Since I was concentrating on the politics of the budget in my post last night, it’s worth pointing out that there’s an interesting take on Wayne Swan’s first budget from market economist (and former Keating adviser) Barry Hughes at New Matilda this morning. It’s confirmation of some of the early reaction from other economists on Lateline Business that the policy settings in the budget are basically neutral, giving the government (and the Reserve Bank) wriggle room to respond if things take a quick downward turn in an environment of almost unprecedented international instability. But it’s worth remembering one thing. Unlike the previous government, this one actually does have a macro-economic policy:
Financial markets will be thankful for small mercies. Who knows what Howard and Costello might have done? Perhaps they might have finally learnt some economics. But on their past form they would have continued to party. Keeping a budget surplus around one per cent of GDP would have left high single digits of more billions of new spending and tax cuts. And financial markets will also be impressed that the ALP has been able to slot in its new spending without blowing any valves.
Think about that as you assess the economic value (if any) of anything Malcolm Turnbull and Brendan Nelson have to say about the “Labor budget for a nation”.
Update: Also in New Matilda, Ben Eltham on the rhetoric and the reality of budget cutting, an assessment of the “Education Revolution” and the infrastructure fund… And somehow an AFL metaphor slipped into the title of my contribution to the budget discussion the morning after.
Terms like “securitisation”, “derivatives”, “longitudinal diversification” and “dynamic hedging” would make most of our eyes glaze over, I suspect. Yet all this arcana is now having an impact on us - vie the subprime mortgage crisis and the shock waves it’s set off in the world economy. There are at least two factors which mitigate against discussion and examination of causes and solutions - the arcane nature of the math and language used by the finance wonks, and the reactive press coverage - attuned more to reporting on what pollies and regulators are saying or doing than assessing causes and debating the way forward. So I’d thoroughly recommend taking the time to read author and sociologist Robin Blackburn’s article The Subprime Crisis. It took me about half an hour to read, but I think it was time well spent, as Blackburn takes great care to demystify the nature and history of the crisis, and thus provides a basis for thinking about its implications which is far better than skimming spin laden or impenetrably written articles.
Continue reading ‘So how about that credit crunch?’
The price of oil continues to set records - it’s now reached nearly $126 US Dollars. While some of that can be attributed to the Pacific Peso-ization of the greenback, by most measures the oil price has reached a record. Against the Euro, it’s still a record. Inflation-adjusted, it’s still a record.
But there’s still one measure by which the oil price isn’t a record - against the purchasing power of the average Western consumer, apparently. According to today’s Fin, it would have to reach somewhere around $135 per barrel to match the peak price of oil by that measure. But it seems like there’s every possibility it might continue to go up in the short term. Indeed, some guy from Goldman Sachs is predicting that oil will reach $200 per barrel in a few months’ time. Continue reading ‘Oil marches on…’
While everyone’s heard the jokes about the USA being the land of the monster truck, it’s not until you actually go there and wander round a shopping mall carpark that you appreciate just how gargantuan the average American family vehicle is. The typical American car isn’t a car at all, it’s a Ford F-150 SuperCrew, a 2500 kg behemoth. They’re terrible to drive, by all reports, and get about 13mpg - or, if you like, use 18 litres for every 100 kilometres driven. But, since 2001, sales of “light-duty trucks” of this ilk have exceeded total sales of passenger cars in the United States, helped not only by cheap fuel but a collection of tax write-offs that encouraged their purchase.
Continue reading ‘Energy roundup - cars vs trucks, better biofuel’
Michael Molitor gave a public lecture last night at UNSW, where he now holds an adjunct professorship with the Climate Change Research Centre between appointments as a ‘Carbon Manager’ for PriceWaterhouseCooper. The talk was entitled Climate Change: ‘Show Me The Money’, which is the famous line from Tom Cruise’s character in Jerry Maguire - so when Molitor spoke passionately of the ‘Governor of NSW’, I was thankful that there were no couches onstage. Though, to be fair, the event showcased a fascinating, eclectic and sometimes contradictory mix of bravado-filled insights on the problem of climate change from someone on the inner circle of business elites. The message was familiar enough - that we aren’t moving quickly enough for the scale of the problem - his analysis, however, was somewhat less conventional.
The ‘good news’ began with the observation that our ‘carbon productivity’, that is, our economic outputs from machines relative to their spewing waste into the global carbon dump has actually been increasing over time. Continue reading ‘Molitor@UNSW’
In the wake of Joshua Gans and Christopher Joye’s AussieMac proposal for a government-backed corporation to provide access to low-cost capital for home loans, it’s interesting to see what’s happening in the UK. According to The Guardian:
The plan is expected to allow lenders to swap mortgages for government bonds or similar instruments, which they could then use to provide collateral for raising cash in money markets.
“We are working very closely with the banks and very collaboratively at options for providing more liquidity to markets,” said a government source. “Things are not quite finished but we are not far off.”
The scheme would only cover mortgages issued up to the end of December last year. This would help thaw frozen money markets but not support new lending or create risks for taxpayers.
Continue reading ‘Bank of England swapping mortgages for government bonds’
This is just a hunch, but here it is for the sake of argument.
I’ve always argued that the Fin Review is well worth $2.70 a day because a lot of what’s actually important to our politics - and our everyday lives - gets discussed there and nowhere else much. Old style unionists didn’t make a practice of reading the Bosses’ Bible for nothing. We’re fast entering a period where economics has risen to the top of the political agenda again - in a rather odd way, it’s somewhat reminiscent of the Whitlam era - a PM who has strong interests in foreign policy and nation building takes office just as the wheels start to fall off the economic engine. Obviously there are differences, but it’s a parallel that struck me when I read Brian Toohey arguing that Kevin Rudd just doesn’t get economics - and that may be exaggerated but you only have to listen to his waffle in question time when asked a question about the economy to realise there’s a fair bit of substance to it. Hopefully there’s no reason to despair, as he’s notoriously a quick study, and it was interesting to read in the Fin today that he’s seconded a senior Treasury boffin to his personal staff.
One thing the PM does know is diplomacy.
Continue reading ‘Exploiting the sovereign’s wealth’
The political and economic blogosphere seems to be pretty happy with the latest discussion paper from the Garnaut Review, from Christine Milne, through Peter Martin, to Harry Clarke, to Joshua Gans. The person most directly concerned, Penny Wong remains a study in non-commitment, of course.
There are several reasons why this proposal is getting an enthusiastic response, including its reasonably solid environmental credentials, the adherence to economic orthodoxy (and previous experience) in auctioning permits rather than handing them out; and, perhaps, a small degree of schadenfreude in that the Greenhouse Mafia of existing polluters aren’t going to be rewarded further for polluting.
Continue reading ‘Everybody loves Garnaut - except power companies’
Today’s Australian carries an edited extract of a speech by Vaclav Klaus, President of the Czech Republic, on what he sees as the dangers of “climate alarmism”.
Klaus is one of the dwindling number of heads of state and/or heads of government who do not accept the consensus of climate scientists, and the large majority opinion of the world’s citizens, about the reality of climate change due to the anthropogenically enhanced greenhouse effect. However, what is interesting about the extract of his speech in the OO is that it does not attempt to seriously engage with or contest the climate science consensus. Nor does it adequately engage with the growing economic literature which suggests that substantial reductions in the carbon intensity of production can be achieved through market-based instruments and without sacrifgicing economic growth. Rather, it makes clear that Klaus’s real objection, as a Hayekian liberal, is that concern over climate change could be the Trojan Horse for a 21st century equivalent of the threat to freedom posed by totalitarian communism. He states that:
Future dangers will not come from the same source. The ideology will be different. Its essence will nevertheless be identical: the attractive, pathetic, at first sight noble idea that transcends the individual in the name of the common good, and the enormous self-confidence on the side of its proponents about their right to sacrifice the man and his freedom in order to make this idea reality. What I had in mind was, of course, environmentalism and its present strongest version, climate alarmism… We have to restart the discussion about the very nature of government and about the relationship between the individual and society. We need to learn the uncompromising lesson from the inevitable collapse of communism 18 years ago. It is not about climatology. It is about freedom.
Continue reading ‘Vaclav Klaus’s incomplete history lesson’
Before getting too up in arms about former National Party leader Mark Vaile moonlighting as a lobbyist - while staying on the public payroll as an MP - let’s look on the bright side and note that he can’t continue to pervert good environmental policy. While in government, the National Party remained the biggest single barrier to fixing the Murray-Darling river system, with their absolute refusal to countenance the idea that governments would have to buy back water allocations.
And now, quietly, without fuss, it’s beginning to happen, as Professor Quiggin discusses approvingly at length:
Three months after the change of government, the seemingly immovable barriers to action have disappeared. The Minister for Water, Penny Wong, has announced a tender to buy water rights back from irrigators willing to sell, allocating $50 million for the current financial year.
Continue reading ‘Waterworld’
It’s all doom and gloom throughout Australia’s farms, isn’t it?
Nope. Now that the drought has started to break in parts of eastern Australia, farmers can take advantage of record prices for “soft commodities”, such as grains. Meanwhile, dairy farming’s not doing so bad either - over in New Zealand, dairy farmers can’t get enough people to work on their properties as the industry’s growing too fast to keep up. While the irrigated dairies of the Murray-Darling basin can’t get enough water to produce much, over the other side of the Divide Gippsland dairy farmers are doing quite nicely.
What’s going on? Well, a lot of it’s the same story as mined commodities - increased demand from China and India. As people get themselves out of poverty, one of the first things they tend to buy more of is meat. And the vegetarians are right - it requires a heck of a lot more than one kilogram of grain (that could otherwise be eaten) to produce a kilogram of pork, chicken, or fish. Throw in the United States’ (and to a lesser extent, the EU’s) quixotic attempt to grow its way to “energy independence” through turning its corn crop into alcohol, and you’ve got a big jump in demand for all things agricultural.
Continue reading ‘Next, the farm boom’
The Age has a report about the three biggest American investment banks, Citigroup, JP Morgan and Morgan Stanley, releasing some new principles about financing electrical generation. Frankly, the press release from Citigroup is more informative. Basically, in consultation with some American green groups, the banks have figured out that carbon charging is coming, and that any new investment in electrical generation needs to take that into account.
The principles include recognition that funding demand reduction and renewable energy technologies should be given serious consideration, and the future carbon costs of conventional power, particularly coal-fired electricity, need to be given “enhanced diligence”.
You have to wonder what’s going to happen around Australia when the baseload electricity capacity crunch hits in the next few years (and it will; I’m prepared to take bets that demand reduction won’t be nearly fast enough to produce absolute cuts in power requirements). NSW and Victoria, at least, seem to still be pencilling in more coal-fired power stations - and NSW is trying to get the private sector to buy their existing ones. Given that carbon capture technologies seem to be fading into the future, getting banks to pony up the dough might be harder than they think.
Ross Garnaut, heading the emissions trading review that Rudd pre-emptively commissioned before the election, has caused quite the fuss with comments on short-term emissions targets. According to news reports, he’s not particularly fussed about short-term emissions reductions: The Age reports:
More than six months before the report is due, Prof Garnaut said it was more important to achieve a long-term greenhouse gas reduction target - for example over 40 years - than to meet short-term targets in particular years.
The market should decide how quickly to cut emissions, he said.
“By focusing on a particular date you may diminish the environmental impact of what you’re trying to do and you may increase the economic costs of it,” he told ABC Radio.
The question seems to come out of the second discussion paper that Garnaut has released in the course of his inquiries, relating to the financial risks associated with climate change and how they might best be tackled. The issue of short-term targets is a complex one, at the intersection of technology, economics, and politics, and Garnaut has a point. But it’s probably not one that should be taken to its logical extreme, and the evidence so far suggests that Garnaut isn’t going to recommend anything so simple as “the market” exclusively deciding to cut emissions. Continue reading ‘Garnaut’s banking and borrowing causes a fuss’
In the light of the reactions to recent stock market turbulence, an interesting counterpoint with the news in another asset price market. Melbourne property prices rose an average of 25% last year, with Brisbane, Adelaide, and Canberra all experiencing very substantial real price rises as well. As the article says:
Renters were not spared either, with the Bureau of Statistics reporting that Melbourne rents jumped 5.4%, the biggest annual rise since 1991.
Hmmm. The price rise in the asset is a huge multiple in the income that can be extracted from it. But wait, there’s more… Continue reading ‘Scary market fluctuation’
It’s not a particularly radical statement to say that capitalism can be irrational. Keynes got it right back in 1936 when he examined short term behaviour in the stockmarket. And Greenspan knew what he was talking about when he warned of “irrational exuberance”.
One of the interesting aspects of the current financial crisis is that many of the problems are caused by an erosion of trust - banks won’t lend to each other and various markets have come to a halt because no one trusts other actors to have acted responsibly in disclosing how much they’re exposed to bundles of subprime debt. In many quarters, the finger is being pointed at regulatory authorities - because there’s no transparency in what’s going on. But that begs the question of whether immensely complex financial products are actually rational in the first place, or whether this result was always on the cards.
George Soros thinks the latter. Soros tends to cop it because he’s seen as some sort of class traitor - immensely wealthy but now prepared to warn of “market fundamentalism”. That seems to me unfair, and his own experience would suggest that he understands all this stuff better than most. It’s also interesting to read his view on the political economy of the current crisis, because the crazed nature of the way the American economy has been run - underpinned by the USD as reserve currency - is unsustainable, and we’re probably seeing the limits of that sustainability being reached now.
Continue reading ‘What is the exact nature of the catastrophe?’
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