Comments on: DebtWatch No 26 September 2008: Losing control of the margin?

By: Michael Holt

Michael Holt — Fri, 26 Sep 2008 11:58:04 +0000

Debt to GDP is not 170%. GDP is about $1000 billion. Australia’s foreign debt was about $500 billion before our dollar dropped.

The Reserve Bank holds most of Australia’s foreign debt. The Current Account Deficit puts Australian dollars on the world market that no one wants. These dollars are mopped up by the Reserve. Yes, apart from the Aus dollar at 98 cents: being caused by currency speculators waiting for the $US to bottom.

So the Reserve sets the price of $Aus, like goldilocks, not too high nor too low, according to the economic circumstances.

Reserve banks borrow printed money from each other. Currency swaps were only stopped as it made blatantly obvious that Reserves were printing money to lend to each other. Debt is not a problem: mopping up debt with printed money possibly could be.

We could have a 15 year Japanese bubble, yet.

The best contribution for the esoteric elite e.g. (Steve Keen) to make, is to put the plain truth on public record.

What does it achieve by testing out the general public. Even if they have informal expertise, their thinking will never make a difference in contributing to a better world.

By: hyperproductive

hyperproductive — Sun, 14 Sep 2008 21:54:52 +0000

Hey Emil, Oracle, definitely no malice intended.

It was more a stream of conscience, i didn’t mean to imply the Oracle was caught up ‘irrational exhuberance etc’.

I’d personally like to see a big readjustment in currency valuations so that nations can compete on an equal footing. I agree it is ‘rational’ to to go make something cheaper where you can, but to me, it should be cheaper because someone can do it better/smarter, not because someone can do it in a country whose currency is worth peanunts – and the peoples wages reflect this. To me, that is artifical comparative advantage.

By: Peter W

Peter W — Sat, 13 Sep 2008 03:25:10 +0000

Asset shifting from public > private > public balance sheets shifts costs & benefits in ways that are probably undesirable and seems to be somewhat cyclical. We change Govenment, they clear the national balance sheet, we wreck our own private balance sheets, we want to transfer it back. Do we wreck the national balance sheet again? Frankly it would be better if we all priced ‘risk’ appropriately. Those who don’t should fail. These are commercial transactions. If you don’t save enough and you over borrow to aquire an asset at inflated prices and recieve insufficient cashflow to amortise and own it, and that recipe fails for you, why reward the behaviour? Moral hazard!

By: Peter W

Peter W — Sat, 13 Sep 2008 00:59:22 +0000

I’m not sure nationalising mortgage lending is good public policy. Individuals get the benefit of the nations AAA credit rating but should that be extended to businesses as well (negative gearing rental property)?. What about all the other businesses that will be excluded AAA credit price, including all the recent infrastructure privatisation. Surely power ports roads etc are equally important to a functioning economy!

By: The Outback Oracle

The Outback Oracle — Fri, 12 Sep 2008 15:20:51 +0000

Peter, you seem to know a bit. We are with Westpac and the mortgage was being held by the Reserve bank? Definitely!

By: Peter W

Peter W — Fri, 12 Sep 2008 11:19:51 +0000

The RBA allowed something like a 1 year repo on the failed RAMS portfolio undewriting ~ $5 – $10 billion. It would be several orders of magnitude larger if the entire mortgage debt was nationalised ~ $1 trillion. The USA just did 1/2 of it ~ $5 trillion(US). It will make business real tough for all the deposit funded banks to make a competitive loan.

By: The Outback Oracle

The Outback Oracle — Fri, 12 Sep 2008 06:25:22 +0000

Peter
We sold our house recently and there was a bit of negotiation with the Bank. Let’s just say we are a good risk! However our Banking Manager was quite frank and explicit. The Mortgatge was being held by the Reserve Bank.
I remember the report of it happening about the time of the Bear Stearns crisis.
Again i am only speaking from memeory but essentlally I think this particular (one of the big 4) Bank was leveraged some 40X.
So, correct me if I am wrong, the mortgsges have already been nationaised here in Aus to try to prevent bank failure.

By: Peter W

Peter W — Fri, 12 Sep 2008 05:44:44 +0000

The main OECD nations nationalise their mortgage banking systems because my maths is roughly right. The USA did it last weekend and the UK is having the political discussion at present.

The missing 3% p.a. has to come from somewhere! Nations will choose… wages growth, eliminate deposit/mortgage margin (nationalise the debt), house price correction.

By: The Outback Oracle

The Outback Oracle — Fri, 12 Sep 2008 04:39:36 +0000

I dunno Peter….you just don’t get it do you!
Real Estate always goes up at 10% per year average, so a bit of negative return and increase in debt doesn’t matter. And…all the gain is tax free!!! Just ask any Real estate agent or Property Consultant.
A few years ago my son and I did a small DCF analysis on Sydney property. Given the leverage you can get on property, the cosseted interest rates, and the tax free status of gains, if you got a 3% REAL appreciation in the house price, the equivalent return required in a 100% equity investment elsewhere (say in some productive enterprise like a factory) was about 26%. The rate varies a little with inflation rates, tax rates etc but the order of magnitude stays the same.
Anyone wonder why Australians overinvest in houses?

By: Peter W

Peter W — Fri, 12 Sep 2008 00:57:17 +0000

The rough maths behind why house prices are not sustainable at 7.5 X wages.

Maximum rent 30% of wages (taxes, petrol, food etc will take roughly 70%)

1/(7.5/0.3) = 4% gross rental yield

Net yield will be ~70% of gross yield = 2.8%

Wage (rental) growth 4%

Total house return = 4 + 2.8 = 6.8%

Debt costs = 9%

Bank deposits = 7%

Prices at 7.5 X wages = -2.2% compound return