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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.

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  1. TerjeP (say tay-a)
    December 12th, 2008 at 17:18 | #1

    Does the US dollar ever go into backwardization?

  2. TerjeP (say tay-a)
    December 12th, 2008 at 17:19 | #2

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

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

  3. TerjeP (say tay-a)
    December 12th, 2008 at 17:20 | #3

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

  4. iconoclast
    December 12th, 2008 at 17:33 | #4

    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.

  5. Ikonoclast
    December 12th, 2008 at 18:22 | #5

    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.

  6. billie
    December 12th, 2008 at 18:43 | #6

    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.

  7. Ikonoclast
    December 12th, 2008 at 19:18 | #7

    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.

  8. rog
    December 12th, 2008 at 19:31 | #8

    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.

  9. MH
    December 12th, 2008 at 20:15 | #9

    ” 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″.

  10. MH
    December 12th, 2008 at 20:23 | #10

    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.

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

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

  12. Nick K
    December 13th, 2008 at 22:43 | #12

    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.

  13. Alanna
    December 14th, 2008 at 19:57 | #13

    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.

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

    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.

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

    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.

  16. carbonsink
    December 15th, 2008 at 10:32 | #16

    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.

  17. Alanna
    December 15th, 2008 at 10:43 | #17

    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.

  18. carbonsink
    December 15th, 2008 at 11:39 | #18

    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?

  19. Nick K
    December 15th, 2008 at 14:02 | #19

    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.

  20. Alanna
    December 16th, 2008 at 13:50 | #20

    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.

  21. Alanna
    December 16th, 2008 at 13:52 | #21

    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.

  22. December 16th, 2008 at 14:31 | #22

    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.

  23. Alanna
    December 17th, 2008 at 22:53 | #23

    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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