Bring back the Drachma June 21, 2011

Howdy All,

I came across this article written by Peter Morici who is a professor at the Smith School of Business, University of Maryland School, and former chief economist at the US International Trade Commission. It is fair to say that Peter is using a significant amount sense by addressing what is a most difficult issue.

Greece does not have a liquidity problem – it is insolvent. Without transfers of wealth from richer states like Germany and France to retire significant amounts of its sovereign debt, Athens must restructure its bonds and essentially default on significant portions of its obligations to bondholders.

Germany and France are at their wits’ ends, because their banks hold a good deal of that debt and would take big losses, and other poor EU governments would likely follow Greece’s lead. Paying off Greek creditors may be distasteful, but covering the problems of all the EU governments in trouble is beyond the capacity of Germany and the other richer EU states.

To patch things over for another year, Berlin and other rich governments want Athens to impose more cuts in government benefits and wages in exchange for more loans and relatively small private creditor haircuts. And they want Athens to sell off valuable state-owned assets to help lubricate the deal.

The Greek people have already taken major cuts in benefits and salaries, and they understand gradualism is not solving the problem. They shouldn’t want their economy bought up by the Germans and others, and they are correct to expect their government to consider other, more reasonable solutions.

The amount of aid the Greek government will receive through current negotiations will likely result in another crisis next year or the year after, and then more cuts in benefits and wages. Importantly, these deals do nothing about private debt – the mortgages, auto loans, and credit card balances Greek citizens are expected to pay as their salaries are cut and cut.

As European integration progressed – for example, with the 1992 Maastricht Treaty that harmonised taxes and product standards, and the 1999 introduction of the euro – European voters in poorer states increasingly expected health care, job security and retirement benefits on a par with the richer states. Civil servants expected to be more adequately compensated – yes “adequately”, because examination of Greek salaries does not reveal payments that are very generous by German or French standards.

Sadly, these efforts at deeper market integration did not give Brussels the power to tax richer Germany to subsidise Greek social services in the way that Washington taxes New York to subsidise health care and retirement benefits in Mississippi.

Over the decades, poorer countries have borrowed too much to keep up, and now without continuous EU bailouts, they will default on their debts.

Prior to the euro, as poorer countries approached such crises they could let their individual currencies fall in value against the German mark to make their exports more competitive, grow more rapidly and boost debt payment capacity. It meant retirees and tourists from Germany and other rich countries could more easily afford to live in or visit poorer countries than the reverse – a small price to pay for keeping the ship of state from capsising.

When countries are broke and locked into the same currency area with their major export customers (as Portugal, Ireland, Greece, Spain, and Belgium currently are), their only option is deflation – cuts in government spending, wages and ultimately prices that make their exports more competitive and boost debt service capacity.

Essentially, this is what Germany is imposing on Greece, but citizens have mortgages and other debts to pay just as the government has bonds to service. Deflation makes private debt nearly impossible to honour, and many Greeks will lose their homes and just about everything else to foreign creditors before the madness ends.

The only real option is to drop the euro and resurrect the drachma, unilaterally remark public and private debt into drachma, and let the drachma float to a value on currency markets that balances Greece’s export revenues against its imports and debt servicing obligations.

Abandoning the euro for the drachma would cause Greek GDP and debt servicing capacity to grow more rapidly. Whatever losses imposed on private creditors, richer EU governments and Greek citizens, those would be smaller than the total losses imposed through an annual ritual of crises, aid packages and debt rollovers – conditioned on ever more draconian austerity – and the ultimate absolute default when the final charade ends.

Some tough times ahead for Continental Europe. Fingers crossed that they make the right decision.

With thanks

Luke Eres

Consumer caution in Australia June 13, 2011

Hi All,

I trust all is well.

It is fair to say that the Australian consumer is a little cautious at present.

Retail sales are down, saving rates are up and there is an evident slowdown in household debt. All this bodes well for it implies that we are managing the mining boom without the usual post boom hangover.

For further information click the link to Dr Shane Oliver’s most recent article.

20110613 Olivers Insights Consumer Caution in Australia

Bidding you all a wonderful day

Luke Eres

How about some accountability please …. June 8, 2011

Morning All,

Hopefully you are managing to stay warm. She’s been a cold one!

I’m not sure about you but I am starting to become increasingly bored with economists and financial commentators who continually get it wrong because they live in what could best be described as La-La Land.

For those of you who aren’t aware, the Reserve Bank left the cash rate unchanged at 4.75% at yesterday’s Board meeting. While this came as no real surprise to most of us, we have over the past week watched economists and financial commentators alike fall over themselves to explain why rates would be increased.

To be honest, these commentators are nothing more than air play hogs. They love seeing themselves on the telly of an evening, they love hearing the sound of their own voices and yet they can say what ever tickles their fancy and be accountable to no one. Essentially all they are aiming to do is lift the anxiety bar for individuals by making them worry about issues that are not real. Not only is this irresponsible but it is just plain wrong.

My advice to these guys is pretty simple.

Stop sitting in your ivory tower offices and get out on the street. If you actually bothered to do this you would know that the Australian economy at the exclusion of the mining sector is struggling. All the numbers are pointing to a slow down and when you speak to businesses and consumers alike you can sense a fair degree of caution. By taking these aspects into account, it is easy to see why rates were never going to be raised! Also cut the Reserve Board a bit of slack. Yes they have made mistakes in the past as well but if any one group had a good handle on the economy you would expect it to be the Reserve Board.

In future can I suggest that these economists and so called financial commentators stop and consider what they are saying. Increasing people’s anxiety simply because they like the sound of their own voice is neither responsible or entertaining. Perhaps they all need a good dose of Ronan Keating’s song …. some say it best when you say nothing at all!

I feel so much better now

Bidding you all a most amazing day

Luke Eres

Carbon Tax …… WTF June 7, 2011

Hello All,

No doubt you are trying to keep warm. Yes winter is definitely kicking in.

For your convenience please find attached a Carbon Tax Discussion Paper. While it remains our intention to remain “A Political” we do in this case believe that climate change is a global issue requiring a global solution. Standing alone whilst noble carries with it significant risk for all concerned.

We hope you enjoy our thoughts and we welcome your feedback

201106 Carbon Tax

Have a great day and stay warm

Luke Eres

Rates on HOLD – Common Sense Prevails June 7, 2011

Statement by Glenn Stevens, Governor: Monetary Policy Decision

At its meeting today, the Board decided to leave the cash rate unchanged at 4.75 per cent.

The global economy is continuing its expansion, led by very strong growth in the Asian region, though the recent disaster in Japan is having a major impact on Japanese production, and significant effects on production of some manufactured products further afield. Commodity prices have generally softened a little of late, but they remain at very high levels, which is weighing on income and demand in major countries and also pushing up measures of consumer price inflation. In response, a number of the countries with stronger expansions have been moving to tighten their monetary policy settings over recent months. Overall, though, financial conditions for the global economy remain accommodative. Uncertainty over the prospects for resolution of the banking and sovereign debt problems in Europe has increased over the past couple of months, which has been adding to financial market volatility.

Australia’s terms of trade are reaching very high levels and national income has been growing strongly. Private investment is picking up, led by very large capital spending programs in the resources sector, in response to high levels of commodity prices. Outside the resources sector, investment intentions have been revised lower recently. In the household sector thus far, there continues to be a degree of caution in spending and borrowing and a higher rate of saving out of current income. The impetus from earlier Australian Government spending programs is now also abating, as had been intended.

The floods and cyclones over the summer have reduced output in some key sectors. As a result there was a sharp fall in real GDP in the March quarter, despite a solid increase in aggregate demand. The resumption of coal production in flooded mines is taking longer than initially expected, but production levels are now increasing again and there will be a mild boost to demand from the broader rebuilding efforts as they get under way. Over the medium term, overall growth is likely to be at trend or higher.

Growth in employment has moderated over recent months and the unemployment rate has been little changed, near 5 per cent. Most leading indicators suggest that this slower pace of employment growth is likely to continue in the near term. Reports of skills shortages remain confined, at this point, to the resources and related sectors. After the significant decline in 2009, growth in wages has returned to rates seen prior to the downturn.

Overall credit growth remains quite modest. Signs have continued to emerge of some greater willingness to lend, and business credit has expanded this year after a period of contraction. Growth in credit to households, on the other hand, has softened, as have housing prices. The exchange rate remains, in real effective terms, close to its highest level in several decades. If sustained, this could be expected to exert continued restraint on the traded sector.

CPI inflation has risen over the past year, reflecting the effects of extreme weather and rises in utilities prices, with lower prices for traded goods providing some offset. The weather-affected prices should fall back later in the year, though substantial rises in utilities prices are still occurring. The Bank expects that, as the temporary price shocks dissipate over the coming quarters, CPI inflation will be close to target over the next 12 months.

At today’s meeting, the Board judged that the current mildly restrictive stance of monetary policy remained appropriate. In future meetings, the Board will continue to assess carefully the evolving outlook for growth and inflation.