Right Pulse

Now is not the time to run-up a $100 billion plus Federal debt under Gillard – Telegraph:

The US, UK, Germany, France, and Spain are all at risk of an “interest rate shock”, either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large.

Countries that “fail to demonstrate the level of social cohesion required to stabilise debt” will lose their AAA rating. “Intra-generational” conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards.

This is not a new warning. I have blogged on many occasions about sovereign risk overseas. Unfortunately Rudd-Gillard have increased Australia’s sovereign risk thanks to their reckless spending and attack on the mining industry. Comments from UBS today:

“It’s been getting more and more difficult to encourage international clients to look at Australian equities as an attractive asset class because of the political risk, the sovereign risk,” said Head, who jointly runs UBS’s equities unit with Robbie Vanderzeil. “They don’t want to be in a place where the rules change or the taxes change, compared with what they expected.”

It is beyond belief that Gillard’s new line is about her economic credibility and not risking the economy to Abbott. Rudd-Gillard attacks on private wealth extend to Telstra, the mining industry, mutual superannuation funds and the economically viable electricity generation industry. They have also basically destroyed the insulation industry and the housing building sector with their schools building programme, etc… The ALP will destroy the fishing industry with their marine park deal with the Greens and are seeking to do-away with large parts of agriculture with their water-buy back scheme. Not too mention what other nasty deals the ALP did with the Greens to get their preferences. The result being:

We are now as good as Argentina under Rudd-Gillard. You’d have to be extremely ill-informed or just blinded by prejudice to believe that Gillard – a one time Communist with no formal economic training- would make a better economic manager than Tony Abbott a Rhode Scholar in politics and economics.

Back at the beginning of 2009 this is how many jobs Wayne Swan said would be created by the stimulus package:

The Treasurer, Wayne Swan, claimed 90,000 jobs would be created by the package over the next two years, but, despite this, the unemployment rate was predicted to jump to 7 per cent by next year.

Moving on in time, Swan then said in mid-2009 that:

Mr Swan said the stimulus would create an extra 210,000 jobs and reduce the forecast peak in unemployment from 10 per cent to 8.5 per cent.

So even though their forecast of unemployment went up, the numbers of jobs created went up also. Now moving forward to the beginning of July 2010, this is how many jobs Swan said the stimulus has created:

“We have created 350,000 additional jobs over the past year. That is a very good outcome for the Australian economy when there has been very difficult circumstances elsewhere.

And this is what Gillard is saying now that the election has been called and she is behind in the polls today:

Describing herself as “a fighter” Ms Gillard turned to the economy as she pitched Labor’s case, arguing the government had created 450,000 jobs during the global financial crisis.

Funny how 100,000 jobs just magically appeared in one month, and all due to Rudd’s stimulus – apparently.

UPDATE

Paul Howes on Friday’s Lateline:

Is this the issue that matters to the 200,000 working Australians who have their jobs today solely because of Labor’s interventionist approach during the global financial crisis?

Someone in the ALP might want to make an effort to get their story straight. All the massive inconsistency makes the idea that the stimulus created any jobs in net terms not very plausible.

UPDATE II

Bob Hawke at the ALP party launch claimed that the ALP had created 500,000. Just take your pick – any number.

That’s right. The PM had a meeting with Dick Smith, who advocates the overthrow of capitalism to be replaced with an economic system that either does not grow or something. I can’t explain it but it seems neither can Dick Smith but here goes.

Dick Smith has it that because energy is produced from finite resources the whole capitalist economic system is unsustainable due to its survival upon growing markets and population. This situation, Smith argues, will eventually collapse the global economy due to the finite nature of resources. No energy no capitalism, etc…

Prime Minister you talk about a sustainable population. The problem is that our economic system is not sustainable, as it’s completely predicated on constant growth and any Government will be thrown out if it doesn’t have a growth in GDP every year. That means a growth in the use of resources and energy.

Now Dick Smith claims that Gillard gave no opinion on the matter. Really? Then what was she doing meeting with someone who is clearly devoid of basic facts? I don’t think it is any coincidence that Gillard associates with so many anti-capitalist and anti-population characters.

Well anyway, Dick Smith’s argument really depends upon what one defines as finite resources. According to the Australian Coal Association, based on current growth rates and assuming we don’t find anymore coal deposits or that coal fired plants don’t become any more efficient – massive assumptions – the earth has over 200 years of coal left. Then you add in uranium, gas, oil, etc… for all intents and purposes Dick Smith is harping on about an issue that may or may not become a problem in around 300 + years time. We can’t begin to imagine the state of technology produced by ‘evil’ capitalism by then.

Julia Gillard should stop wasting tax-payers time with cranks like Dick Smith.

At the moment Noble Prize winner in economics and former Bill Clinton advisor Joseph Stiglitz is touring the country as sponsored by the Economics Society of Australia, which is currently headed by the ANU. Predictably Stiglitz is aggressively and vocally attacking the Coalition’s fiscal conservatism in the media. His arguments are laughable but that’s for another time.

The ABC is giving Stiglitz  plenty of coverage, as if no one in the economics discipline disagrees with Stiglitz. At the same time the ALP is attacking the Coalition claiming that without the ceiling insulation programme and the like the economy would be in recession. Stiglitz and the ALP attack lines seem terribly close to each other. Why would the ANU bring to Australia during an election a person so obviously opposed to Coalition policies ? A person that seems to be re-reading ALP attack lines in the media. Coincidence? It would seem not.

The ANU is headed by former ALP foreign affairs minister Gareth Evans, previously it was former ALP leader Kim Beazely. The chief ANU sponsor of Stiglitz is a labour economist Bruce Chapman, critic of Howard’s tertiary education policies who once attended the Labor Fringe Program in 2009, an official ALP conference. So it is pretty clear whose politics Chapman is supporting.

It seems the ANU has decided to play politics. They have brought over a Democrat Party economist to specifically attack Abbott’s economic credentials and to lend public support to the ALP during an election. This move may have been in response to a recent tour by Harvard economic historian Niall Ferguson who is on the other side of the economic and political spectrum from Stiglitz. Ferguson attacked the ALP’s spending-tax-debt agenda last month.

…while Stiglitz praised Australia’s stimulus as ”one of the best economic policies I have seen, ever”, Ferguson said the size of the package – the third biggest in the world compared with the size of the economy – was disproportionate to the risks. ”I think the whole thing was an overreaction,” he said, arguing that more should have been directed to tax cuts.

How on earth could anyone seriously think and say that something like the ceiling insulation programme is ‘one of the best economic policies I have ever seen’. This is a programme were the cost to fix it is nearly as much as the initial cost to complete it, were nearly 100 homes burnt down and 4 people died. There are still nearly 250,000 houses yet to be inspected. As for the education building programme, all truly independent investigations have proven that government managed buildings cost nearly twice of private school buildings to build.

There was only one ABC reference to Ferguson’s visit, by contrast the ABC went to town on Stiglitz. Most readers already realise that the ABC and ALP are in bed together, but it is the blatant attempt by the ANU to play politics that signals a new chapter in the attempt by the left to capture government institutions in order to monopolize and stifle public debate and disagreement. It really is quite sneaky but brazen at the same time.

UPDATE

This is the upshot. What socialists like Joseph Stiglitz have to maintain is that joke government programmes like the ceiling insulation roll out and the education building rort were more important in saving Australia from recession than the following:

1. Australia’s stable and profitable banking and financial sector,

2. Strong export growth sector,

3. Strong fiscal position with low levels of government debt Australia-wide,

4. Stable housing market – despite the negative impact of the education building programme on that sector,

5. Automatic fiscal stabilisers like existing welfare programmes, and

6. The strong impact of monetary policy on the economy – especially the absence of USA style 30 year fixed mortgages.

Who is the ANU-ALP-ABC axis trying to fool? Their own followers and the ignorant. No one else that thinks about the issues for a moment would buy the left-wing spin that a ceiling insulation programme and an education building programme that is not even half way completed saved Australia from a recession that was meant to have occurred last year.

Still not convinced? Consider this counter-factual. Would Rudd’s ceiling insulation programme and the like have saved Australia from recession if Australia had the following?

1. A poorly capitalised banking sector on the verge of collapse,

2. A collapse in export earnings,

3. Chronic levels of public debt across all levels of government,

4. Falling house prices,

5. Suspension of welfare programmes like unemployment benefits, and

6. The maintenance of high interest rates and the monetisation of public debt by printing cash.

Hopefully this puts the ALP’s absurd claim that their wasteful programmes some how saved us all from impending economic doom.

The media’s interpretation of Abbott’s promise to keep interest rates lower than Gillard as some sort of hark back to Howard in the 2004 election is pretty weak:

Opposition Leader Tony Abbott has given a guarantee he would keep interest rates lower than a Labor government in a move that could backfire on him as it did for former prime minister John Howard.

Mr Abbott on Sunday said Labor policies and the size of the government’s debt were pushing up living costs and putting upward pressure on interest rates.

But in comments reminiscent of a promise made by Mr Howard during the 2004 election campaign, Mr Abbott suggested a coalition government would be able to keep interest rates lower.

If the media in this country bothered to give even a cursory look at recent economic history they would find that interest rates have been lower under the Coalition than the ALP for the simple fact that the Coalition has in past avoided the worst aspects of fiscal debt so common with the ALP.

What part of economics 101 doesn’t the main stream media understand? Fiscal debt  in a growing economy = higher interest rates. It isn’t rocket science. Even Rudd at the height of his arrogance admitted that the ALP’s debt was going to impact interest rates. In other words, see them go north beyond what they would have otherwise done without the debt and spend agenda of the ALP.

Count this as the third great media lie about Abbott during this election campaign. The first being that Abbott only recently decided to not push through Work Choices Mk II and secondly that boat people arrivals isn’t the real problem Abbott is making it out to be.

According to the IMF, Australia’s structural deficit is worse than the many usual European suspects.

Further analysis here. Despite Treasury’s best efforts over recent months to blame the budget mess on the Howard government, international analysis suggests that the structural deficit is all Rudd’s fault:

Treasury has now replied that “significant structural changes in the economy over the past quarter century” meant it would be inappropriate to stretch its methodology back to the 1970s. Instead, it presented structural balance estimates going back to 1971 from the Organisation for Economic Co-operation and Development and to the 1980s from the International Monetary Fund. As Costello points out, these OECD and IMF estimates suggest that the budget remained in structural surplus until the end of the former Coalition government. Treasury used to show him such numbers, he says.

“In fact, the only occasion in 40 years when a government managed to produce a structural surplus was between 1998 and 2007 — the 10 surplus budgets which I brought down,” Costello says of the OECD and IMF numbers.

A structural deficit/surplus is how the budget looks when the business cycle is taken out of the analysis. So if the economy was at peak output, would the budget still be in deficit? If it is then it is a structural deficit, meaning that spending is too high relative to tax rates and regulations. The budget would never go into surplus, only on the back of cyclical movements in the economy, like commodity prices, etc….

The IMF’s Fiscal Monitor report released this month had this to say about debt:

There is a negative relationship between initial government debt and subsequent per capita GDP growth. The fitted line (OLS) of a scatter plot of initial debt against subsequent growth over five-year periods shows a coefficient of initial debt of -0.025 (Figure 1). Taken at face value, this suggests that a 10 percentage point of GDP increase in initial debt is associated with a slowdown in per capita GDP growth of 0.25 percentage points. This magnitude is consistent with that obtained using econometric estimation (see below). Second, the average growth rate during periods of rising debt is lower than that during the periods of falling debt (Figure 2). 

The graphs are revealing, accessed through the link on page 63 of the report. They obliterate Rudd’s tax-spend-debt agenda.

A recent article in the WSJ by Allan Meltzer, professor of economics at Carnegie Mellon University makes much the same point:

Keynesians who think reducing public spending during a recession is a disastrous error should recall that they warned British Prime Minister Margaret Thatcher in 1981 that Britain would never recover if she continued with her tight fiscal and monetary policy during Britain’s deep recession. Mrs. Thatcher declined to take their advice. Expectations about Britain’s future changed for the better, and a long, productive recovery began soon after.

Greece’s government should take heart from her example. The new government in Britain might remember this as well. And so might the Keynesians in the Obama administration.

More historical background here. Peter Costello outlined in his book that he was given much the same warning when he took the Treasury reigns, and look what happened to the economy and budget.

The entire mining industry up in arms, international and local investors bewildered, foreign competitor governments delighted, billions in value destroyed on the stock market and in superannuation accounts, billions in projects either delayed or cancelled, threats of further electricity rises and job losses, all from Kevin Rudd’s 57 per cent tax on the mining sector’s ‘super-profits’:

GAS producer Santos has joined the revolt by big mining against the Rudd government’s resources super-profits tax, deferring for up to six months a decision on whether to build a $15 billion LNG export terminal in Gladstone.

…Mining giant Rio Tinto yesterday confirmed that it was reviewing all its Australian projects, including an $11bn Pilbara expansion plan, while it assessed the potential impact of the government’s resources super-profits tax.

I wonder how the state ALP governments are going to react? Will they join WA in the long list of dissatisfied parties? Rudd is essentially destroying the value of private property, Hugo Chavez style. Sinclair Davidson, professor in the School of Economics, Finance and Marketing at RMIT:

This week, however, the Rudd government moved into serious sovereign risk territory. The Henry Report defines sovereign risk as the risk that future government policy will reduce the value of investments. People are going to start noticing that property rights are under attack.

One of the more bemusing aspects of the Henry Review occurred when it acknowledged that changes in government policy create perceptions of sovereign risk but then claimed that the mining tax would lower that risk. That’s not what market participants seemed to think. It isn’t really appropriate that some Canberra bureaucrat lecture investors on the incidence of sovereign risk.

Well when you have a couple of confused individuals like Ken Henry and Heather Ridout running the review what do you expect? How about levying a super profit tax on the job-network sector that made Rudd’s wife so wealthy?

The New York Times claims that Australia and Canada are some how ‘afraid’ of a global bank tax.

A more surprising bit of opposition comes from regulators in Canada and Australia. Those countries survived the bust better than most, in part because of tougher oversight of their financial sectors. Now, with the International Monetary Fund suggesting a globally coordinated bank tax, Canadian and Australian officials are saying that their banks shouldn’t be punished alongside American and European banks.

Ah, no. Banking regulation in Australia at least is far more liberal (not in the American sense of the word) than in the USA. Australian banks avoided the sub-prime crisis for two main reasons:

1. Then Treasurer Peter Costello made a gentleman’s agreement with the banks that they would not involve themselves in the sub-prime mortgage market. By contrast, US regulators and some law makers encouraged and at times forced banks to make sub-prime loans to customers of dubious credit history. There was no regulation stopping Australian banks from issuing sub-prime loans to customers. They just chose not to because if they lost money they knew there would be no government bail-out.

2. Australia and Canada do not have the socialised mortgage policies of the USA, which is the main cause of the financial crisis. The greed that resulted was merely a symptom of the problem, but not the cause.

I’ve previously linked to the following WSJ article about the differences between the Canadian and American mortgage markets. Here it is again:

Canada has no housing GSEs. Mortgage interest is not tax deductible. It does not have 30-year fixed rate, freely prepayable mortgage loans. Mortgage lending is more conservative and much more creditor-friendly….Canadian mortgage lenders have full recourse to the mortgage borrower’s other assets and income, in addition to having the house as collateral. This means there is little incentive for borrowers to “walk away” from their mortgage…..Most Canadian mortgage payments are made through automatic debit of the borrower’s checking account—a technical but important point….Canadian fixed-rate mortgages typically have prepayment penalties to protect the lender and the interest rate on the loan is fixed for only up to five years.

Same in Australia. Most US mortgage products are backed by two government business enterprises in Mae and Mac. Enterprises that are bleeding money and create a massive moral hazard problem for banks in managing risk. When borrowers and lenders do not have to take the full risk of the lending product upon themselves, then there is little incentive to scrutinise customers. Especially when the government demands loans be made to customers based on grounds that have nothing to do with their capacity to repay the loan – like race, etc… The issue is not about how much regulation, but the right sort of regulation. Something clearly lost of the NYT and their campaign to tax banks around the world. The NYT continues:

So if the United States and Europe decide a bank tax is in their best interests, they do not need to be dissuaded by Canada and Australia. No matter what, we can be confident that the world’s banks won’t all move to Toronto and Sydney.

The rest will just move to Japan and Hong Kong and escape the clutches of ill-considered banking regulation.

After weeks of speculation Wayne Swan has come out against Obama’s great big global bank tax:

The Treasurer said the government had concerns about the IMF proposals because they were broader in scope than just dealing with the costs of a particular corporate failure. “They encompass a discussion about the impact of financial failures on the wider economy and how that should be dealt with,” he said.

Australia was among countries including Japan, Canada and Switzerland that raised objections to the IMF’s proposal for a bank tax at the G20 finance ministers meeting.

The US and much of Europe took a positive view. US Treasury Secretary Tim Geithner said the US would go ahead with a bank tax, subject to Senate approval, and he believed other countries would follow.

More like other failed countries will follow. Swan is even opposed to raising capital ratios in Australia. So Swan is hanging tough. I suppose he has other things on his mind, like the May budget. This from Canadian Finance Minister:

Mr. Flaherty said his Western counterparts could learn from Canada and Australia, which have sketched out plans to return to budget balance. And he warned the economic forecasts from certain developed economies incorporate “too much optimism,” in terms of projected growth and the health of their balance sheets.