who charge tolls both ways. At $15 a day that equates to $150 a week which could be spent from savings and at least it clears some of the false profits out of infrastructure (execs wages, false profiteering on PPS, consultants fees etc etc) and the govt ends up with a real asset or a stake in an asset they used to think it was their responsibility to own outright or subsidise (roads, ports, schools, childcare centres etc). Now is as good a time as any and it seems to be what the public wants ie more public services not less. I dont see any swing against Rudd despite Turnbulls media posturing even when the deficit word came up.

  64. Alanna
    December 14th, 2008 at 20:03 | #64

    MH

    Please tell me where I can get that book! “The Great crash” (Galbraith) ? published some time in the 60s. Its only little but it was a beauty. I read it some years ago…fascinating. Put it down, it disappeared and have been searching ever since.

  65. Michael
    December 15th, 2008 at 00:49 | #65

    I am interested to hear about people’s thoughts if the US goes into a Depression and the devaluation of the USD? What effect this would have on the Australian economy?

    Several articles that I read/heard lately from well known economists (Paul Krugman, Henry Dent etc) has mentioned that the US is heading into a Depression. On top of this, the biggest financial problem face by the U.S. (in history)is the devaluation of the USD due to excessive foreign debts which is being supported by new printed money generated from thin air. This off course would have a hugh financial implication world wide and for Australia. It is a scary thought! Interested in your thoughts.

  66. carbonsink
    December 15th, 2008 at 10:32 | #66

    I am interested to hear about people’s thoughts if the US goes into a Depression and the devaluation of the USD? What effect this would have on the Australian economy?

    Nothing. Glenn will cut interest rates to zero, Kev will keep spraying around money, and Australians will build houses for each other until the global economy recovers.

    Some people actually believe that.

    If the “decoupling” fairytale had come true then perhaps Australia could have muddled through on the back of China, but seeing as China is clearly entering a serious slowdown (and perhaps even a real recession) we’re screwed. The resource states will be smashed, national income will collapse, government tax receipts from the resources sector will vanish, and seeing as we don’t actually do much in Australia anymore apart from banking, digging and building houses for each other, there’s not much to fall back on.

    Read Michael Stutchbury’s Our China crisis and Alan Kohler’s China cracks.

  67. Alanna
    December 15th, 2008 at 10:43 | #67

    Carbon sink

    “seeing as we don’t actually do much in Australia anymore apart from banking, digging and building houses for each other, there’s not much to fall back on”.

    Quite funny Carbon sink but you had better cross out banking from list.

  68. carbonsink
    December 15th, 2008 at 11:39 | #68

    That was the point Alanna. You can scratch the finance and construction sectors as well, so what’s left? The farm sector seems to be doing ok. Perhaps we can hop back on the sheep’s back?

  69. Nick K
    December 15th, 2008 at 14:02 | #69

    Carbonsink, you are right about that. If China experiences a major downturn Australia will be in deep trouble.

    Australia has become a one-trick economy. The only thing we do well is dig resources out of the ground and flog them overseas.

    Most of the benefits of the resources boom have been squandered on funding more government handouts and fuelling a real estate bubble. The sensible thing to do would have been to put most of the windfall into either funding necessary infrastructure or increasing national savings. Not enough has been put aside for a rainy day, and it may well be pouring before too long.

  70. Alanna
    December 16th, 2008 at 13:50 | #70

    Carbon sink

    Before we can hop back on the sheeps back we may need a cross breed that drinks rarely and is capable of eating dust. Maybe a sheepmel.

  71. Alanna
    December 16th, 2008 at 13:52 | #71

    Nick
    “Australia has become a one-trick economy. The only thing we do well is dig resources out of the ground and flog them overseas”.

    Shades of Nauru in the making? We could become the detention centre for the rest of the world.

  72. December 16th, 2008 at 14:31 | #72

    Alanna,
    Perhaps we should just leave it all in the ground and the workers can earn less by doing some metal bashing (on more expensive metal) around Sydney. That makes perfect sense.

  73. Alanna
    December 17th, 2008 at 22:53 | #73

    Andrew,

    I agree – lets leave the minerals where they are. Expensive metal recycling sounds very appealing right now. How many bicycles would one tonne of expensive metal yield? We could export the bikes to China, reduce both Australia’s and China’s carbon emmissions in one go, and there would be fewer undesirables clogging up parking spaces in the financial CBD.

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