BRYAN DAWE: Why are people selling the European currency and buying the US dollar?
JOHN CLARKE: Because the US economy is so much stronger than the European economy.
BRYAN DAWE: Correct. Why is that Roger?
JOHN CLARKE: Because it's owned by China.
Read the rest of this Australian truth-spoof here (htp: Brian Gongol)
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Tuesday, July 13, 2010
Monday, July 12, 2010
British victory as octopus scores 100%
Weymouth-born psychic octopus Paul got all his predictions perfectly right in the World Cup. What more important questions should we ask him?
Here come higher interest rates - and inflation?
An article in yesterday's New York Times - hat tip to Michael Panzner - points out that some $5 trillion in short-term borrowing by banks has to be renewed within the next couple of years. American banks have to refinance $1.3 trillion, but Europe's $2.6 trillion - twice as much in cash terms, and still nearly double the USA's burden in terms of the relative size of their economies (GDP).
Competition among borrowers will strengthen the hand of lenders, so expect interest rates to rise.
In turn, this will hit the trading value of existing bonds (because their income is fixed and so will become less attractive). It will put further downward pressure on house prices as mortgages become more costly and harder to get. And investment banks will be less keen to borrow cash to speculate on the market, so quite possibly shares will fall as debt-fuelled gambling reduces; besides, businesses will find it harder to make a profit if they pay more for their borrowing at the same time as their customers have less money to spend, and the rate of profit obviously impacts on share prices.
From what I read, much of Britain's public debt is in the form of bonds with longer maturity dates, so that part of the government's debt servicing won't be hit so soon as in the USA, where more comes due earlier. But the UK is projected to increase public borrowing for some years yet, so any increase will be funded at a higher cost. And, as I've said before, private debt in Britain is greater than public debt, so the economy is likely to slow as credit cards, variable rate mortgages etc become more expensive and Joe Public trims his personal spending - there is already clear evidence of this in the USA. Expect businesses that rely on discretionary expenditure to be hit particularly hard (except, perhaps, those that service the richer end of the population - inequality has grown in Britain and the USA).
Lower profits mean less tax revenue and more unemployment. Some fear that our governments will be in such a squeeze that they will crack and begin creating money to buy their own debts - bailing themselves out as they did the banks. Inflation is a threat to savers, who for the last 10 years would generally have been better off in cash than in the stockmarket. We could be approaching a turning point. (Contrariwise, Steve Keen thinks inflating our way out can't be done, nor will debt be defaulted or written off - he is predicting another Great Depression - see his last paragraph.)
There's more than one type of inflation. We tend to think of it as higher prices, and certainly there's been some of that, as evidenced by the cost of petrol, food, energy; but the effects aren't universal - my first car cost £6,000 in 1989 and its equivalent today costs the same. We could see price inflation hitting the poor worse than the rich.
Monetarists see inflation differently: they define it as an increase in the amount of money and credit in the economy. If the money supply grows faster than the economy, then in general (in theory) we'd expect an increase in wages and prices. However, since global trade sets the workers of the world against one another, median wages in the UK and the USA have not progressed much for decades. The improvement in standards of living has come from cheap imports, increasingly financed by personal debt.
If the monetary base in one country increases, then normally you'd expect the currency to devalue against that of stronger, foreign economies. But the situation has now become very complicated: many economies are in a similar crisis, so their currencies are falling together against commodities (like gold) whose supply cannot easily be expanded. Other economies (e.g. China) have become dependent on trade with the spendthrift countries, and therefore have a strong incentive to keep down the relative value of their currency, so as not to price themselves out of the market.
Can the show continue forever?
Traditional economists assume that the economy is self-righting, and that debt doesn't matter much because it ripples throughout the system and raises both wages and prices; and currency exchanges will adjust international trade so that it comes back into balance, eventually. Their harmonious conception is now challenged, just as the mediaeval concept of an orderly universe was challenged and replaced with a vision of colliding worlds.
Leading this modern Copernican-style revolution is maverick Australian economist Steve Keen, who models finance in a way that shows the system tends to increasing instability and breakdown.
Yet the economy is not a fixed machine - not even a self-destructive one. Its workings can be changed, for example by the action of governments. As the philosopher Henri Bergson said:
It is of the essence of reasoning to shut us up in the circle of the given. But action breaks the circle.
The economist can suggest what will happen if, if, if. The politician trying to avert disaster and get re-elected will then try something to avoid the consequences of his and our actions. The economy is dynamic, changing and with many intelligent and competing players. It's more like poker than Meccano; perhaps more like war than poker.
UPDATE (13 July): John Mauldin agrees with Keen that deflation seems unavoidable, and predicts that government bonds will increase in value because they are safe. But as I've suggested here, that's the first part of the game; the question is, whether governments will indeed find a way to reflate out of the hole - effectively part-paying-off debt by stealing value from savers. As John Hussman says (my emphasis):
From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That's an economist's way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly. Over the short-term, very large quantities of money and government debt can be created with seemingly no ill effects. It's typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace.
For commodity speculators, the second highlighted point is a challenge: wait for the bottom and then ride to the top, or get in now because you may not be able to make the purchases during a really rapid rise (especially if you don't trust "paper gold" and only want the real, tangible stuff)?
So much of what I read among the experts is about timing the market in the short term, which is OK if that's your day job; I don't put myself up against these "gunslingers", as George Goodman (aka "Adam Smith") terms them.
Counter-argument: Charles Hugh Smith says that the rich and powerful simply won't let inflation destroy wealth, since they have most of it.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Competition among borrowers will strengthen the hand of lenders, so expect interest rates to rise.
In turn, this will hit the trading value of existing bonds (because their income is fixed and so will become less attractive). It will put further downward pressure on house prices as mortgages become more costly and harder to get. And investment banks will be less keen to borrow cash to speculate on the market, so quite possibly shares will fall as debt-fuelled gambling reduces; besides, businesses will find it harder to make a profit if they pay more for their borrowing at the same time as their customers have less money to spend, and the rate of profit obviously impacts on share prices.
From what I read, much of Britain's public debt is in the form of bonds with longer maturity dates, so that part of the government's debt servicing won't be hit so soon as in the USA, where more comes due earlier. But the UK is projected to increase public borrowing for some years yet, so any increase will be funded at a higher cost. And, as I've said before, private debt in Britain is greater than public debt, so the economy is likely to slow as credit cards, variable rate mortgages etc become more expensive and Joe Public trims his personal spending - there is already clear evidence of this in the USA. Expect businesses that rely on discretionary expenditure to be hit particularly hard (except, perhaps, those that service the richer end of the population - inequality has grown in Britain and the USA).
Lower profits mean less tax revenue and more unemployment. Some fear that our governments will be in such a squeeze that they will crack and begin creating money to buy their own debts - bailing themselves out as they did the banks. Inflation is a threat to savers, who for the last 10 years would generally have been better off in cash than in the stockmarket. We could be approaching a turning point. (Contrariwise, Steve Keen thinks inflating our way out can't be done, nor will debt be defaulted or written off - he is predicting another Great Depression - see his last paragraph.)
There's more than one type of inflation. We tend to think of it as higher prices, and certainly there's been some of that, as evidenced by the cost of petrol, food, energy; but the effects aren't universal - my first car cost £6,000 in 1989 and its equivalent today costs the same. We could see price inflation hitting the poor worse than the rich.
Monetarists see inflation differently: they define it as an increase in the amount of money and credit in the economy. If the money supply grows faster than the economy, then in general (in theory) we'd expect an increase in wages and prices. However, since global trade sets the workers of the world against one another, median wages in the UK and the USA have not progressed much for decades. The improvement in standards of living has come from cheap imports, increasingly financed by personal debt.
If the monetary base in one country increases, then normally you'd expect the currency to devalue against that of stronger, foreign economies. But the situation has now become very complicated: many economies are in a similar crisis, so their currencies are falling together against commodities (like gold) whose supply cannot easily be expanded. Other economies (e.g. China) have become dependent on trade with the spendthrift countries, and therefore have a strong incentive to keep down the relative value of their currency, so as not to price themselves out of the market.
Can the show continue forever?
Traditional economists assume that the economy is self-righting, and that debt doesn't matter much because it ripples throughout the system and raises both wages and prices; and currency exchanges will adjust international trade so that it comes back into balance, eventually. Their harmonious conception is now challenged, just as the mediaeval concept of an orderly universe was challenged and replaced with a vision of colliding worlds.
Leading this modern Copernican-style revolution is maverick Australian economist Steve Keen, who models finance in a way that shows the system tends to increasing instability and breakdown.
Yet the economy is not a fixed machine - not even a self-destructive one. Its workings can be changed, for example by the action of governments. As the philosopher Henri Bergson said:
It is of the essence of reasoning to shut us up in the circle of the given. But action breaks the circle.
The economist can suggest what will happen if, if, if. The politician trying to avert disaster and get re-elected will then try something to avoid the consequences of his and our actions. The economy is dynamic, changing and with many intelligent and competing players. It's more like poker than Meccano; perhaps more like war than poker.
UPDATE (13 July): John Mauldin agrees with Keen that deflation seems unavoidable, and predicts that government bonds will increase in value because they are safe. But as I've suggested here, that's the first part of the game; the question is, whether governments will indeed find a way to reflate out of the hole - effectively part-paying-off debt by stealing value from savers. As John Hussman says (my emphasis):
From an inflation standpoint, is important to recognize the distinction between what occurs during a credit crisis and what occurs afterward. Credit strains typically create a nearly frantic demand for government liabilities that are considered default-free (even if they are subject to inflation risk). This raises the marginal utility of government liabilities relative to the marginal utility of goods and services. That's an economist's way of saying that interest rates drop and deflation pressures take hold. Commodity price declines are also common, which is a word of caution to investors accumulating gold here, who may experience a roller-coaster shortly. Over the short-term, very large quantities of money and government debt can be created with seemingly no ill effects. It's typically several years after the crisis that those liabilities lose value, ultimately at a very rapid pace.
For commodity speculators, the second highlighted point is a challenge: wait for the bottom and then ride to the top, or get in now because you may not be able to make the purchases during a really rapid rise (especially if you don't trust "paper gold" and only want the real, tangible stuff)?
So much of what I read among the experts is about timing the market in the short term, which is OK if that's your day job; I don't put myself up against these "gunslingers", as George Goodman (aka "Adam Smith") terms them.
Counter-argument: Charles Hugh Smith says that the rich and powerful simply won't let inflation destroy wealth, since they have most of it.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, July 11, 2010
The Economist: UK houses 33% overpriced
The Economist magazine has produced a table comparing rents with house prices to give an idea of fair value in different countries. According to this, the average UK house is 33% overvalued, or in other words should drop 25% to return to its long-term price/rent ratio.
A word of warning: Mike Shedlock (where I found this) points out that the US is too diverse to make these statistics precise and universally applicable. I would say the same for the UK, small as we are. Nevertheless, it corroborates my feeling that houses are generally still too expensive here.
Addendum (19:37): Charles Hugh Smith gives some reasons why owning a home may not be the Holy Grail, anyway. I was suggesting selling up and buying a caravan to my dearest some years ago, but women love plumbing.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
A word of warning: Mike Shedlock (where I found this) points out that the US is too diverse to make these statistics precise and universally applicable. I would say the same for the UK, small as we are. Nevertheless, it corroborates my feeling that houses are generally still too expensive here.
Addendum (19:37): Charles Hugh Smith gives some reasons why owning a home may not be the Holy Grail, anyway. I was suggesting selling up and buying a caravan to my dearest some years ago, but women love plumbing.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Sunday, July 04, 2010
Signs of the times - Acocks Green, Birmingham on Sunday 4 July 2010
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
David Cameron may face his Major/Lamont moment
There was tension in our insurance office on Wednesday, 16th September 1992. The British government was fighting to remain in the Exchange Rate Mechanism, which pegged the pound to 2.95 Deutschmarks. George Soros, we later discovered, had started a run on the pound with a massive "short" that would soon net him one of his several billions.
The government was using the interest rate as its defensive weapon. The rate had leapt from 10% to 12% at lunchtime. Still unconvinced, the currency traders continued dumping the pound, which the government frantically bought by the billion to support its value.
Then came the moment of truth - or rather, an utterly implausible bluff, instantly called: the Chancellor shoved the rate up to 15%. While we in the office were dazedly contemplating the effect on our mortgage clients, the market knew it had won. 15% just couldn't be done. Britain was ejected from the ERM like a pip from a crushed lemon.
As every teacher, as every parent knows, you musn't threaten what you cannot perform. When you overreach, your credibility is busted. And I fear that David Cameron may be skirting very close to that point.
Cameron has let the papers know about wargame economic scenarios to cut public spending by as much as 40%, a figure that would have barely-conceivable consequences. Clearly this is to scare policymakers and departments into crystallising proposals for much lesser reductions.
Yet there is a whiff of desperation in this big-stick-waving and weekend-news-leaking, and if the markets scent fear and self-doubt at the heart of government, the hunt may begin.
The initial figure of £6 billion in savings, yet to be turned into concrete plans, was merely a stopgap to reassure the bond markets that the new government intends to get control of the budget. Compared to the accumulated and increasing public debt, this first cut is a drop in the ocean. It's held off the short-sellers for now and we retain our official AAA credit rating, which allows us to keep down the interest rate.
Unofficially, our rating has already fallen to "AA", according to the credit insurance market. If interest rates go up, debt servicing becomes much more difficult, not only for the government but even more so for the worker-consumer - private debt in the British economy is far greater and Joe Public pays above the bank lending rate, so he can support all those people in glass-and-marble offices who send him his mortgage and credit card statements.
So if the market senses a panicky bluff, up go the rates and down goes the pound, real estate, the stockmarket and the trading value of bonds.
Mr Cameron will have to talk tough, just enough.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The government was using the interest rate as its defensive weapon. The rate had leapt from 10% to 12% at lunchtime. Still unconvinced, the currency traders continued dumping the pound, which the government frantically bought by the billion to support its value.
Then came the moment of truth - or rather, an utterly implausible bluff, instantly called: the Chancellor shoved the rate up to 15%. While we in the office were dazedly contemplating the effect on our mortgage clients, the market knew it had won. 15% just couldn't be done. Britain was ejected from the ERM like a pip from a crushed lemon.
As every teacher, as every parent knows, you musn't threaten what you cannot perform. When you overreach, your credibility is busted. And I fear that David Cameron may be skirting very close to that point.
Cameron has let the papers know about wargame economic scenarios to cut public spending by as much as 40%, a figure that would have barely-conceivable consequences. Clearly this is to scare policymakers and departments into crystallising proposals for much lesser reductions.
Yet there is a whiff of desperation in this big-stick-waving and weekend-news-leaking, and if the markets scent fear and self-doubt at the heart of government, the hunt may begin.
The initial figure of £6 billion in savings, yet to be turned into concrete plans, was merely a stopgap to reassure the bond markets that the new government intends to get control of the budget. Compared to the accumulated and increasing public debt, this first cut is a drop in the ocean. It's held off the short-sellers for now and we retain our official AAA credit rating, which allows us to keep down the interest rate.
Unofficially, our rating has already fallen to "AA", according to the credit insurance market. If interest rates go up, debt servicing becomes much more difficult, not only for the government but even more so for the worker-consumer - private debt in the British economy is far greater and Joe Public pays above the bank lending rate, so he can support all those people in glass-and-marble offices who send him his mortgage and credit card statements.
So if the market senses a panicky bluff, up go the rates and down goes the pound, real estate, the stockmarket and the trading value of bonds.
Mr Cameron will have to talk tough, just enough.
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
Saturday, July 03, 2010
China and gold mining in Alaska
China has reached her first gold target, expanding holding from 600 tonnes to 1,000 as of last month. But she has stated her intention to boost stocks by 10,000 tonnes over the next decade. This source reports on a new long-term contract to purchase gold ore from the Kensington Mine in Alaska.
The mine is about 400 miles from the Klondike, so unfortunately not quite justifying the inclusion of photos of grizzled - they always are, aren't they? - prospectors from the late nineteenth century.
Another difference - perhaps typical of the modern (what is post-modern?) age - is that this is a high-level government deal. It's not about the individual struggle for enrichment and independence. Central banks have also reversed their long-term policy of releasing gold onto the market to depress its value and are now beginning to buy, as Mark O'Byrne suspected 18 months ago.
These developments are likely to support the price of gold, even though it has quadrupled (in dollar terms) in the last 10 years. But the expansionary plan could also be seen as a straw in the wind, for those who see gold as a store of wealth in increasingly uncertain times.
Just for fun (and a little right-brain stimulus), here's a picture of Chinese gold prospectors in California:
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
The mine is about 400 miles from the Klondike, so unfortunately not quite justifying the inclusion of photos of grizzled - they always are, aren't they? - prospectors from the late nineteenth century.
Another difference - perhaps typical of the modern (what is post-modern?) age - is that this is a high-level government deal. It's not about the individual struggle for enrichment and independence. Central banks have also reversed their long-term policy of releasing gold onto the market to depress its value and are now beginning to buy, as Mark O'Byrne suspected 18 months ago.
These developments are likely to support the price of gold, even though it has quadrupled (in dollar terms) in the last 10 years. But the expansionary plan could also be seen as a straw in the wind, for those who see gold as a store of wealth in increasingly uncertain times.
Just for fun (and a little right-brain stimulus), here's a picture of Chinese gold prospectors in California:
DISCLAIMER: Nothing here should be taken as personal advice, financial or otherwise. No liability is accepted for third-party content, whether incorporated in or linked to this blog.
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