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Top 10 at 10: Nouriel Roubini on the ‘mother of all carry trades’; Lost decade(s) for US?; Aussie parity party?; Dilbert
November 3rd, 2009Here are my Top 10 links from around the Internet at 10am. I welcome your additions and comments below or please email your suggestions for Wednesday’s Top 10 at 10.
1. Must read – Nouriel Roubini is right back on form in this cracker of a column in the FT about the ‘mother of all carry trades facing an inevitable bust.’
The combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe – for now – for the mother of all carry trades and mother of all highly leveraged global asset bubbles.
While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.
The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.
But one day this bubble will burst, leading to the biggest co-ordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate – as was seen in previous reversals, such as the yen-funded carry trade – the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a co-ordinated collapse of all those risky assets – equities, commodities, emerging market asset classes and credit instruments.
We have all been warned.
This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
2. Japan’s fiscal crisis – Ambrose Evans Pritchard at The Telegraph has shone his dark light on an area of the global financial system that hasn’t been getting a lot of attention lately: Japans’ fiscal crisis. His report is startling. It also paints a picture of what happens to an economy over the long term that has a demographic problem, a zombie bank problem and decades of stagnation after a property bubble burst. Sound familiar?
The rocketing cost of insuring against the bankruptcy of the Japanese state is telling us that the model has smashed into the buffers. Credit default swaps (CDS) on five-year Japanese debt have risen from 35 to 63 basis points since early September. Japan has suddenly decoupled from Germany (21), France (22), the US (22), and even Britain (47).
Regime-change in Tokyo and the arrival of Yukio Hatoyama’s neophyte Democrats – raising $550bn (£333bn) to help fund their blitz on welfare and the “new social policy” – have concentrated the minds of investors at long last. “Markets are worried that Japan is going to hit a brick wall: the sums are gargantuan,” said Albert Edwards, a Japan-veteran at Société Générale.
Simon Johnson, former chief economist of the International Monetary Fund (IMF), told the US Congress last week that the debt path was out of control and raised “a real risk that Japan could end up in a major default”.
The IMF expects Japan’s gross public debt to reach 218pc of gross domestic product (GDP) this year, 227pc next year, and 246pc by 2014. This has been manageable so far only because Japanese savers have been willing – or coerced – into lending for almost nothing. The yield on 10-year government bonds has been around 1.30pc this year, though they jumped to 1.42pc last week.
“Can these benign conditions be expected to continue in the face of even-larger increases in public debt? Going forward, the markets capacity to absorb debt is likely to diminish as population ageing reduces saving,” said the IMF.
3. Aussie Parity Party – A bunch of economists are now forecasting the Australian dollar will hit parity versus the US dollar next year because it is benefiting so much from the Chinese economy. We are so lucky to be right next door to the lucky country. Here’s the Bloomberg report.
Australia’s dollar is heading toward parity with the U.S. currency for the first time as investors hungry for China’s economic growth buy into the world’s biggest exporter of iron ore used in making steel.
The so-called Aussie has soared 35 percent the past 12 months, more than any other currency tracked by Bloomberg. Citigroup Inc., Calyon, Barclays Capital and National Australia Bank Ltd. forecast it will trade at 1 U.S. dollar next year, implying an additional 11 percent gain. Hedge funds and other large traders have more bets than anytime since July 15, 2008, that the rally will continue, data from the Washington-based Commodity Futures Trading Commission show.
4. GDP mirage – Michael Mandel at BusinessWeek makes the case that apparent US GDP strength is a mirage because it overlooks cuts in research and development, product design, and worker training. HT Mish.
The official statistics are not designed to pick up cutbacks in “intangible investments” such as business spending on research and development, product design, and worker training. There’s ample evidence to suggest that companies, to reduce costs and boost short-term profits, are slashing this kind of spending, which is essential for innovation. Without investment in intangibles, the U.S. can’t compete in a knowledge-based global economy. Yet you won’t see that plunge reflected in the GDP and productivity statistics, which are still too focused on more traditional sectors, such as motor vehicles and construction.
In effect, government statisticians are trying to track a 21st century bust with 20th century tools. Not only is that distorting the critical data that investors, policymakers, and corporate executives use to evaluate the economy, but it might also be creating a false sense of relief as Americans battle a brutal recession.
5. Cheap Jobs? – Mish at Global EconomicAnalysis has worked out that the US government’s US$207.3 billion of stimulus spending so far has created 640,329 jobs at a cost of US$323,793 per job. Maybe not such a good investment…. Even if Obama hits his 3.5 million jobs target the numbers are ugly.
Funds paid out so far = $83.8 billion + $52.1 billion + $71.4 billion = $207.3 billion
$207,300,000,000 / 640,329 = $323,739.83 per job created
Now let’s assume this stimulus package will eventually create (or save) 3.5 million jobs and all the money (but no more) will be spent.
Here’s the math again. $787,000,000,000 / 3,500,000 = $224,857.14 per job created
6. Want to sleep? – I think sleep is overrated. Here is a piece from MoneyWatch with 5 scenarios on what could go wrong with the US economy. All very plausible. They are: Runaway inflation; Stagflation; Crippling government debt; A 10 year Japanese style recession; The Dollar Collapses. The one option they didn’t include was all of the above.
Here’s Barry Ritholz on the Japanese lost decade scenario.
“My biggest fear is the U.S. becomes like Japan. During their economic crisis in the 1990s, the Japanese lowered interest rates to zero, never forced their ailing banks to write down their bad assets, and threw a ton of money at bad banks that accomplished nothing. That looks like what we’re doing right now. We’re not requiring banks to take write-downs, and we’ve suspended mark-to-market accounting so that banks can hide their losses. And we’re propping up banks that are borderline insolvent with billions of dollars in government assistance even though they’re not lending as they’re supposed to do. If we follow Japan’s model, we may have Japan’s results — 10 years of subpar economic growth and a lot of government spending on zombie banks that refuse to lend. The Nikkei stock index has fallen more than 70 percent from its 1989 peak as a consequence. That could be our future.”
7. Lobbyists win — again – US Congressman Ron Paul says his broadly supported (by the public) bill to Audit the Fed has been gutted in the equivalent of select committee, Bloomberg reported.
The bill, with 308 co-sponsors, has been stripped of provisions that would remove Fed exemptions from audits of transactions with foreign central banks, monetary policy deliberations, transactions made under the direction of the Federal Open Market Committee and communications between the Board, the reserve banks and staff, Paul said today.
“There’s nothing left, it’s been gutted,” he said in a telephone interview. “This is not a partisan issue. People all over the country want to know what the Fed is up to, and this legislation was supposed to help them do that.”
The Fed, led by Chairman Ben S. Bernanke, has come under greater congressional scrutiny while attempting to end the financial crisis by bailing out financial firms and more than doubling its balance sheet to $2.16 trillion in the past year. The central bank is also buying $1.25 trillion of securities tied to home loans.
Paul, a member of the House Financial Services Committee, said Mel Watt, a Democrat from North Carolina, has eliminated “just about everything” while preparing the legislation for formal consideration. Watt is chairman of the panel’s domestic monetary policy and technology subcommittee.
8. Cold Turkey - Bob Janjuah, chief strategist at Royal Bank of Scotland, is the bear’s bear. Here’s his latest missive, as cited by FTAlphaville. Warning: it carries a bitter taste.
Near term I think the battle will be between Central Bankers, who deep down, and I think privately at least, FEAR bubbles, FEAR failure and FEAR FORCED abandonment if current policies are persisted with too long and/or added to, vs Fiscal Authorities, who by definition want short-term fixes (there is after all an election cycle in the UK & in the US next yr). This is like a rumble in the jungle between the VOLCKER-ites and the GREENSPAN-ites, with GREENSPAN representing the Fiscal Authorities (he was after all surely the most politicised central banker ever). Are the Volcker-ites up to a fight? I think so. I hope so. Kevin feels and I FEAR however that they aren’t/they won’t. In which case MORE policy and then, very soon thereafter DISASTER, will follow. In this rumble the inevitable outcome is deflation and multi-yr austerity. China will be the Ref in the boxing ring.
9. Don’t wait too long – Wolfgang Munchau at the FT.com reckons the world’s central bankers shouldn’t wait too long before beginning the big exit. He points out it is the world’s central banks who should apply the brakes rather than governments. His views don’t match those of Alan Bollard here, who seemed to suggest last week he expected budget stimulus to be withdrawn before he would withdraw monetary stimulus.
As the world economy heads into a still uncertain recovery, this is not the time to apply the fiscal brakes. But it is perhaps time for a moderate monetary tightening. Unwinding the unusual policy measures like quantitative easing should be a first step, but without higher interest rates there is a risk that this policy would lead to renewed financial instability, which might be difficult and costly to undo.
10. Outlook for Shiti – The New York Times has a long, detailed look at the outlook for the ultimate ‘Too Big To Fail’ bank which is Citigroup.
OVER the past 80 years, the United States government has engineered not one, not two, not three, but at least four rescues of the institution now known as Citigroup.
While Citigroup has written down tens of billions of dollars’ worth of mortgages on its books, there are looming problems in its huge credit card portfolio. Of the company’s $1.2 trillion in credit commitments outstanding in the second quarter, $873 billion were credit card lines. A measure of the bank’s efforts to wrestle that problem to the ground is the interest it charges customers: in October, Citigroup raised interest rates on some credit card holders to 29.99 percent.
Chris Whalen, editor of the Institutional Risk Analyst, calls Citigroup “the queen of the zombie dance,” referring to the group of financial institutions that the government has on life support.
“They are hoping that a combination of bank assistance and maximizing revenue and buying time will let them survive,” he said. “When I look at the whole picture, Citigroup is in the process of resolution. I continue to believe the equity is worth zero and that the company will have to go to bondholders for some kind of money to make the bank stable.”
Here’s my favourite quote from the article. It’s from 1999 just after Glass-Steagall was repealed, which allowed investment banks to join together to regular banks.
“By liberating our financial companies from an antiquated regulatory structure, this legislation will unleash the creativity of our industry and insure our global competitiveness,” Mr. Weill and Mr. Reed, Citigroup’s co-chairmen and co-chief executives, said in a statement after Congress repealed the law. “As a result, all Americans — investors, savers, insureds — will be better served.”
Sure thing.
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November 3rd, 2009 at 11:12 am
#3 – If the Aussie $ hits US$1 next year, that means our currency will also be dragged up with it, and it is likely the NZ $ will be above US$0.90. More bad news for our exporters.
November 3rd, 2009 at 11:38 am
Re 2 Japan
Can anyone answer a question on Japan? Japan has been running trade surpluses for years and has substantial foreign reserves as a result, particuarly in US treasuries. The question is are these reserves taken into account when debt of 218% of GDP is quoted? Are commentators looking at both sides of the Japan Inc balance sheet?
November 3rd, 2009 at 11:41 am
#7 – the final paragraph from this story.
Keith Kelly, a spokesman for Watt, declined to comment and said Watt wasn’t immediately available for an interview. Watt’s district includes Charlotte, headquarters of Bank of America Corp., the biggest U.S. lender.
Remember that the FED is a private bank owned by bankers for the bankers – any surprise as to why it is unlikely to be audited?
November 3rd, 2009 at 11:44 am
Reserves are not a factor of GDP as perol in the tank is not a measure of how fast a car is going.
GDP is a measure of economic velocity – how fast the economy is growing and contracting – debt to GDP ratio is a measure of how much of todays production is needed to service the debt.
if the Debt to GDP ratio is greater than 100%, then you are effectively depleting the reserves.
November 3rd, 2009 at 11:50 am
Why is growth considered a good thing?
November 3rd, 2009 at 11:52 am
Japan puts more focus on incenting large corporations to continue to employ people than on making an overall profit as a country. The result is a basket case of financial statistics, but the average person has a high standard of living and is docile. Similar concept to some of the thinking behind the German economy.
Interesting comments earlier about banks being the churches of today. So true in so many ways!!
M.
November 3rd, 2009 at 12:03 pm
@1: So we have all been warned….but what can we do?
regards
November 3rd, 2009 at 12:07 pm
@ Martin
I undersatand that reserves are not measured as part of GDP, however if I have a mortgage of 100k and a bank deposit of 100k then my net position is zero, as long as the bank deposit is secure. Similarly if Japan has public debt of 218% of GDP and had a similar level of foreign reserves then the sustainability of the economy would not be a major issue, hence the question above.
November 3rd, 2009 at 12:10 pm
Interesting also that the US response is going down the same track as Japan ten years ago. I remember having some of my retirement savings in Japan…
Not sure of the solutions. Current economic models don’t work anymore. Some down-trodden economist in the bowels of Treasury might have some new equation?
Personally, I”m planting vegetables and keeping my meager finances flexible and diverse.
November 3rd, 2009 at 12:13 pm
Curious: the Japanese debt shown is public debt, not national debt. Most of the public debt is in fact domestic, lent by Japanese savers – as opposed to US govt debt, which is largely owed to foreigners, & therefore adds to national debt.
November 3rd, 2009 at 12:14 pm
@Paul
Growth is EVERYTHING – Our money is debt – loaned into existance – However the money to pay the interest is not. Therefore without growth, the monetary base collapses because there is not enough money in existance to repay the loans.
Of course what we are told is that 4% growth is sustainable – have a look at these charts to show what happens to 4% compounding growth…
November 3rd, 2009 at 12:18 pm
@Paul
“Why is growth considered a good thing?”, So democratic governments can fund their promise now pay later election bribes.
@Curious
I’m not sure about the figures you quoted but is it private for government debt, with in NZ we have low government debt and high private, Japan may have high government debt and low private
Neven
November 3rd, 2009 at 12:35 pm
@2 I thought piece 1 was good….but 2! ouch…and 6….and ppl are confident they are not going to lose their shirts? why isnt valium being shipped by the tonne?
Besides this my Q is and for me its a big one….PPl have generally taken on debt believing what the Pollies have told them, ie things will get better…what happens when things stop getting better?
ie. As powerdownkiwi (I think so?) and I believe we are looking at years of GDP decline just from peak oil let alone this mess…..or baby boomers…what happens when assets ie wealth vapourises? By this I mean most ppls biggest second asset is their car(s) which could become almost worthless in just a few years (unaffordable petrol)….and of course they were funded with debt….so ppl suddenly see a worthless substantial “asset” not to mention other issues….Im sure they are going to be oh so impressed with National (especially) and indeed Labour when it dawns on them that they have been effectively lied to, and things wont be getting better.
November 3rd, 2009 at 12:39 pm
@Paul its considered good because it benefits Govn’s more than anything…they get a bigger tax take without putting up taxes….so they can spend more, or give cuts without actually having to do anything….
regards
November 3rd, 2009 at 12:50 pm
Martin – you put growth very well. And the exponential function. People talk of China growing at 10% as if it will go foever. The real question is how long you can sustain a doubling every 7 years. Pity it wasn’t part of economics teaching over the last twenty years.
November 3rd, 2009 at 12:51 pm
In breaking news, the advisor to NZ Inc, J. Key and Associates, confirmed market speculation that they intended to relinquish NZ’s sovereign rights within the next decade. A typically upbeat John Key, acknowledged that much of the hard work had already been undertaken over the past 9 years under an associated company, Labour. However, he took credit for the failure of National to seriously address the dangerous structural imbalances and in particular to even discuss the looming financial crisis of funding retiring baby boomers. Consequently, he was pleased to announce that the loss of sovereign rights was tracking well ahead of schedule.
Two bidders had emerged – Australia and China. A spokesman for Australia Inc, told the press conference that since they already had a controlling interest in NZ Inc, acquiring the full 100% would be relatively simple. He stressed the benefits to Australian shareholders of securing arable land and water resources to offset the impacts of climate change in their home land. He also acknowledged that they had engaged J. Brownlie Ltd to conduct due diligence on the minerals in NZ national parks. Critics argue that since most skilled NZ’s are already employed by Australia Inc, they would simply be acquiring a hollow entity of bureaucrats and beneficiaries. However, the spokesman replied that Australia Inc was only interested in the assets of NZ Inc, not the liabilities. Considerable synergies could be achieved by outsourcing NZ’s government to a shared service centre in Canberra. The Treaty of Waitangi, and all the associated contingent liabilities, would be abolished in favour of the Australian constitution. Entitlements to “NZ bludgers” would cease upon acquisition.
Meanwhile the CEO of the China Dominance of South Pacific Group, Mr Wee TakeAll, commented that because they already had interests in the South Pacific region,adding NZ to the investment portfolio was a logical strategic move. On being asked if he was concerned about integrating NZ Inc into the China model, he replied that China had a proven model for dealing with minority interests. The plan was to move NZ’s unskilled workforce to China to work in the factories. NZ would be reserved for high-net worth shareholders moving here from China to retire, enjoy the lifestyle or to manage the farms and fisheries they had acquired.
November 3rd, 2009 at 12:56 pm
Martin : Correct me if I’m wrong , but as those graphs show compounded figures , shouldn’t the graphs be on a logarithmic scale , not an linear scale ? Point being , they misconstrue the figures , to give a dramatic upwards bias .
November 3rd, 2009 at 1:00 pm
LOL very good fromthesidelines – the best satire always has a strong element of truth to it.
November 3rd, 2009 at 1:02 pm
@Fromthesidelines: Bravo! Great reading! But according to ’succinct’ ,on another thread today, far to long.
November 3rd, 2009 at 1:08 pm
Succinct has been told to live down to his moniker and his advice………Nary a peep since . Bravo !
November 3rd, 2009 at 1:15 pm
In Oz , house prices across all 8 capital cities , have risen an average of 6.2 % in the year to October 31 . In the August-October quarter alone , house prices popped up 4.2 % . ………. . And same for all of us ?
November 3rd, 2009 at 1:17 pm
Roger : I’m not convinced – When you are looking at something where you have compounded growth the logirithmic scale masks the impact. We are dealing with an animal that starts of modestly and then eats you alive. Globally we are at the end stages of an unsustainable growth model that has to break – due to this compounding growth of money v’s a finite world of resources.
Take inflation – we are lead to believe that 2% inflation is our “good” number. its better than 5% and so much better than 10%. When you look at the real effects of 2% compounded v’s 5%, the only difference is the time it takes to go parabolic… Even .0000000001% will go parabolic eventually, it will just take many many centuries….
By showing this in a strictly liniar graph shows this for what it is. Unsustainable. Just like population, resource consumption, food consumption.
When we had a sound monetary system, which was limited to the amount of gold in existance, inflation was followed by deflation as night follows day. Money would expand and contract, giving a level environment where wealth could be preserved. This has long since ended and we are now caught is a fantasy world of make believe money where deflation can never be allowed to happen because the politicians know that once it starts, it is the end of the fake money and the end of their power.
November 3rd, 2009 at 1:18 pm
He might’a gone to twitter.
Roger T – it doesn’t matter which way you look at compound growth, it trends to the vertical. Most folk don’t get it.
Google: Professor Albert Bartlett / mankind’s biggest failure….
November 3rd, 2009 at 1:20 pm
Absolutely on the money Martin – or on what it once was….
November 3rd, 2009 at 1:28 pm
My QV in the mail this morning says my house in Central Wellington is worth more than it was in September 2007.
November 3rd, 2009 at 1:41 pm
From the sidelines says… lips…. to GODS ear…brief enuff.
November 3rd, 2009 at 1:45 pm
Selwyn tells it like it is. Flick the link to X, Y’s and BB’s who give a toss. Worth the 12mins.
http://www.95bfm.co.nz/default,190775,joe-nunweek.sm
November 3rd, 2009 at 1:47 pm
Now the descision for you, Megan. Do you go and unlock that increase in equity? No point in having more money if you’re not going to use it to make more.
November 3rd, 2009 at 2:00 pm
@ Harriet – It’s not part of what I consider my investment portfolio. It’s my home. The cost of selling would not be worth it at the moment.
“No point in having the money if you’re not going to use it to make more.” Hope you’re joking. Some money is for investing, some is for spending, some sits in a grey zone. There is more to life than making money.
My point is that the market is meant to be lower than where it was in Sept 2007, but QV has decided my house is worth more. How?
November 3rd, 2009 at 2:02 pm
So you have all given me reasons to ask my second question…..”why is growth a good thing that we aim for?”
Growth by definition is therefore not sustainable?
November 3rd, 2009 at 2:02 pm
Things are only worth what people are prepared to pay for them. Case in hand – there’s a townhouse a few doors down from where I live that’s had a “For Rent” sign outside it for 5 weeks now. We rang up about it, purely out of interest, as it’s a similar age to the place we went, only a bit smaller, not as well maintaned and part of a duplex as opposed to our standalone townhouse, and they’re asking $140 more a week for it!!! Man, I knew we were on a good wicket where we currently rent, but that’s insane! Obviously the landlord doesn’t need to have it occupied……
November 3rd, 2009 at 2:07 pm
@ Megan – yes, I recall an article that came out last week from QV saying that house prices in Wellington were down on 2007. It stated that “average prices had fallen 3.5%” so I guess some have risen and some have fallen well below that (I think Tawa fell into the latter category from memory). You’re obviously in the former category.
And I agree with you that there is more to life than making money. Enjoying life – I can’t think of anything more important than that
November 3rd, 2009 at 2:14 pm
@ Paul – “Growth by definition is therefore not sustainable?”……….logic says it can’t be. Not year after year after year after year anyway. I once worked for a huge international food producer here in NZ, they were the most miserable days of my life. I felt like a racehorse that was constantly expected to win “the race” – my boss was the jockey and he was permanently on my back whipping me to go faster (sell more). It didn’t matter if I sold 150% more than what I was forecast to sell, he’d keep whipping me to sell more. Who benefited from my increased sales? Not me! I’d ocassionally get tossed a carrot ($200 Farmers vouchers or similar) but generally ended my 10 hour days totally shattered and disenfranchised. The bigwigs and shareholders reaped most of the benefits – sounds like a pyramid or Ponzi scheme! In a nutshell, it’s unsustainable. I burned out, quit, and some newbie replaced me who had all the enthusiasm and energy under the sun…….and lasted 6 months. Rinse and repeat……
November 3rd, 2009 at 2:35 pm
well guess we shouldnt be suprised that the FED isnt going to get audited, dissapointed but not suprised, thought it was to good to be true, began to think the system might actually work, if i was a US citizen i would be pretty pissed
November 3rd, 2009 at 2:39 pm
@veedub – your experience sound like that of a lot of Kiwi employees. It’s certainly similar to my story. I’m much more careful about who I ’sell myself’ to now. And how much for.
Growth is certainly not sustainable for anything – there is always a limit and consequences somewhere. Our brand of capitalism has found ways to transfer the costs away from the beneficiaries. Cunning.
November 3rd, 2009 at 2:45 pm
the selling of ‘growth’ as an ideal, is the pushing of a ponzi which makes Madoff’s effort look like kindergarten.
Yet 60% of Kiwis still buy it. And I suspect another 20% don’t understand it.
November 3rd, 2009 at 3:08 pm
Joking?….absolutely, Megan! Sorry. I don’t know how to do all the fancy bits with HTML that would show my ironic tones. As veedub knows, I, like you, am one for the ‘life is for living’ philosophy; (without the pressure of excessive debt).
November 3rd, 2009 at 3:30 pm
There is a classic example of exponential growth where each day pond weed doubles the amount of surface covered and will cover the entire pond in thirty days. It takes 28 days to cover 1/4 of the pond, but only 2 days to cover the rest. i.e by the time its noticed, its already too late.
IIRC Chris Martenson also does a good presentation on the failure to understand exponential growth / componding interest ..
http://www.chrismartenson.com/crashcourse/chapter-4-compounding-problem
November 3rd, 2009 at 3:45 pm
Maybe Chris Martenson has shares in a laundry service , ‘cos he seems to be hell bent on scaring the shit out of the whole world .
November 3rd, 2009 at 4:04 pm
No it’s easy maths.
All percentage growth is expressed in terms of ‘doubling time’. 3% p.a. would double in 24 years (from memory), 10% p.a. in seven years.
If the resources of the planet were used up, the last doubling would have been from ‘50% depletion’. The one before would have been from 25% depletion, the one before that from 12.5%.
So when you have only used up 12.5 % of a finite resource, there are only 3 ‘doublings’ left.
It took so many ‘doublings to get to the 12%, that nobody was prepared for the coming landslide. We’re there now. 50% oil depletion, no doublings left.
Even a whole ‘nuther planet would only give you one more doubling….
November 3rd, 2009 at 4:06 pm
NZ Super Fund and Infratil looking at buying Shell’s business in NZ . If National are true to form , and scrap the fund ( after the 2011 election ) , the Gumnut can add bowsers to its’ eclectic mix of assets , Air NZ , KiwiRail , KiwiBank , Landcorp . S’pose they can give themselves a discount , and take the excise off the fuel they use .
November 3rd, 2009 at 4:07 pm
@Matt S – have you seen what happens to the weed in the days after it covers the whole pond?
November 3rd, 2009 at 4:15 pm
@ Megan “Our brand of capitalism”
Sad to say that we don’t have capitalism – we have Socialism/Facism. – where the state through interferance decides who succeeds and who fails.
November 3rd, 2009 at 4:26 pm
But the State has presently been commandeered by…..
November 3rd, 2009 at 4:36 pm
Megan, nope.. tell me?
Edit: RBA rate rise to 3.5%
November 3rd, 2009 at 4:47 pm
Acid tripping hippies harvest it , and get real confused when it won’t light up in their bongs ?
November 3rd, 2009 at 4:47 pm
Chris Martenson opened my eyes to the reality of our situation and the issues that will shape the next 20years.
Exponential growth in debt, depletion and population.
For those that haven’t try chapter 19
http://www.youtube.com/watch?v=YDNvr82gqd0&feature=player_embedded#
November 3rd, 2009 at 5:22 pm
We’ve been commandeered by people who think that growth will go forever, and who will stuff the planet my kids should inherit in the process.
It’s either arrogance, ignorance, or a combo, but I’d just rather hand the next generation a ‘going concern’.
We aren’t going to do that on this trajectory, and we’re nearly out of time. I emailed the Chief Science Adviser, with copies to Key, English, and Brownlee. Asked is he grasped things like ERoEI.
No reply.
November 3rd, 2009 at 5:31 pm
We’ve been commandeered by people who think that growth will go forever, and who will stuff the planet my kids should inherit in the process.
Mmm, I rather thought those ‘people’ were creating future jobs for your kids powereddown, and thus a future for them – you’re going to have to throw them out of that life boat of yours at some stage. Just as well there are a group of productive people out there trying to prepare a place for them.
Did you see my post on the other thread about how Antartica has just had the lowest ice melt in thirty years of satellite recording in its last (2009) summer. I hope Key and the designers of our economy killing ETS have noted that.
November 3rd, 2009 at 5:55 pm
Energy ration cards for everyone planned?
http://www.telegraph.co.uk/news/uknews/1493219/Energy-ration-cards-for-everyone-planned.html
November 3rd, 2009 at 5:55 pm
@ Mark Hubbard – you don’t get it. Those ‘future jobs’ might not exist as the world will have changed. The idea of a ‘job’ is a recent social construct. Who knows what will be the norm in 50 years time?
November 3rd, 2009 at 6:07 pm
NZ has just had it’s coldest October for sixty years Megan.
November 3rd, 2009 at 6:24 pm
Chairman – ‘Energy ration cards for everyone planned’. If I recall correctly this dates back to a House of Commons select committee recommendation in 2008.
EXTRAORDINARY COINCIDENCE ISNT IT!!!!!! When North Sea oil and gas are declining rapidly (with most of the decades of royalties squandered on welfare) and the Magnox and pressurized water nuclear reactors are being steadily decommissioned (with scant government regard to replacement) and the population is set to literally explode (due to deliberate governmental decreed mass immigration) and the purchasing power of Pound Sterling is being destroyed due to quantitative easing – low and behold and by pure coincidence it becomes necessary to look at rationing energy to save the planet. A more cynical gentleman than myself might think that the real reason for energy rationing is because – having squandered its indigenous supplies, and having squandered its nuclear expertise, and having created exponential increases in demand by mass immigration – that dear old Blighty – having destroyed much of the purchasing power of Pound Sterling – now finds itself broke and unable to buy the energy it is going to need. So much better to tell the punters they must suffer hardship to ’save the world’ than to come clean and say that decades of socialism have stuffed the country and its future!.
November 3rd, 2009 at 6:36 pm
Hi all you residential property boffins out there ….. isn’t great that property has only decreased in value by 4.4% approx. from it’s 2007 peak and we are still paying around 8-9 times the average income for an average house. Truly wonderful
Time to take away the tax credit on interest on mortgages for investment property I think ….. but the banks won’t have it, as they have too much tied up in these over priced, shoddily built, “leaky buildings” and as for the government , well most MP’s are have residential investment property, so fat chance….. as I say, we are a stupid, greedy little country, as in the end, the choices of a few will be paid for by the majority.
November 3rd, 2009 at 6:49 pm
@bullfrog
Banking is in a game of chicken with house prices – except in this game if either flinch its hame over for both.
Banks have to lend to keep prices up because they will be ruined if prices come down because they are over exposed to the market. If they stop lending, prices plunge and banks get wiped out with the punters who have bet on the house.
There is so much leverage and over endebitedness that there is no way out – keep lending and blow up the bubble further, or stop lending and burst the bubble. To all of those people who think that there is a way out that will be OK, just take a look at the US situation to see how it is going to end.
November 3rd, 2009 at 8:33 pm
@ Martin
Yes, you are right on the money. I am still amazed that a US like situation hasn’t happened here in NZ. I do suppose the banks however haven’t gone quite as overboard as in the US…but time will tell.
November 3rd, 2009 at 8:57 pm
Re:1
Disagree with the easy money idea. We not currently in an easy money scenario. Hence rising interest rates with no corresponding inflation.
November 3rd, 2009 at 10:24 pm
Mark Hubbard – do some physics research. And some stats research. Don’t they teach accountants about noisy data, probabilities and capacitances?
What do you do, just shove the pretty beads along the strings?
Fluctuation amplitude was predicted, and is entirely a reasonable expectation.
Get informed old son – do some night-classes or something.
November 3rd, 2009 at 10:24 pm
Martin/powerdownkiwi/Roger – I’m with Roger, anything graphing value over time needs to be on a logarithmic graph, otherwise it always draws an upwards curve. Journos always make this mistake, but hey it makes a better story. And it is sustainable, all that happens is new currencies get created. Take the Euro for example – Italian lira on your linear graphs would have been going vertical, but once the Euro came along suddenly nearly 2000 lira was just 1 Euro – and around it goes again…. like I said in the other thread Martin, we used to have copper coloured 1c coins, now it’s 10c – at some point it will be the $1 coin. Then some politician will have the bright idea of making the $1 coin the new 1c, since it’s copper looking anyway…….. and around it goes again…. millions become billions…. billions become trillions….. trillions become millions…..
November 3rd, 2009 at 10:25 pm
Excellent piece , Malcolm . Given me some ammo for some rather over the top arrogant Brits. wot I know , old chap . Cheers , man ………Have a gummy bear !
November 3rd, 2009 at 11:16 pm
Oh I know all about noisey data Powereddown: AGW has been built on political will, money and power greed, and just that – noise.
Just one table of peer reviewed studies indicating the sham (as profitable as it has been for Al Gore – he’s a billionaire on the back of it) of AGW:
http://groups.google.com/group/sci.environment/browse_thread/thread/31a80144379ca500/1e3496eca7ce23c1
Another study link:
http://epw.senate.gov/public/index.cfm?FuseAction=Minority.Blogs&ContentRecord_id=84e9e44a-802a-23ad-493a-b35d0842fed8&Issue_id
(REally worth reading this one: Quote: An abundance of new peer-reviewed studies, analysis, and data error discoveries in the last several months has prompted scientists to declare that fear of catastrophic man-made global warming “bites the dust” and the scientific underpinnings for alarm may be “falling apart.” The latest study to cast doubt on climate fears finds that even a doubling of atmospheric carbon dioxide would not have the previously predicted dire impacts on global temperatures. This new study is not unique, as a host of recent peer-reviewed studies have cast a chill on global warming fears.
“Anthropogenic (man-made) global warming bites the dust,” declared astronomer Dr. Ian Wilson after reviewing the new study which has been accepted for publication in the Journal of Geophysical Research. Another scientist said the peer-reviewed study overturned “in one fell swoop” the climate fears promoted by the UN and former Vice President Al Gore. The study entitled “Heat Capacity, Time Constant, and Sensitivity of Earth’s Climate System,” was authored by Brookhaven National Lab scientist Stephen Schwartz.
“Effectively, this (new study) means that the global economy will spend trillions of dollars trying to avoid a warming of ~ 1.0 K by 2100 A.D.” Dr. Wilson wrote in a note to the Senate Environment & Public Works Committee on August 19, 2007. Wilson, a former operations astronomer at the Hubble Space Telescope Institute in Baltimore MD, was referring to the trillions of dollars that would be spent under such international global warming treaties like the Kyoto Protocol.
… Other scientists are echoing Wilson’s analysis. Former Harvard physicist Dr. Lubos Motl said the new study has reduced proponents of man-made climate fears to “playing the children’s game to scare each other.”
Another list of links to peer reviewed anti-AGW studies:
http://www.warmingscaretactics.com/Peer_Review_Papers.php
Well over 100 studies on that list – a hell of a lot of noise.
Another list:
http://petesplace-peter.blogspot.com/2008/04/peer-reviewed-articles-skeptical-of-man.html
All this, and I’ve still lost my doc file in which I had been listing my main links.
Regarding AGW powereddown, how much of the ‘peer-reviewed’ science for this, outside the discredited UN fraud that is the IPCC, have you actually read?
Man-made global warming will be shown – is already – to be the biggest fraud of the turn of the century, with Al Gore making Madoff look like a rank amateur. Andon the back of this, our politcians are about to throw more and more of our freedoms away in Copenhagen. It is going to result in a body of unelected bureaucrats having a huge say in our lives: and unquestioning individuals like you have allowed it.
November 3rd, 2009 at 11:24 pm
And I don’t think you ever did give me your ‘considered’ thoughts on Professor Howard Hayden’s one letter disproof of AGW:
http://www.stephankinsella.com/wp-content/uploads/2009/10/HaydenToJackson.pdf
November 4th, 2009 at 12:02 am
@Murray,
Sorry son – you missed the message. We are talking about money – which among its tasks it features preservation of wealth. The only reason to resort to logarithmic charts is to hide the true effect of the compounding. Why would you want to do that? Maybe to fool the masses into believing that things were ok???
It was Keynes who said
“By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some. The process engages all of the hidden forces of economic law on the side of destruction, and does it in a manner that not one man in a million can diagnose.”
Inflation = confiscation of wealth – transfer of wealth if you like to those closest to the printing press. It is a deliberate government policy, along with the growth mantra that we are fed on a constant basis.
As Chris Masterson says, inflation has two components – Money growth and expectations. Govts jigger the numbers and manage expectations to keep the myth alive. The myth that everything will be ok.
To simply shrug and say “thats the way it is” – is an abdication of responsibility.
Sadly the moral fibre and independant thought of our society has declined. We have become a people who would rather sit at home, being spoon fed mindless propoganda than a people of action who care about our fellow citizens. Its easier to let the government tackle the big problems.
There is a nice story in the bible about Noah and his Arc. It makes interesting reading in light of our situation today. There are those who see the flood comming – it is not however a flood of water, but of fiat currencey. When the wave hits, those who prepared will survive intact – those who didn’t will be banging on the door saying save me!
Oh, and just for the record – I am not a religious person. The story just served as a good example of what I see coming.
November 4th, 2009 at 5:42 am
Murray is right : Given the magnitude of the compounding effect , those graphs ought to have been on a logarithmic scale . You are mis-representing your data , Martin . In the same way that audible pitch ( octaves ) , salinity ( ph scale ) , and seismic activity ( richter ) are depicted as powers of 10 . Those graphs look awesomely dramatic , surging vertically , going to the stratosphere , and beyond . Hello ! That is not what is really happening . Sorry son , you are wrong .
November 4th, 2009 at 6:45 am
Murray is wrong – ask any algal bloom.
Roger – “given the magnitude of the compounding effect” ????? So because it’s so dramatic, we should scale it back? What for? So as not to scare the children, or to fool ourselves it’s not so serious?
Regardless of scale though, the pyhsics remains the same. Depletion can absolutely be defined arithmetically if you’re worried. Here it is:
The oil is 1/2 gone. (does that work for you?
Mark – our weather is a system of ‘highs’ and ‘lows’ which march around the southern ocean. In summer, the highs tend south, in winter, they tend north. In between times, we get the aptly-named ‘equinoctial gales’.
Both highs and lows can drag up cold surface air from down south – the highs (anticlockwise) do it on their front edge, the lows (clockwise) on their trailing one, and if they are next to each other, there is an ‘eggbeater’ effect between them.
The greenhouse effect was always about spreading the desert bands (that circle the planet) further away from the equator – which is why the record drought and fire situation in Australia was entirely predicted – well within the models.
That shifting away from the equator (an average thing) will have an impact on WHERE those highs and lows come through. So it’s unsurprising indeed to find a record cold October – we’ve just had a record amount of southerly flow for the time of year, thanks to untypical placement.
Which is why we call it climate change.
That said, one spring does not a trend make. The ground is colder in spring, and the adiabatic lapse rate is greater than, say, in February. Much less stable atmosphere, magic thermals, great flying…..
November 4th, 2009 at 6:46 am
no1 “Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows.”
Introduce overnight any money exchanged in NZD can not be exchanged back into any other currency for a minimum 30 days. On an international scale introduce international law that no bidder can participate in any market unless they can prove they are capable of taking delivery of that, that they bid on. These two simple measures would dent the impact of speculation upon our realsector.
No 7, no surprises here, the Fed dont want to ever have to admit openly what most of the world will probably never cotton onto on their own.
November 4th, 2009 at 7:01 am
Aaahhh – no wonder gold has been so strong – the Indian Central Bank has being buying 200 tonnes….
http://www.bloomberg.com/apps/news?pid=20601090&sid=aUm.roGyeOR0
This is gold acting as money rather than as a commodity. Gold price has shot up in whatever currency you care to name. Note that industrial metals such as lead and copper were down on fears that the recovery is stalling and the US$ was up – so it wasnt a commodities or a $ story.
Fascinating.
November 4th, 2009 at 7:03 am
Martin – I agree with Keynes and have always said inflation is an ugly beast, but it is so ingrained in the human psyche that I believe we will always have it – so like your Noah example, it is wise to build yourself an Arc in preparation for the flood of currrency in future years. I know of no better Arc (aka “inflation proof asset”) than owning property long term.
The biggest problem with linear graphs is that they show actual increases and not percentage increases. If the price of something went from $1 to $2 fifty years ago, it would show on your linear graphs the same as something today increasing from $10 to $11, which is wrong. $1 to $2 is a 100% increase, and would be the same as something today going from $10 to $20, which a logarithmic graph would accurately show.
It can and will go on indefinitely, as more zero’s are added and new currencies are created. History shows that no single currency has endured through the ages. I’m not debating the moralities of the system, I’m just saying that’s the way it is – and logarithmic graphs show it accurately over time. Now, back to working on my Arc…..
November 4th, 2009 at 7:14 am
powerdownkiwi – “So because it’s so dramatic, we should scale it back?” – it’s actually the other way around. Linear graphs scale things up.
As I said above $1 to $2 is the same as $10 to $20. Even without graphing it over time, if ABC company sells $1 products, and increases their prices 10% to $1.10 that’s a 10% increase. If XYZ company sells a $100 product, and increases the price to $110, that’s a 10% increase.
Linear graphs would show ABC as a 10c increase, and XYZ as a $10 increase – 100 times as much! Greedy buggers……
November 4th, 2009 at 7:39 am
Martin/powerdownkiwi – here’s a link to a 100 year Dow Jones chart, the first is linear and the second is logarithmic.
http://www.lowrisk.com/djia100year.htm
Under a linear scale, the 1930s depression hardly even shows up since in absolute values it was quite small by todays standards, however in percentages it was huge at the time.
One thing your linear graphs are good at demonstrating to people is the diminishing buying power of their money over time, which is why hanging on for that 3% pay rise each year is a fruitless exercise…..
November 4th, 2009 at 8:43 am
powerdown : You believe in that climate change malarky too . Martin only got one thing wrong . You bagged the double ! Wanna treble ? Tell me more . ( excellent charts , Murray , they clearly demonstrate Martin / powders , mistake )
November 4th, 2009 at 8:57 am
Roger, not just Martin & powerdowns mistake, most journos including Bernard make the same mistake, and the internet is full of such graphs with people making huge crash predictions based upon them……
November 4th, 2009 at 10:01 am
Hi All
Welcome to the next financial trouble sparked by Collateralized Foreign Exchange Obligations (CFXO) – kind of CDO but in Forex. As all carry trades are insured with this type of derivatives and then suddenly the situation changed when US increases its interest rate in the future and USD appreciates promptly just before the maturity of the FX loans.
November 4th, 2009 at 10:02 am
Murray, instead of huge crash predictions then, how about something like the growing gap between rich and poor, or forever increasing house price multiples to income.? The exponential / parabolic is behind that too.
Take two salary and wage earners, each receiving a 7% pay rise each year. One on $33k, the other on $100k (gap $66k). After 10 years their salaries have doubled, rising at same rate but gap is now doubled too. No big deal you might say, but try that for say the CEO of Air NZ and see what happens.
But now do the same for house prices. When house prices are $100k, and a wage earner getting $33k. No big deal. Even double wage and house price, and is still no big deal. As it climbs up the initial long tail, its pretty much flat and so nothing seems wrong. Its not until you get a situation like today where the average salary is something like $45k, and avearge Auckland house price at $500k. Now double those figures a couple of times and see what happens?
November 4th, 2009 at 10:32 am
Matt S – it’s not the fact that growth in values is always exponential/parabolic that is the problem. The problem in the last 2 decades has been that house prices doubled each decade while incomes did not. It’s as much about incomes falling behind as house prices getting ahead. If we “double those figures a couple of times” as you suggest, it would make no difference – the ratios would still be the same. It’s only when one changes at a different rate (say incomes double, but house prices triple) that the ratios change. I would expect in the next decade to see smaller housing gains and bigger income gains.
A couple of other points:
- the average Auckland wage is higher than the average NZ wage
- houses built in the last decade are over twice as big and have many more features than say a 1960s house, so it would be logical for the income/price ratio to have increased.
November 4th, 2009 at 10:37 am
I think Matt makes a good point – it is when you compare the rates of compounding that you see the problems, either by different starting rates and constant dounling, or even same starting value and different rates of doubling. Either way you have the extreme divergence.
You can not compare the 1930’s with today. In the 1930’s, money was gold and that set a limit on the amount that could be printed. We are now 80 years down the road, and we have had 38 years where the worlds currencies have been free floating items with no fiscal restraints.
Have you noticed that in the past 2 years, billions have become trillions? Soon 10’s of trillions and then 100’s… Does that not jangle any warning bells? For all of the talk of deflation out there, all i can see is massive inflation. It’s just not being spent into existance yet.
One day soon, in desperation after everything else has failed, the governments are going to open the flood gates and release the tide of money on society. It will not be pretty.
On an aside, I’m not convinced that property is the be all and end all of inflation hedges. Securing shelter is a good thing, but as a store of wealth it is lacking for a couple of reasons.
1. It is not movable – if you have to leave the area your property is in you can’t take it with you.
2. You can not sell 1/10th of your house should you need it. (except by home equity loans whihc add liabilities).
3. Houses are a depreciating asset. Left to their own devices they will decay. In order to preserve their value you have to maintain them, thus sinking more money into them.
4. The can not be purchased without taking on debt, and until they are paid in full, they are not really yours.
5. They only have value if you can find a buyer to pay what you want for it.
November 4th, 2009 at 10:47 am
Murray, totally agree that wages haven’t been rising in line with house prices, and in fact haven’t been keeping up with many things. Whereas house prices have reached the point in the parabola (where the upward curve is really starting to steepen) and where people are now starting to notice its effect. To this point in history house prices have been moving along that long tail, no one has really noticed it much. Wages have yet to reach that point and are still way behind on the tail, hence the stress to the economy.
So it seems you do agree then with those crash prediction graphs after all?
November 4th, 2009 at 11:05 am
Matt S – no I don’t agree with predictions of giant falls, but I do agree that house prices and various other prices have risen faster than wages.
“house prices have reached the point in the parabola (where the upward curve is really starting to steepen)” – with linear graphs that depends entirely on your start point. If you started 1000 years ago prices would have gone vertical many moons ago. Logarithmic graphs don’t suffer this problem…..
November 4th, 2009 at 11:19 am
Martin –
1. No, but you can sell it and buy where you are moving to, or keep it and rent it out. You can also get relatively cheap insurance against fire etc.
2. Depending on the size of your mortgage it is often quite easy to increase your limit, which is quite often really just redrawing principal you have paid off. There are also syndicates and proportionate ownership schemes if you want to buy or sell a 1/10 share.
3. I agree, and have often argued that much of the increase in values is actually money that people have poured in to them.
4. That depends on your situation, if I sell another property first I can then buy another property with cash and no mortgage.
5. You may not get what you want for it, but as long as there is a buyer there is a value. This applies to anything – shares, property, art, concert tickets!……
November 5th, 2009 at 7:31 am
Roger T and Murray – sorry, I was at a Centre for Energy Research conference all yesterday, out of action.
The only graph that counts is that of the ‘real’, and the ‘doubling time’ used by biochemists etc, is indeed the way it happens.
Of course that will make the thirties look like a minimal blip – surely that’s the exponential growth we’re talking about.
I suspect the problem is that you folk may work with figures in an esoteric environment.
Folk like me track real figures in real environments. The water-flood of Ghawar for instance.
I’ll give you the tip – the next ‘doubling’ can’t happen, not if it involves real physical resources. We’re past peak supply for too many commodities now.
Regardless of which way we scale x and Y.