QE 3 - Private to Public Debt Transfer

Quantitative Easing (QE) is a tool used by central bankers/governments that have failed to manage their economies. At its heart QE is the transfer of private debt to the public purse. This QE step albeit necessary in terms of freeing by the balances sheets of financial institutions does support the notion that profits are privatised, whereas losses are socialised. It is arguable that QE is a recognition that the current capitalistic model is broken as those who have the priviledge of mobilising capital should not be allowed to abuse their position of trust.

The cost to the US tax payer has and will continue to be immense and the implications for the rest of the world are not fully understood. For Australia is keeps the upward pressure on the Australian dollar and investors will turn to real assets, e.g. commodities. The Australian Government must continue to support micro-economic reforms, e.g. tarfiff reductions, introduce more flexible employment practices and invest in infrastructure, if Australia is to maintain its competitiveness and respond to the actions of governments of failed economies.

 

Eurozone Mess - Trade Barriers

Most of the recent commentary on the eurozone has focussed on individual country debts and the re-capitalisation of eurozone banks. The debate should be widen to deal with their trade barriers that are part of their economic problem. If Europe is to stay together, then it needs to grow and this can only really be achieved by trading its way out of its economic problems. Trade barriers come at a huge cost, including a human cost to those countries excluded, notably African countries. The daily flow of refugees from Africa to Europe is a direct consequence Europe's trade barriers. These economic refugees would stay at home if they saw a future, as it is a major step for any human being to leave their country of birth and their roots forever. The best way to stop the flow is to remove the barriers so that African nations can trade their way out of poverty. India, China, Brazil and Indonesia are case studies of countries that are doing this.

Prior to the UK joining the European Common Market it was our major trading partner. Once it joined the European market and our exports of agriculture products dried up to the UK. Australian farmers had to find new markets and Japan, Korea and the USA filled the gap. In more recent times China and India, as well as our near Asian neighbours have become the export destination of our products, e.g. minerals and commodities and services, e.g. education.

Europe needs to remove the trade barriers and export to the world while allowing cheaper imports to come in, so that European consumers benefit and ease the simmering racial tensions that are reflected in the rise of racially intolerant political parties, e.g Golden Dawn. Trade barriers are relics of the past that have been proved to be an impediment to economic growth.

 

Interest Rates RBA Decision - 3rd July 2012

It was no surprise that the Reserve Bank of Australia (RBA) kept interest rates on hold. Understandably, home loan borrowers were seeking a further cut, however the change in the tax free threshold and the recent Federal Government handouts as compensation for the Carbon Tax were viewed as sufficient stimulus to the economy.

This RBA interest rate hold position means that the probability of rates going down or staying as they are in the future is greater than them going up. It also means that the RBA has not used up its monetary policy options and get themselves into a similar position as the Federal Reserve and the Bank of Japan, i.e. Quantitative Easing is the only monetary policy measure available to them because interest rates are basically zero.

It is important for the RBA in assist in building consumer and business confidence by not being over reactive with monetary policy, i.e. not dropping rates too low and then being forced to increase them. This approach undermines consumer and business confidence which is vital in driving economic growth. We advocate a steady as she goes approach to monetary policy.

Carbon Tax – Method of Payment Inappropriate

It is well documented that the recent Federal Government cash handouts have been spent on the pokies. This was not the aim of the payments, even if it had a stimulus effect on the economy. The Federal Government should have paid the compensation payments directly to the energy companies, who then should have been required to pass them on as a credit offset to householder's energy accounts. By doing this the Federal Government would have created a direct link between the carbon tax and the compensation.

For those who received the compensation it is likely they did not feel or connect that the funds are compensating them for the effects of the carbon tax as the two items (i.e. money appearing in their bank account and carbon tax) seem very far removed. Whereas, for those that did not receive a compensation payment seeing the recipients spend the money on the pokies reinforces the view that the money is being wasted.

In 2009/10 when the Federal Government handed out cash its aim was to stimulate the economy. At a macro economic level how the money was spent was irrelevant so long as it made its way into the economy. This time the payment method was relevant and important because it was meant to be compensation, not stimulus. A key lesson from these various cash payment packages is that the method of payment and planning for human behaviour are relevant to their effectiveness.

Eurozone, Iran and the "X" factor in 2012

Each year there is an unknown factor that negatively impacts on financial markets and the global economy. This factor is often referred to as the "X" factor.

There are a number of key characteristics of the "X" factor. The first is that it is an unknown and happens fast, e.g. Lehman Brothers came out of left field to the markets, although those in the Collateralised Debt Obligation (CDOs) should have been aware.

The other features of the "X" factor are its unquantifiable financial impact and it must have global consequences.

So what will be the "X" factor of 2012? 

Given the features described above, it won't be the USA presidential elections.

It won't be the Eurozone, although it will continue to adversely impact on world business and consumer confidence and there will be many more periods of major market volatility. The possibility of Greece or Spain leaving the Euro has already been fully priced in by financial markets.

It won't be the "Arab Spring".

In my view the "X" factor in 2012 will be the impact on global demand/suppy of oil from the sanctions on Iran. Even though the sanctions have been in train for some time, i.e. a known factor, it is the lack of certainty around both their effectiveness and consequences that makes it the "X" factor in 2012. 

The sanctions may economically hurt Iran, athough they will not likely impact on its nuclear energy resolve. However, they could lead to another global "oil shock"  and place significant financial pressure on the developing economies, e.g. China, India, Brazil that are major importers of Iranian oil. Higher oil prices in those countries will reduce their economic growth right at the time the rest of the world are relying on them to drive global growth.