Ordinarily I’d simply post a link to a media report in either my Gems or Brickbats page. But this quote from Microsoft CEO Steve Ballmer shows that he really understands what is going on now, in a way that no other person in authority seems to have done as yet. The full report can be found at:
Microsoft resorts to first layoffs, cutting 5,000
Ballmer’s perceptive analysis of what is going on is:
“We’re certainly in the midst of a once-in-a-lifetime set of economic conditions. The perspective I would bring is not one of recession. Rather, the economy is resetting to lower level of business and consumer spending based largely on the reduced leverage in economy,” said Chief Executive Steve Ballmer during a conference call. For consumers, that may mean less discretionary income to spend on a second or third home computer, he said.
Bravo. That is precisely what is happening. It is also why, though government action might slow down the decline, ultimately it can’t prevent a serious decline in economic activity. That can happen only gradually as we slowly replace debt-generated spending capacity with income-generated capacity. What the government can do is remove the logjam standing in the way of that process, which is the crippling mountain of debt accumulated by the Ponzi financing behaviour of the last 4 decades (and in particular the last one). But that will require much more drastic action than simply bailouts: given the scale of debt accumulated, either the debt has to be devalued by inflation, or written down via government decree.
We’re still a long way from any government official or politician realising that. But the fact that someone as influential as Ballmer has put his finger on the problem implies that maybe that day of realisation is approaching.
January 23rd, 2009 at 8:32 am
I am someone keenly interested in economics, with no education in the subject, and I enjoy this blog enormously. Your comment above, ‘written down via government decree’ got me thinking and I would like to ask a question..
If the US were to negotiate a decoupling between oil pricing and US dollars, what would be the result on US inflation or deflation, if any?
It occurred to me that the demand for US dollars is somehow related to its reserve currency status, and that status is to some extent related to its connection with oil. If this connection were removed presumably this would result in a comparatively greater demand for domestic produce within the USA, stimulating the domestic economy. Would it also reduce the trade imbalances, that ultimately supplies the incentive for cheap credit to be extended in the first place?
January 23rd, 2009 at 12:17 pm
This is indeed an insightful comment from a phenomenally successful businessman. I can’t help wondering about his motives, given that the truth usually takes second place to “what’s good for Microsoft”. However, I congratulate him on expressing this view and hope that some of our businessmen, politicians (and even economists) will soon see the light.
January 23rd, 2009 at 12:29 pm
Steve,
What do you think would have been the best way to use that $10 billion that KRUDD handed out?
Was it good the way it was spent?
As you say, we need to focus on income generating investment, and paying off credit card debts (or any debts)with that money won’t solve the problem will it?
Would it have been better not to have touched that money at all and kept it to invest in whatever income generating scheme Aussies would be good at?
January 23rd, 2009 at 2:26 pm
And along with that worldwide GDP reset, as you have so clearly articulated on this blog Steve, we will see huge swathes of jobs go that were dependant on debt fuelled spending, jobs located either in Australia or overseas. Jobs that support mortgages.This isnt such a brave call, many postcodes are registering 20% declines already;
“Brisbane house prices could face a fall of up to 15 per cent this year, according to a Gold Coast based property analyst.
Midwood Report author Bill Morris said the average price of homes in Brisbane had already fallen 5 per cent in the six months to December 2008.
He said this “unprecedented decline” in house prices was worrying and the biggest fall recorded since 1980.
Mr Morris said house sale numbers had also plummeted by 36 per cent in the same period.
He said the sales numbers of 4242 were the lowest for any six-month period since 1980.
Mr Morris’s views are in contrast to many other commentators who say population growth and a collapse of new home construction will underpin demand and stop dramatic price falls”
http://www.news.com.au/couriermail/story/0,27574,24949022-3102,00.html
The collapse in the Chinese economy I was commenting on last and earlier this week has now been outted in public view. It will get far worse. And no ammount of spending by KRudd will fill the hole left behind by the retrenching of Chinese orders to Australia.
The huge US economy is resetting as Ballmer indicates. Gone will debt/credit fuelled discretionary spending- saving is the new black in the US. The same is occurring in all developed economies.
The real danger to Australia here is what will be Krudd’s response? If he decides to send Australia finances deep into the red (as other nations seem hell bent on doing) in a futile effort to counter these forces with deficit spending, Australia will suffer much more arduous circumstances than would be the case otherwise. This is THE big test for KRudd.
January 23rd, 2009 at 2:28 pm
I am looking at the economic fact sheet for Australia 2007/08 http://www.dfat.gov.au/geo/fs/aust.pdf
with 2 observations:
1: Number one export country is listed as Japan with 18.9% followed by China with 14.1%. I realise things might be different for 2008 but I am sure Japan is still a SIGNIFICANT enough export country to matter for Australia. I don’t see the effects of Japan’s demise on Australia much mentioned in the news. Why would that be the case???
2. The trade deficit / current account balance for Australia in 2008 was 4.9% of GDP, down from around 6.4 the year before. The trade deficit for the USA is 4.6% of GDP. So we’re not looking better than the USA in that regard. http://www.dfat.gov.au/geo/fs/aust.pdf.
Kevin hails our banks as being much better regulated and managed (8% reserve requirement???). Apparently, if you want to be anywhere during a world recession it would be here in OZ. Banks around the world are going under while ours stand solid and proud.
The ASX just went down 101 points to 3385.8.
We’re so freaking doomed.
(borrowed line from the mogambo guru).
I really wish our govt would just let those banks and all the other corporations / industries go broke and let something new & better rise from the debris. We’ll have a crisis sooner and later, better sooner than later.
Hey, we’ve got honey bees, chickens and an ever growing veggie garden. I think about storing some diesel and food supplies for say, 3-5 months. Maybe goats would be a good idea too.
The only question for me is how will I pay our mortgate (our only debt) when the interest hits double digits and/or my job goes? I Better get back to work now…
January 23rd, 2009 at 3:08 pm
Am i mad to think that the average small weatherboard home in inner Melbourne should go for $150,000 to $200,000 max?
January 23rd, 2009 at 4:39 pm
Hi Steve and ‘al49er’, In absorbing the fact that ‘debt’ will need to wash away from the economy, what does our (and the west) future gdp growth rates look like? especially with our long gone manufacturing industries offshore? surely we must be looking at some very slender growth for many years. If as ‘al49er’ describes we are all in for a leaner time “socially” (less debt)the consumption ramifications (oz ‘consumption’ 65% of gdp)must be large.
January 23rd, 2009 at 7:56 pm
Thanks ‘bullturnedbear’for the very helpful definitions on derivatives which I have committed to file together those from ‘MACCA’,
‘tommyt’ and of course Steve.
Also knew ‘prudentsaver’would come back with some insightful comments.
Those people who are talking about making changes in their lives, saving, being more thrifty and considerate in their spending etc seem to be the sort of people that are more naturally “savvy” (not Spivvy, ‘tommyt’)
and “streetwise”, can ‘sniff the wind’ and make the necessary adjustments for their own well-being and survival.
I am not too confident that the required broader sociological changes will occur quite so easily.
Their is still that massive if not majority group who ‘haven’t got a clue’ and who will become very very shocked and distressed when things really begin to bite.
We tend to acknowledge those who are easily recognised as socially disadvantaged but are genuine and triers. But we don’t give as much attention to those with a more natural
penchant toward socially irresponsible or criminal behaviour and I expect this group will become very problematical in Australia and throughout the world. I think reports indicate that things are getting a bit stirred up in China but I think from reports they seem to face a different set of issues including guest workers etc.
I also believe that the climate caused by the
GFC will be fertile ground for unexpected leftfield incidents with the potential to exacerbate the situation in ways we might not yet even imagine.
As ‘bulturnedbear’ intimated, it is a terrific discourse with many insightful contributions,
links and perspectives to keep us all ‘connected’ whilst awaiting Steve’s successive instalments.
thank you all.
January 23rd, 2009 at 8:12 pm
Hi Steve,
Congratulations on a great site – made even better by the quality of input by contributors like bullturnedbear. I have been reading this blog for almost a year and it has helped prevent me from making some large financial mistakes – many thanks.
Steve Ballmer is likely to be followed by many others in business and the main stream media in the near future in “outing” the true nature of the economic and financial mess we are now in. Politicians and financial planners are likely to be the last in line.
This article from “Financial Sense” (although I do not agree with all conclusions) is very interesting in its identification of the true problem and refers to Minsky and the “Austrians” in its assertion that our current capitalist system is on the verge of failure.
http://www.financialsense.com/fsu/editorials/schoon/2009/0121.html
I am a lot more optimistic – IMHO for a best case scenario we are likely to experience a small Depression (we have moved past Recession scenarios) or (if world governments continue to ignore the root problem) a severe Depression.
I have spent the past 30 years in economic and financial stats and policy areas of government and Steve’s comments on suggestions that he should be involved now in developing the solutions are (unfortunately) spot on. Steve is more likely to be invited to help well after the mess has covered the walls and is a lot harder to clean up.
January 24th, 2009 at 2:01 am
Steve ,I’m wondering what’s your take on the recent trend with debt downgrades within the EU. Countries like Spain, Italy, Greece, Portugal, Ireland are having their national debt downgraded, and the yield on their 10 year notes are going up, it’s worst in Greece. Even France are displaying the same trend, although they are still AAA.
http://www.bloomberg.com/apps/quote?ticker=GFRN10%3AIND
Are these countries moving towards hyperinflation and are the Euro going to blow up? I guess unless Germany spend more government money, the Euro Zone might face a mix of to low interest rates in countries like Greece (the spread between 10 year and short term rates set by the ECB would become 5,5 % if the ECB went to 0 %, I think that’s why they can’t lower interest rates any further, even rates are still to high for Germany.
January 24th, 2009 at 9:29 am
Thanks Stats Watcher,
For reasons that I’ll elaborate on in the February Debtwatch, I disagree with some of the analysis in that Financial Sense post, as well as the conclusions. Unfortunately, I’m probably more pessimistic than you; given the scale of the debt we’ve accumulated, and our dependence on growing debt for aggregate demand, I expect we’re in for a serious Depression no matter what, and it will be prolonged for as long as governments continue trying to help the private sector validate debt that should never have been issued in the first place.
January 24th, 2009 at 9:33 am
I expect we’re in for currency collapses galore Prudentsaver,
But as you probably know, I expect deflation rather than inflation overall. Government’s can’t create inflation simply by increasing fiat money in a debt-encumbered credit-based economy–unless they’re willing to “print” a factor of ten more dollars than they’ve yet done, which I doubt. So I expect we’ll see international finance collapse and debt defaults galore, with cross-border interest rates becoming prohibitive, but domestic nominal rates heading for zero amid collapsing prices and incomes.
January 24th, 2009 at 9:42 am
The problem with a sum like that in our current crisis is that it’s trivial compared to the scale of de-leveraging we face, let alone to the scale of debt itself. It helps, but $10 billion is only half a percent of the most conservative measure of Australia’s outstanding private debt levels. It would probably pay just two weeks interest on the actual level of debt.
When the deleveraging gets up a head of steam, even a deliberate 1% reduction in debt levels would take three times as much money out of the economy as the $10 billion injection pumped into it.
But it kept the wolf from the door for a few people, so I don’t oppose it, especially when our government debt levels are as low as they are. But ultimately the only way out of this crisis is a still painful route of debt reduction via either inflation (which I don’t believe our economic managers know how to create) or legislative debt writedowns. Ironically I think attempts to bailout the economy financially like this have to be given time to fail before more serious measures will finally be considered.
January 24th, 2009 at 9:48 am
I expect the US dollar would plummet Frank.
As for its effect on inflation, it might simply wipe out a section of US consumption rather than drive its price all that much higher. Sales of Asian-manufactured consumer goods have already plummeted, even though the US dollar has appreciated largely so far, thus making these goods notionally cheaper. If the dollar’s oil prop were removed and its currency depreciated, sales of these items might evaporate even more.
There might be some domestic stimulus in that, but don’t forget that debt dynamics dominate here. Revival via domestic consumption is still a long way off.
January 24th, 2009 at 10:13 am
Hi Steve,
You say our economic managers don’t know how to create inflation. If you were given “control” would you be able to manufacture it?
Additionally, do you have any thoughts on what a debt write down might mean for savers, people’s super, etc?
Thanks for the blog by the way.
January 24th, 2009 at 10:27 am
By increasing wages across the board, and simultaneously letting corporations know they could pass on up to 99% of the increase in their costs as price increases–but no more.
The problem with trying monetary means to cause inflation–which Bernanke is doing right now–is that in an overindebted credit-money economy, the increase in fiat-generated money is more than offset by a collapse in credit-created money. That is apparent in the US data right now (though there is still a time lag to be taken into account). As a result, the money supply in toto can fall, even though the government is trying desperately to increase it.
In Japan’s case, even in a country with a high personal savings rate, increased fiat money was completely absorbed into private debt reduction. Japan tried a 30% increase in base money one year, only to see the rate of deflation accelerate the year after.
An increase in wages on the other hand would force companies to put up prices, and workers would have no option but to spend the increase in their nominal wages.
However this idea has Buckley’s chances of being attempted. I proposed this approach in a paper on debt deflation as a potential cure for Japan back in 2000, with zero expectation that it would be tried because neoclassical economists are so beholden to their fallacious theory of wage determination that they wouldn’t even consider centralised wage fixing, let alone an orchestrated increase in money wages.
January 24th, 2009 at 10:28 am
On the savers and super front, I think the latter is largely doomed no matter what–massive losses on shares and property will ultimately be crystallised. Savers, on the other hand, would do quite well out of a debt write-down in the context of overall deflation.
January 24th, 2009 at 1:44 pm
Hi Steve.
Here’s an article on how to shoot the messenger.
Seoul Cracks Down on an Internet Financial Guru
http://www.time.com/time/world/article/0,8599,1873346,00.html
It appears this bloke has been reasonably accurate at picking corporate collapses and the extent of the downturn and has attracted a huge following. So… the South Korean government has arrested him. He’s been arrested for supposedly spreading ‘misleading’ advise about the economy. Imagine if they instituted that here, half the financial community would be in Jail for talking it up when it continues to head down.
January 24th, 2009 at 2:48 pm
Thanks ‘Stats Watcher” I liked the Darryl Schoon article, this being 1 passage among a number.
“When people have their eyes shut and their minds closed, they will not see nor understand what is happening to them. Trust me on this, although many will not understand what is about to happen, it will not prevent it from happening.
What we are about to experience is an economic tragedy in personal terms that will exceed anything in recent memory. Even the Great Depression of the 1930s will not equal what is now about to be; and those who thought their adherence to a belief system about God was faith are now about to find out the difference.”
Thinking about how upset people are with losses of 15% to 25% or even more in the capital value of their super funds. Imagine
how distressed and they will be when they learn that this is not a one-off but a continuum.
Generally this is a “civilised” group whose reactions will probably translate to writing articles and ‘letters to the editor’, attempting to find a politician to vote against, maybe even marching across Sydney Harbour Bridge with ‘genuine reason’.
What about ‘uncivilised’ people when ruination visits upon them? How might we expect they will react?
We live on a small property and the GFC has really further highlighted the value of having a vegetable patch, with the help of the ‘mobile butcher’ transferring three of our lambs to the freezer, where we also put 6 rabbits after a recent hunting trip, and our water is stored in a tank from those rare occasions that it does rain.
Having ‘lost everything’ as a result of being a ‘silent partner’ in a business that failed when interest rates went from 9 to 18% in about 6 months (this being the upshot not cause – which was my own bad judgements).
Then marrying for the first and only time (I read the contract, understood what it meant and I endeavour to abide by the commitments I make. I also understand it is not a mechanical object and the excuse ‘it didn’t work’ is not valid) at 43, my wife and I determined a number of things about how we would approach life together.
We would pool personal resources and attempt to utilise them in the best mix, with the objective of attaining the best life/work balance.( going well so far)
If we were fortunate enough to have children
we would always have one of us at home to ‘raise them ourselves’. (we did and we have)
The almighty dollar and ‘maximising our income’ for its own sake or that of indulgence, would not be dominant in our strategy.(it hasn’t been)
The financial part of that strategy, after we bought our home, was to do everything within our means (without compromising the above) ‘to pay off the mortgage and other debt’. (we virtually have, though we have no savings)
Enjoying the inherent qualities of the process and fruits of working to maintain a sound marriage, and truly embracing the product and nurture of our union( raising and enjoying the kids), would be principal in our lives. (it has and continues – see dividends)
We would place a very high value on good health and the need to ‘work’ to retain it.
(a journey not a destination, still being travelled also see 1 above)
We would eliminate as far as possible life’s crappy minutee and spend a bit of time trying to understand how the systems (social, political, financial etc etc) work.
(we have, and the last one is why we’re here)
There are other things, but you get the drift.
NB , some will read this is being self-indulgent – it is not intended that way.
More a reflection on the “dividend we and others are receiving from our nonfinancial investments”, having rejected the advice/social pressure to follow the prevailing ‘way of the world’and become part of the rat race.
It is also a way of putting the proposition that, like it or not, more and more people will be driven to reassess what they call ‘capital’ AND their ‘valuations’.
Steve, ‘bullturnedbear’, ‘prudentsaver’ and others rightly emphasise the technical
economics and financial and monetary system issues, others like ‘tommyt’ and ‘MACCA’ at times as well as myself and others no doubt, like to consider the sociological aspects and ramifications.
Taken together it is all pretty interestingand intriguing, if at the same time scary.
January 24th, 2009 at 5:57 pm
Hi Steve,
I figure myself extremely fortunate to have come across you and your profound explanation for the worlds current state of affairs.
I am nearly 30 and have not bought a house. It has just never felt “right”. The prices have always slightly been out of reach for the savings that I have had at the time. I am an engineer (single), and earn good money. I don’t think my timing in life could have been any worse – yet now I can comprehend what has happened, and how blatantly wrong our governments economic management is. It scares me that I live in a country that doesn’t understand how the economy actually works.
I have many friends and family relations think of me as weird and crazy for not “getting into the market”. I now firmly believe I will be ahead of many people my age in five years time. Having saved a large deposit, I will continue to wait until this madness ceases.
With the interest and understanding I have gained in your outlook and theory, I am seriously considering studying again. Knowing that current economic theory is in general incorrect, where can you recommend studying modern theory that may one day rid the world of these absurd situations?
To me there seems to be an obvious, major part of the solution for the future – and that is to tightly regulate the lending practices of financial institutions in times of economic euphoria. Surely lessening the “ups” and “downs” of these cycles is a basic, necessary goal. Without having had this enormous, falsified up, we wouldn’t be facing this dramatic mess for the next X years.
January 24th, 2009 at 7:35 pm
The idea of fixing things by increasing wages would be nice if increasing wages in the past hadn’t led to higher unemployment. Raising prices isn’t that easy, consumers can easily get upset and not buy or buy something imported, and wages increase immediately and increased income will take a while to flow back at a time when many business are having problems. What about government, they will be paying out more with a hoped for increase in revenue to match. Will it ? A significant amount of spending for both business and government is for capital works, this will increase in price with higher wages with no immediate increase in revenue.
January 24th, 2009 at 7:40 pm
Like and agree with most of your work Steve(that which I can understand anyway – the technical stuff is past me), but I have to take issue with the suggestion that the answer to this is to raise wages across the board.
What about the export industries? They cannot pass on the cost of the wages without losing market share and if Australia has any hope in coming through this it lies with our exporters. Last week I heard that the milk factories have reduced payment to the dairy farmers because of the falling world prices and at the same time a suggestion that Europe is going to ramp up their export subsidies.
You better prepare for ‘war’ with the NFF and the Mining Industry Council if keep to this line of argument.
January 24th, 2009 at 7:50 pm
Hi Steve,
what are yout thoughts regarding Gold and Silver bullion?
Taking physical delivery.
Yes cash is king for the moment but will cash be trash soon?
Where will they go over the next few years?
January 24th, 2009 at 8:41 pm
During the mid-80s I became very concerned at the balance of payments deficit that Australia was running and the associated build up of debt. My brief analysis of the stats at the time indicated that we were heading towards a “Banana Republic” at a rapid rate (well before Keating made his famous remarks).
As a result of those concerns I decided to pay off the mortgage as quickly as possible and became debt free – a feeling that still brings happiness every day.
However, as we climbed out of the recession of the early 90s and experienced the “good times” – I thought my analysis of debt and BoP must be wrong.
Then in September of 2007 my charting of the ASX indicated that we had broken out of the long term “high value”, like in 1987, and we were in for a correction. As I was waiting for the correction to “bottom” I heard Steve on ABC radio – once again I looked at the debt and BoP stats – hmmm a lot worse than the mid- 80s. What is even more concerning is that this happened at a time when we were digging up and shipping out resources like never before.
http://www.abs.gov.au/ausstats/abs@.nsf/mf/5302.0
Effectively – Australia is now “borrowing” $3-4 billion a month to pay the interest bill on foreign equity and debt. (Steve – I know this is a simplistic interpretation so please correct me if I am wrong.) This is likely to rise to $5 billion a month (or more) as our export markets dry up and the cost of refinancing debt increases.
January 24th, 2009 at 10:08 pm
Hi Al
I’m with you on the sociology. I think human sentiment starts the whole process. Whether boom or bust. It all turns on sentiment.
Hi Steve,
Has the “raise wages idea” been tried? Also has it been tried in a world where demand is crashing because sentiment has turned completely negative? Like is happening now with people switching from spending to saving?
The increased wages could allow more income for debt reduction (while only marginly increasing spending). The burden for this would be placed on an already struggling business. The business may try to raise prices, but with demand crashing the market will set the prices lower than the businesses need to remain viable. This will accelerate the failure of business and lead to greater unemployment and bring on the depression and deflation even faster.
January 24th, 2009 at 11:25 pm
The reason cash is king, is because it is the only way to pay your debts. The value of this “cash” is tied to the expansion of the “credit system” through private banking. This is what is so little understood by the hyperinflationists and the gold bugs. Gold has become a commodity, and “fiat dollars” have now suddenly become “gold”. I bet very few saw this comming. It’s a shame that so few “neoclassical economists” don’t have basic common sense and reasoning skills. A shame if it weren’t so serious!!
January 25th, 2009 at 12:01 am
For those of you with a “religious bent”, the solutions to this crisis are right there in the Old Testament. Every 7 years, debt was to be “forgiven” and every 50 years there was to be a “jubilee” which was basically the redistribution of all wealth. Forgiving debt every 7 years allows the geometric component of debt to be eliminated, and the redistribution of wealth every 50 years allowed the accumulated prosperity of the past to be evenly distributed thus empowering a new level of prosperity. It’s a shame that GREED has prevented so many religious people from recognizing these facts.
I think a critical examination of where we are right now would validate the above points beyond refute. Wealth is currently so concentrated in so few hands, that the economy is basically parilized. Geometric compound interest has finally met the wall of unsustainability….why is there so little common sense among economists?? GREED BABY GREED!!
January 25th, 2009 at 8:03 am
There are two major and looming problems with the Australian Banking system.
1. Australian banks are NOT WELL CAPITALISED AT ALL. A CAR (capital Adequacy ratio) of 8% means that a bank can lend 12.5 times its reserves. This model works like a charm when property prices (residential and commercial) are rising. An irony develops though.
As property prices rise, bank risk falls. But at some point in the future prices must fall. No system rises forever. For a time Banks think their risk is falling, so they continue to gear into the rises. The problem is that when prices start falling (and they are now) the risk levels rise dramatically overnight.
AUSTRALIAN BANKS BECAME DRUNK ON PROPERTY DEBT. Their profits skyrocketed. The crash in credit has already brought down many lending institutions in Australia. Only the majors remain. The crash in house prices will bring down all the banks. Only Government bail outs will keep them alive.
2. Somewhere between 30% to 50% of Australian bank liabilities (deposits and bonds) comes from overseas. This figure must run somewhere between $700B to $1.2T (does anyone have some exact figures). Risk aversion and demand for cash is rising around the World daily. The World is already pulling their money out of everywhere. When that trickle turns into a flood the Australian banking system is insolvent overnight.
The Sydney Morning Herald ran a story yesterday that KRudd and Swan were setting up a $4B fund to support property should the “banks and financiers have trouble rolling over the $75B in foreign lending that is due to roll over in the next 2 years”.
$75B is bull. They have conveniently counted only the foreign funded syndicated lending. Whilst they have ignored all other forms of foreign funding. This is political spin to start a story by saying we have a small problem. Later they can say the problem was bigger than we thought. Despite this, how can $4B help when $75B is the problem. $4B will rise, no doubt! The tax payers will be on the hook for 10s of billions. The real problem is that the $75B is over $700B. Australian banks are stuffed.
The best course for the government would be to let the weakest fall. Once this has run its course the Government should birth a new bank which is free of stupid risk and will be overrun by people desperate to deposit what little money they have left in a bank that is safe. Unfortunately this will only happen once the government and the people get sick of bailing out the failed banks. The cost to the taxpayers of the coming bailouts in Australia will be gigantic.
January 25th, 2009 at 8:27 am
More on Banking. This part is just crystal ball gazing now.
If the share market sell off that started Jan 9 finds a new low not too far from the current low. The Aussie banks will survive longer. If the Nov 21 lows are breached by another 25%, some Aussie Banks may be calling for government bailouts sooner rather than later.
I expect a rally in the markets after this current sell off. (to relieve the oversold position). I expect the rally to be the strongest to date. Once that rally sucks in enough bulls and many people think “this crises is over, we’ve solved it”. The next crash (new market lows) will be so big, that most people “holding for recovery” will either give up or it won’t matter because some of the companies they own shares in will be worth zero or close to it.
When this happens the Australian Banks will be on their knees and it will be better to have your cash well and truly out of them by then. Because cash will be very hard to come by.
My tip is that sometime between August and October 2009 the biggest market sell off will begin. The “point of recognition” will occur during or after that sell off. That is purely a guess based on history, sociology and some technical measures. I understand that many will disagree with my take. That’s cool. I’m happy to put it out there for ridicule.
This is just my lame prediction. Please do not rely on this to make investment decisions. Time is a terrible measure. It’s better to look for oversold or overbought conditions. I only lay out my time frame to show the urgency of personal action that is required.
January 25th, 2009 at 8:48 am
I’m talking global Halycon,
And not about a redistribution of income from capitalists to workers (though in Australia the shift to bosses has gone too far as well) but from financial capital to industrial capital. The whole point is not to increase real wages, but nominal ones and hence push commodity prices up while debt remains relatively constant.
January 25th, 2009 at 8:56 am
The opposite has been tried Bullturnedbear–cutting wages.
It was part of the reason for the depth of the Great Depression. All it did was maintain deflation, while real wages actually rose during the GD (for anyone that had a job).
My advice is a bit like what a driver should do after having lost control of a car while going around a bend: turn the wheels into the direction of the slide. That is the exact opposite of the natural reflex to turn even harder in the direction you want to go–but if you do that, you are doomed.
Ditto here. Neoclassical economists’ first reflex in a Depression is “cut wages, because it’s obvious that wages are too high, otherwise there wouldn’t be unemployment” (for anyone with an irony deficiency, I’m being ironic here). That has bugger all effect on real wages–because the cut in nominal wages is passed on to prices in a competitive environment amplified by deflation–and simply adds to the rate of deflation.
The opposite action–increasing money wages–could cause an instant jolt to inflation. Especially if it were centrally done and employers were told to pass on the cost increase (but no more).
But I am supremely confident that this idea will never be tested. Neoclassical economists might be dead wrong and actually have helped cause the current crisis, but their advice and their prejudices will still rule the roost in how policy makers respond to this crisis.
January 25th, 2009 at 8:59 am
Bullturnedbear, it sounds like you are a follower of Bob Prechter and the elliottwave guys?
January 25th, 2009 at 9:06 am
Steve, the only way that one can protect themself from the greatest depression that we are in is to own physical gold.Your theories are correct but while telling people what is coming i believe the public should be told how to protect themselves from the danger ahead.
January 25th, 2009 at 10:20 am
hi everyone, can anyone let me know (apologies if it has been raised before) if we should have ‘nationalised’ the banks last year? would this have ‘spooked’ the masses. I wonder what will happen after 1/10/2010 when the ‘guarantee is over? another guarantee? or failure of more banks?
January 25th, 2009 at 10:22 am
This might sound naive here but wouldn’t the housing bubble have been avoided if banks were only allowed to lend say 3 – 4 times the borrowers income. Therefore keeping house prices in check? Instead of the govt throwing money into housing grants why not pass a law that banks can only lend circa 3-4 times of a single borrowers income, most aussie loans are in fact “subprime” when one looks at the real income of the borrower.
This would drive house prices down to their real value – based on wages.
At the same time all the mugs that bought during the boom and basically got ripped off could apply for some kind of govt help ( first home owners grant money used to assist struggling current home owners ). As for investors, well they should be left to lick their wounds and accept their losses as they helped fuel this mess in the first place.
January 25th, 2009 at 10:54 am
To start paying off Australia’s debt we need to improve our balance of payments by around $6 billion a month). Possible actions to achieve this include
1. Increasing exports by 25% – this is not going to happen in the current GFC
2. Decreasing imports by 25% – this would result in a radical change in lifestyle (petrol imports are $3b and motor vehicles $1.5b a month)
3. Charity –unfortunately other countries are not going to “give” Australia $6 billion a month
4. Inflate our way out of the problem as Steve suggests – this is going to be very painful and will take many years of high inflation (something like 20% pa for a decade before debt becomes manageable)
5. Sell Australian Citizenships – 6,000 a month at $1 million each (I am not advocating this – just stating that this is an option for solving the problem)
Bullturnedbear – thanks for your “crystal ball gazing” – I think we are still a couple of months away from the next rally – February is going to be all bad news on the Stats and business reporting front. I would not be surprised if we see a further fall of 15-20% before the Ides of March.
Steve,
Your inflation solution will take many years to be effective (unless we end up with hyperinflation). What is your short term solution to the problem if other countries stop lending to Australia – given that we need $5 billion each month in new borrowings to support our lifestyle (let alone the roll over of existing debt)?
January 25th, 2009 at 12:10 pm
RE: cutting wages vs increasing wages:
Steve, I’m an employer and an exporter. The 98c Aussie dollar almost broke us mid last year. We had to reduce costs (almost all salaries) which meant either layoffs of cutting wages. In the end we did a bit of both.
I’d love to pay my people more but the money ain’t there. Higher wages is a lovely idea to avoid deflation, but please explain where the money comes from?
January 25th, 2009 at 12:36 pm
Hi Steve,
I guess I sound like a defeatist when it comes to solutions. But I think this depression (as tragic as it will be) is necessary. The wash up will give Gen Y and Gen Z a fresh start. I am hopeful that the masses will reject the Government bail outs in time and “failure” will be allowed to occur. Maybe I’m just being too hopeful.
In terms of wages. The Economists may think that they cut wages in the GD. Maybe it was just the deflation (and human sentiment) that cut wages. I think falling wages are both necessary and going to happen. It all flows from risk aversion and the resultant falling demand.
Unless wages, prices and debt levels reset much lower, we will just have another bubble in the medium term. A total wash out will give our World another 70 years before the current “mistakes” are repeated in some new form.
January 25th, 2009 at 12:41 pm
Hi Elliotwave,
Yes I have been reading and following Bob Prechter for a while. His take on events is very calm and counter intuitive. Very interesting.
Hi Stats Whatcher,
I agree. I think the current sell off will run through Feb and Marchish. Before a large rally begins.
I also fear that rallies will become smaller and shorter than we would normally technically expect. During 1929 to 1932 most if not all of the larger degree rallies were about a third retracement. None appeared to retrace 1/2 or 2/3s.
January 25th, 2009 at 12:59 pm
I’m doing that right now for the next Debtwatch Carbonsink,
The basic answer is that banks would be compelled to supply it–as they do under “normal” conditions when the extend working capital and maintain lines of credit.
But I hasten to add, I don’t expect this idea ever to be tried–I am aware of the resistance to it from all quarters. Instead we’re far more likely to see falling money wages–as we did in the Great Depression–but if anything rising real wages (for those who have jobs of course) as deflation more than outpaces the fall in wages.
This is what happened during the Great Depression, and as you’ll see in the next Debtwatch, it happens in my model of a credit crunch as well.
And Bullturnedbear, I am also a defeatist on solutions in your sense. What I hope to do is make the pain less extreme, and also set in stone institutional changes that will prevent a recurrence of this. But even there I expect I won’t be listened to sufficiently, and the reforms that are ultimately enacted will leave the seeds there for another bubble and crash in half a century or so. I just hope that when that one comes, finally meaningful changes will be instituted.
We humans are brilliant innovators, but when it comes to collective factors in what Soros called reflexivity, we are very slow learners.
January 25th, 2009 at 1:11 pm
i must say i agree with bullturnedbears sentiment on the market-early feb the adjusted data for the USA is released and i expect the market to be bearish-but sometime in march april expect a dummy bull run to come through with obama euphoria and his stimulus plan- market might go to 4400+- but come the US fall/winter watch out- the market will be heading south for the winter or should i say ice age- wonder what odds the bookies will give me on the market going well below 2000 by the end of 2010.
bullturnedbear is right to be concerned about the stability of our banking system- but i think first cab off the rank in terms of banking collapses might end up being a very high profile investment bank with a big fat zero as there logo-ive had this feeling for many years even before jim chanos starting ringing the alarm bells-we’ll see
frank raised an interesting point about the US dollar oil realtionship- the herd is currently grazing on US dollars- the key word here is “relative”- right now everybody wants to be liquid-but in what currency-US dollar is the best of a bad bunch-better the devil you know-thats why the US dollar will keep going up this year along with the price of a barrel of oil-oil might end up at $70 a barrel – and subsequently what odds on our beloved aussie dollar at well below 50 cents US – this wont change until someone has the gumption to start writting multi billion dollar deals in another currency – and the problem is whos currency do you trust- better the devil you know seems to be the go at the moment
enough tea leaf reading
most enjoyable blog steve-contantly finding the level of discourse most enlightening
January 25th, 2009 at 1:26 pm
Gold and Silver bullion are easy to buy from the Perth Mint.
Google them and call them.
You agree on the price – they email you the contract and then you fax it back signed.
Then you can send them the money using internet banking.
It arrives in the mail – you have to sign for it.
I really feel this is the only way people will hold onto their savings in the next few years…
Gold is going to appreciate against all currencies – there is still time but she is moving up to $900USoz – once it gets back over $1000 – this time i don’t think it will go back down.
January 25th, 2009 at 1:32 pm
Hi Steve,
It seems we concur on the likely outcomes and course of events. This blog has become compulsive viewing. One strong confirmation of this is that my wife is now upset with me about blogging too much.
Hi dpmartin,
The reason I believe banks were not limited in the way they approved loans is because of herd mentality or sentiment.
The borrowers (herd) wanted to borrow as much as they could. Over time this process drove governments and further drove the herd to a point where they borrowed more than they could actually afford. Reflexivity!!!
The best place to look for this is in the US where Investment Banks were allowed to do as they pleased (leveraged up to 50 times). Because that’s what the herd of investors wanted.
I also believe that this process will fully reverse itself. Debt levels will fall to multi decade lows. As that is happening the herd will demand that governments get tough on banks so that “it never happens again”. The result of this will be that it will become very hard to get finance. This will slow the muted recovery and extend the pain longer. Also at the bottom (whatever that means). The borrowers will totally shun debt altogether as well.
Anyone that is able and willing to borrow around that time will benefit from massive rises in asset value before the World even wakes up that the worst is over. To find a bottom to this mess though, will take enormous patience and a long time.
January 25th, 2009 at 2:08 pm
STEVE,
Can you please comment on GOLD!!!
Thanks and all the best.
Bill Moore
January 25th, 2009 at 2:12 pm
I’m not a gold buff wmmmoore, but I’m reluctantly coming to the opinion that it will be a useful hedge against what is probably coming our way in terms of economic and financial chaos. It could easily lose a lot of its monetary value in the next year or so though, before probably going the way that dojufitz and others here anticipate.
January 25th, 2009 at 4:27 pm
Steve Keen wrote:
“it” being money to pay my employees more?
Look, I’m kinda old-fashioned when it comes to running a business. The company has never borrowed a cent. We’ve always worked on the basis that we try to sell more than we spend. When we don’t sell more than we spend, we cut costs.
I’d love for banks to supply me with free money to give my employees, but I can’t see it happening anytime soon.
January 25th, 2009 at 4:29 pm
i agree with you steve-gold isnt going anywhere soon,it might go up against other currencies but in US dollar terms its only going down . gold i think is like a de facto currency, its less mobile ,less liquid ,less convertible than the US dollar AT THE MOMENT- as people are fleeing these imploding assett bubbles, the last resort at the moment is the US dollar- one day it will cease to be the last resort and gold will have its day as it becomes the last resort amid the turmoil.
if the US government keeps going on its merry spree converting corporate risk into sovereign risk , it might do just enough to convince the rest of us the only thing the US dollar will be good for is wiping ones fan one the exscrement hits
January 25th, 2009 at 6:25 pm
Steve, how would increasing wages work if the prices are to be increased in line as well? I thought the problem is debt that is so huge now, it can’t be amortised or refinanced anymore when asset prices go down. If people get paid more money, but have to spend more to acquire necessities, where the extra savings required to reduce debt will come from?
Wouldn’t having a government sponsored moratorium on interest, plus certain percentage of debt writedown be a better approach? I guess it is better outcome for everyone (compared to bankruptcy and prospect of minimal recovery).
January 25th, 2009 at 6:51 pm
hi bullturnedbear, your comments on the banking system most enlightening. like you i think we are going to face a major banking crises. but as steve has said previously we are going to get the credit and macro economic crunch first. please forgive me if my reasoning has more holes in it than a slice of swiss cheese, perhaps you can set me straight. i am confused. i still cant grasp the direct connection between falling house prices and banking insolvency- the price of a house may rise or fall but the income stream the house loan provides to the bank would be the key. the reason how all this mess started in the US is because home owners were unable to pay back their loans and thus the assetts held by various banks and financial institutions became worthless.
a bank in australia borrows a million dollars and that theoretically allows them to turn that into 12 million in loans or assetts. the problem for them would be that they usually borrow short term and lend long term- so that million has to be re financed in a year or so. if the bank that lent them the money says we cant roll it over then they have a problem. and i presume if this scenario keeps repeating itself the whole banking system has a problem- a 100 billion shortfall in their re financing would lead to over a trillion dollar hit to the their capital adequacy requirments- thats why the government has been openly canvassing the prospect loosening the CAR- the availability of credit would collapse as you rightly point out and any busines’s that rely on large short term re financing-eg housing and contruction industry would collapse with it
but as long as people and busineses are able to service their debts the banks remain viable. thats a big if since the collapse in credit would lead to a collapse of many busineses and jobs-
like steve says- a credit and macro crunch folowed by a financial crises
so my point is falling house prices are more likely to be a symptom of the problem rather than the initial cause. house prices fell sharply in the early 90s but the 4 major banks didnt go under then- admittedly the situation is infinately worse this time round
as i mentioned to steve in a rcent email-if the banking situation gets bad enough we might all have to take a leaf out of that well known investment guru tony soprano. he hid his money in plastic bag under the compost bin- quite an apt image given the circumstances
January 25th, 2009 at 7:37 pm
There have been quite a few comments on gold. I was also interested in it for a while, but no longer. There are too many respected people making claims that the gold markets are being manipulated by central banks. I am in no way predisposed to believing in evil plots, but looking at the way fractional reserving banking works, and the incentives behind maintaining the credibility of the dollar, it would not surprise at all if concerted efforts were being made to discredit gold as a useful store of wealth. If it is indeed the case, then I wonder how long this can go on – eventually someone is going to run out of gold to dump on the market.
Regarding the USD-oil prop, Iran trades oil in Euros as of the start of 2008. It’s no wonder the US is demonising those poor buggers. But can someone please elaborate for me the following? I have read that Sovereign Wealth Funds pose a threat somehow to this oil prop. That is, apparently, exporting nations have a decreasing incentive to hold USD. How does that work? If at all?