Monday, January 30, 2012

Super. Shorten opens the can of worms

Tightening access for the pension will be up for discussion as part of a new push by the government to make superannuation fairer.

Minister Bill Shorten has assembled 16 industry professionals and experts to advise him on “providing Australians with more options in retirement and improving certain superannuation concessions”.

The roundtable, to be chaired by Mr Shorten himself will toss around ideas rather than formally receive submissions or make recommendations. It is the approach the government took in deciding on the form of the carbon tax legislation.

“We have got to look at the ridiculous notion that super is there to take pressure off the age pension, said one of the members of the panel, Richard Denniss of the Australia Institute.

“Peter Costello and John Howard loosened the means test and the assets test for the pension very generously on their way out. People of substantial means are getting the part pension and getting access to up to $800 a year to help meet their utility bills.”

“I’ll be telling Mr Shorten he can’t look at the rules governing superannuation without also looking at the rules governing access to the pension."

Another panel member, Pauline Vamos of the Association of Superannuation Funds agreed.

“We have to look at it... The means test threshold has to move much higher,” she told the Herald. “Super was meant to be a replacement for the pension, not tacked on alongside it.”

Access to a part pension is at present available to couples earning up to $65,572 a year and single retirees earning up to $42,837 a year. The Industry Super Network's David Whiteley, who is also on the panel, said he expected it to examine Treasury modelling on the effect of access to the pension.

“Interaction with the pension has to be an element. I don’t have a firm view on where access should be cut, but it has to be an element.”

Dr Denniss said a recent letter to a financial advice column concerned the plight of an Australian in receipt of a full age pension plus income from a defined benefit super scheme who had paid off his house and owned four investment properties. “He wanted advice. I think that one letter spells out just about all that’s wrong with this ridiculous notion that super is there to take pressure off the aged pension system,” he said.

An even bigger problem was that contributions to super were taxed at 15 per cent, yielding almost no tax benefit for someone on the 15 per cent marginal rate, but a big benefit for someone on the 45 per cent marginal rate.

“They’ve taken some action. They are going to post people on the lowest tax rates a $500 cheque, but it is trivial compared to size of the tax concessions still offered to the rich, Dr Denniss said.

Ms Vamos cautioned against making further big changes to the superannuation tax rules.

“No system is going to be perfect. The changes people are talking about would really only tweak at the edges in terms of their effect, but would be very disruptive.”

Mr Shorten said it was important to examine the fairness of the system before the start of the phased increase in compulsory super contributions from 9 per cent to 12 per cent from July 2013 and July 2019.

Other questions to be considered by the roundtable would include the compliance cost of proposed changes to the concessional contributions cap and the availability of annuities as an alternative to lump sums.

All proposals would have to be funded by offsetting savings.

Published in today's SMH


THE HON WAYNE SWAN MP
Deputy Prime Minister
Treasurer

THE HON BILL SHORTEN MP
Minister for Employment and Workplace Relations
Minister for Financial Services and Superannuation

29 January 2012

SUPERANNUATION ROUNDTABLE

The Gillard Government is today pleased to announce a new Superannuation Roundtable to consider ideas raised at the Tax Forum for providing Australians with more options in retirement and improving certain superannuation concessions.

Our superannuation system is based on the foundation of compulsory savings, supported by concessional tax treatment, with the aim of ensuring that more Australians have adequate savings in retirement.

The Government is already implementing important reforms to make superannuation concessions fairer for low-income earners and improve the adequacy and equity of the retirement income system. These include increasing the superannuation guarantee, introducing the low income superannuation contribution, abolishing the age limit on the superannuation guarantee, and providing Australians with access to low-cost funds through MySuper.

At the recent Tax Forum there was further discussion about building on these reforms by giving retirees more options in the drawdown (or ‘post-retirement’) phase, and about better ways to target and more efficiently deliver current concessions.

The Superannuation Roundtable will progress these ideas by bringing together representatives of the superannuation industry, small business, employees and the community sector, as well as technical experts and academics.

The first stage of work for the Roundtable will discuss and examine better ways to target and deliver certain concessions. The Roundtable will need to consider offsetting savings from within the superannuation system for any proposals that have a budget cost.

As part of this initial work, the Roundtable will consider compliance cost issues raised by the superannuation industry in relation to the new higher concessional contributions cap for individuals aged 50 and over who have less than $500,000 in superannuation.

The Roundtable will subsequently examine proposals to expand options in the drawdown phase, like annuities and deferred annuities, as well as appropriate offsetting savings.

We expect this work to be completed by December 2012.

The Roundtable will be chaired by the Minister for Employment and Workplace Relations, Minister for Financial Services and Superannuation, the Hon. Bill Shorten MP.

The work of the Roundtable will build on the significant superannuation reforms announced by the Government as part of its Stronger, Fairer, Simpler package of tax reforms. These include:

· progressively increasing the superannuation guarantee rate from 9 per cent to 12 per cent from 1 July 2013 to 1 July 2019;

· introducing a new low income superannuation contribution worth up to $500 a year from 1 July 2012, which will effectively refund the 15 per cent contributions tax for individuals with income up to $37,000;

· introducing a $50,000 concessional contributions cap for individuals aged 50 and over who have less than $500,000 in superannuation from 1 July 2012, which is $25,000 more generous than the general cap of $25,000; and

· abolishing the 70 year age limit on the superannuation guarantee from 1 July 2013.

The Government’s reforms to boost retirement incomes are part of a broader suite of reforms to strengthen and broaden Australia’s economy. These include over 30 individual reforms originating from the Australia’s Future Tax System Review, including resource taxation reform making possible higher retirement savings for all Australian workers and tax relief for Australia’s 2.8 million small businesses.

Also arising from last year’s Tax Forum, the Government has established the Business Tax Working Group to look at how our tax system can best help businesses increase productivity and respond to the pressures of a changing economy.

The membership of the Superannuation Roundtable will be:

The Hon. Bill Shorten MP (Chair)
Minister for Employment and Workplace Relations
Minister for Financial Services and Superannuation

Hazel Bateman
School of Risk and Actuarial, University of New South Wales

John Brogden
Chief Executive Officer, Financial Services Council

Everald Compton
Chairman, Advisory Panel on the Economic Potential of Senior Australians

Richard Denniss
Executive Director, The Australia Institute

Paul Gerrans
Business School, University of Western Australia

Dr Cassandra Goldie
Chief Executive Officer, Australian Council of Social Service

Melinda Howes
Chief Executive Officer, Institute of Actuaries Australia

Ged Kearney
President, Australian Council of Trade Unions

Mark Rantall
Chief Executive Officer, Financial Planning Association of Australia

Fiona Reynolds
Chief Executive Officer, Australian Institute of Superannuation Trustees

Andrea Slattery
Chief Executive Officer, SMSF Professionals’ Association of Australia

Peter Strong
Executive Director, Council of Small Business of Australia

Pauline Vamos
Chief Executive, Association of Superannuation Funds of Australia

David Whitely
Chief Executive, Industry Super Network

Cate Wood
Australian Association of Women in Super

Representative of the Joint Accounting Bodies


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Israel as the RBA's Eden Monaro

Mmm..

Could Israel hold the key to next week’s Australian decision about interest rates?

Martin Whetton, an interest rate strategist at Nomura Group thinks so. He says Australia’s Reserve Bank has followed the lead of Israel’s central bank on 16 or the past 19 occasions it moved rates.

The Bank of Israel has just cut rates for the third consecutive meeting. If Australia’s Reserve Bank cuts on Tuesday week it’ll be the third consecutive occasion.

Asked why the two should move in unison and he and some of his colleagues take the relationship seriously, he is momentarily stumped.

“It can’t be because we both have masses of resources,” he says. “But we are both small open economies, able to navigate our own ways in the world.”

“And there are the backgrounds of the people involved... Israel’s Stanley Fischer got his doctorate in economics from the Massachusetts Institute of Technology. Two of the assistant governors under Australia’s Glenn Stevens got their doctorates from MIT.”

“People from MIT seem prepared to go against the consensus. Both Australia and Israel reacted extremely quickly the global financial crisis. Each moved from tightening rates to pushing them down in a matter of months.”

“Fischer and Stevens are each conservative in that they manage the economy in a conservative way, but they are not bound by conventional wisdom. They are prepared to run their own race.”

Mr Whetton says each is looked to by traders in the US for guidance as to what a forward-thinking bank governor would do.

“It is case of each being independently ahead of the game. I don’t know what relationship they have personally - I couldn’t begin to speculate. I doubt if they phone each other before meetings.”

Stanley Fischer is a former World Bank chief economist and deputy managing director of the International Monetary Fund. He last week denied reports he was interested in seeking Israel’s presidency after Shimon Peres steps down in 2014.

"I feel lucky in being governor of the bank," he said. "As an economist for many years I believe the career and personal track that I have chosen does not necessarily train me to serve as President.”

Glenn Steven’s term of Governor of Australia’s Reserve Bank expires in September 2013. Next month assistant governor Philip Lowe moves into the number two spot as his deputy governor - traditionally a staging post for the top job. He got his doctorate from the MIT.

Published in today's Cnberra Times, SMH and Age


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Thursday, January 26, 2012

RBA free to move. It may not move, but it is now free to move

A dramatic drop in inflation means there’s now nothing to stop the Reserve Bank cutting interest rates when it meets for the first time this year Tuesday week..

Australia’s official rate of inflation fell to 3.1 per cent for the year to December and to zero for the December quarter itself. It’s the first time Australia has recorded no inflation in a quarter since December 2008.

Offsetting increases in the prices of telecommunications, rents and domestic holidays were big falls in the price of fruit; led down by a 46 per cent slide in the price of bananas, and prescription drugs led down the end of the year cut-in of the Pharmaceutical Benefits Scheme safety net.

But even the seasonally-adjusted rate of inflation was low, coming in at just 0.2 per cent for the quarter.

The Reserve Bank’s preferred measures of underlying inflation came in at 0.5 and 0.6 per cent, suggesting price pressure is well within the Bank’s target band.

“Inflation is a dead duck. The Reserve is all but certain to deliver an interest rate cut on February 7,” said Stephen Koukoulas, until last year economic advisor to prime minister Julia Gillard.

“Inflation is simply not a concern, the Bank’s decision in February need pay no heed to the consequences for prices,” said BT Financial Group economist Chris Caton...

But futures traders marked wound back their bets on a February interest rate cut, cutting the implied probability from 84 per cent to 66 per cent. “The underlying inflation figure came in just above the market’s expectations,’’ explained NAB currency strategist Emma Lawson. “That allowed some pricing of the expected cut to be taken out of the market.”

The Reserve Bank itself believes price pressure is firmly in the middle of its 2 to 3 per cent target band - low enough to enable it to cut rates once more but not low enough to compel it to cut.

Tuesday week’s decision will be heavily influenced by developments in Europe and the Bank’s assessment of their implications for the rest of the world.

Treasurer Wayne Swan spoke by telephone to International Monetary Fund chief Christine Lagarde yesterday telling her Australia understood the danger of a new global downturn and pledging support for the her efforts to fight one.

Australia is expected to announce a decision about whether to pledge more money to the IMF at a Group of 20 Finance Ministers’ meeting in February.

Darwin recorded the biggest December quarter fall in the prices of 0.7 per cent. Perth recorded the biggest increase; 0.3 per cent. Sydney prices fell 0.1 per cent, Melbourne prices climbed 0.1 per cent.

Supermarket price wars saw bread prices fall 2.3 per cent over the year to December and milk prices 10.1.

Vegetable prices slipped 3.6 per cent over the year, while fruit prices climbed 24.4 per cent.

Insurance premiums climbed 7.2 per cent, child care charges 8.5 per cent, water and sewerage charges 8.6 per cent and electricity prices 12.2 per cent.

Treasury modelling says water, gas and electricity costs will climb a further 7.9 per cent as a result of the carbon tax to be introduced in July. The Reserve Bank has promised to “look through” such increases in setting rates, acting only on what it believes are other reasons for price increases.

Published in today's SMH and Age


INFLATION STALLS

Year to December: 3.1%
December quarter: 0.0%

HEADING DOWN:

Bread prices down 2.3%
Major appliances down 4.6%
Electronic goods down 9.8%
Milk prices down 10.1%
Computer software down 18.8%

HEADING UP:

Insurance premiums 7.2%
Child care charges up 8.5%
Water & sewerage up 8.6%
Electricity prices up 12.2%
Petrol prices up 12.4%

Year to December, ABS 6401.0


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Wednesday, January 25, 2012

CPI at 11.30 AEDT. How will the market take it?

ANZ:

An outcome for underlying inflation of 0.8% q/q or more would be a genuine surprise. It would likely cause the RBA to revise up its inflation forecasts (after they cut them in November) and would lift the hurdle for a February rate cut considerably.

Underlying inflation of 0.4% q/q or lower would be a genuinely low outcome.
This would probably see the RBA revise its forecasts downwards, and would suggest that momentum in the non-mining economy is weaker than the (mixed) activity data is suggesting. Whilst we doubt such a low result would trigger a 50bps cut at the RBA's February meeting, it would certainly provide scope for the RBA to deliver back-to-back 25bps rate cuts in February and March, should other domestic and global conditions warrant such easing.

An outcome of between 0.5% and 0.7% q/q would be consistent with the RBA's current forecast, and thus not particularly inconsistent with current market pricing. A result of 0.7% q/q, while 0.2ppts above the market median forecast, would still see the six month annualised underlying inflation rate fall slightly, provided there are no revisions to the historical data. Hence, any initial market reaction that perceived 0.7% as a high result could be quickly reversed.


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Don't treat fiscal policy as a morality play. This could be 1930 - IMF

Gee, how did The Australian report her pleas about fiscal policy?

The world will face a “1930s moment” of the kind that brought on the great depression unless money can quickly be found to support nations such as Italy and Spain, the International Monetary Fund says.

Ahead of releasing dramatically downgraded forecasts early this morning Australian time IMF chief Christine Lagarde told an audience in Berlin $1 trillion would be needed to support ailing governments and stave off a deeper crisis - half of which would have to come from Fund backers such as Australia.

Australian Treasurer Wayne Swan backed Ms Lagarde saying without “larger firewalls” to protect embattled European nations the global economy was a risk.

But Shadow Treasurer Joe Hockey questioned whether such payments were in Australia's national interest.

The IMF has shaved three quarters of one per cent off its previous global global growth forecast issued in September. It expects the world economy to grow by 3.25 per cent in 2012 and advanced economies 1.2 per cent. China would grow 8.2 per cent, down from 9.2 per cent. The so-called Eurozone would shrink 0.5 per cent before growing weakly in 2013.

But Ms Lagarde warned the world was facing something much worse - “a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand”...

“I understand the frustrations of the rest of the world. Just as they were picking up the pieces after the 2008 crisis they watch their recovery being blown off course by trouble in Europe. I also understand the feelings in countries that have been thrifty, asked to help those who could have managed their economies more prudently,” she said.

“But must all understand is that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral.”

The IMF economic update released overnight (WED 2.00AM) warns of “adverse feedback loops” in which countries that have trouble paying debts cut spending further, depressing their economies further, making it even harder to repay their debts and imperiling financial institutions worldwide.

In Berlin Ms Legard attacked the “worrisome tendency to view fiscal policy as a morality play between profligacy and responsibility.”

Spending cutbacks were no longer a black or white issue. While governments should commit to cutting spending in the medium term, the US in particular should avoid cutting further at the moment. Countries such as Australia which could readily finance higher deficits should allow them to climb rather than cut back if the world turned down.

Mr Swan endorsed the IMF analysis saying no country can expect to be immune from the global threats it identified.

Coalition Treasury spokesman Joe Hockey said should the IMF ask Australia for more money “the government must explain to taxpayers whether it would be in Australia's national interest to contribute, and from where it plans to fund any such contribution."

A spokesman for Mr Swan responded “Mr Hockey would be better off working out how he will pay for the $70 billion budget crater that he announced on breakfast television, rather than undermining half a century of Australian governments meeting their responsibilities”.

Published in today's Canberra Times, SMH and Age


Global Challenges in 2012

By Christine Lagarde
Managing Director, International Monetary Fund

Berlin, January 23, 2012

Good afternoon. It’s a great honor for me to be here, in Germany, in this great city of Berlin. Germany plays a vital role in Europe, in the global economy, and on the global stage. There can be no resolution to the crisis without Germany, and a lack of resolution will in turn hurt Germany, the euro area’s economic linchpin. I can think of no more suitable place to make this point than the German Council on Foreign Relations, which has been at the forefront of the debate on Germany’s role in the world for the past fifty years.

Before going any further, I would like to pay tribute to the tireless efforts of my good and highly-respected friends Chancellor Merkel and Minister Schäuble in seeking solutions to this crisis.

As we turn the page on a turbulent year, a year in which so much of what could go wrong did go wrong, many look to the future with trepidation and foreboding. They worry about uncertain economic prospects, dwindling job opportunities, and rising inequality. About what kind of future awaits their children.

Indeed, in the economic outlook that the IMF will release tomorrow, we will lower growth forecasts for most parts of the world. Even these lower forecasts assume a constructive policy path that is by no means assured.

In too many places, uncertainty is holding back demand and the willingness to lend. A legacy of high public and private debt is hurting economic prospects. The global financial system remains fragile.

In an interconnected world like ours, these forces are feeding each other across borders. Capital flows to emerging markets have already dropped off, and growth is expected to slow even in the most vibrant parts of the world economy. Low-income countries are especially vulnerable.
Yet before we indulge in yet another bout of collective pessimism, which is becoming something of a global sport, let me ask a simple question—why did 2011 turn out so badly?

I would argue that it was not because of any fresh wound to the global economy. No, it was driven instead by a lack of a collective determination to reach a cooperative solution. We saw many false starts and half measures in 2011—in Europe, but also, for instance, in the United States with its debt ceiling debacle.

Put simply, policymakers let an old wound fester, and in doing so made the situation worse.
Looking at it from this perspective, 2012 must be a year of healing. But as Hippocrates put it long ago: “Healing is a matter of time, but it is sometimes also a matter of opportunity”.

And today, it has to be an opportunity of our making. Otherwise, we could easily slide into a “1930s moment”. A moment where trust and cooperation break down and countries turn inward. A moment, ultimately, leading to a downward spiral that could engulf the entire world.

I remain ever hopeful. I believe we can avoid such a scenario. I say this for a simple reason: we know what must be done. That is my core message to you today—although the economic outlook remains deeply worrisome, there is a way out. Now the world must find the political will to do what it knows must be done.

I would like to lay out the core elements of a policy path forward, in three broad aspects:

First, the path for the euro zone.

Second, the role of the rest of the world.

Third, the particular role and responsibility of the IMF.

Policies in the euro zone

I will start with Europe, which is at the center of concerns—not only because of the historical project it represents but, more pointedly, because of the extensive trade and financial linkages that bind everyone else to it.

In coming to grips with Europe’s crisis, I want to acknowledge up front just how far the euro zone has come in addressing the new realities it faces.

Eurozone countries have established their cross-border safety net with the European Financial Stability Facility (the EFSF) and outlined a permanent version of it with the European Stability Mechanism (the ESM)—only two years ago, this was heresy. They have taken a harmonized approach to recapitalizing banks, and set up a systemic risk board. Governance reforms to enforce stronger and more effective fiscal discipline are in train and individual countries are taking tough decisions to rein in fiscal deficits. In addition, the European Central Bank has unleashed impressive resources to make long-term liquidity available to banks.

These major steps must be recognized. Yet I would not be the first to argue that these moves form pieces, but pieces only, of a comprehensive solution. Many within Europe are themselves making this point with increasing forcefulness.

Let me therefore offer my perspective on what remains to be done. There are three imperatives—stronger growth, larger firewalls, and deeper integration.

First, stronger growth. This has a number of dimensions.

With the euro area economy slowing sharply, inflation is already declining and we see a sizable risk that it will fall well below target next year, raising debt burdens and further hurting growth. Additional and timely monetary easing will be important to reduce such risks.

Stronger growth also means preventing banks from going into reverse gear, contracting credit in the face of market pressure. Solutions should focus on raising capital levels—rather than cutting back lending—as the way to boost capital ratios. Maintaining orderly funding conditions is also imperative.

On fiscal policy, resorting to across-the-board, across-the continent, budgetary cuts will only add to recessionary pressures. Yes, several countries have no choice but to tighten public finances, sharply and quickly. But this is not true everywhere. There is a large core where fiscal adjustment can be more gradual. Automatic stabilizers, which let tax revenues fall and spending rise as the economy weakens, should certainly be allowed to operate. And those with fiscal space should support the common effort by reconsidering the pace of adjustment planned for this year.

Some countries still have much to do to boost their competitiveness and growth potential. For this, structural reforms are critical, however medium or long-term their impact might be. As experience tells us, fiscal sustainability depends, ultimately, on generating long-term growth.

Second, we need a larger firewall. Without it, countries like Italy and Spain, that are fundamentally able to repay their debts, could potentially be forced into a solvency crisis by abnormal financing costs. This would have disastrous implications for systemic stability. Adding substantial real resources to what is currently available by folding the EFSF into the ESM, increasing the size of the ESM, and identifying a clear and credible timetable for making it operational would help greatly. Action by the ECB to provide the necessary liquidity support to stabilize bank funding and sovereign debt markets would also be essential.

We must also break the vicious cycle of banks hurting sovereigns and sovereigns hurting banks. This works both ways. Making banks stronger, including by restoring adequate capital levels, stops banks from hurting sovereigns through higher debt or contingent liabilities. And restoring confidence in sovereign debt helps banks, which are important holders of such debt and typically benefit from explicit or implicit guarantees from sovereigns.

This brings me to my third point—deeper integration. In a sense, the crisis is a crisis of incomplete integration. At the euro-area level, the fundamentals look good—the current account is balanced and inflation and the fiscal deficit are both low. But the euro area does not handle internal imbalances well. In addition, a single financial market cannot rely on legal and institutional frameworks that operate on an asymmetric national basis.

To break the feedback loop between sovereigns and banks, we need more risk sharing across borders in the banking system. In the near term, a pan-euro area facility that has the capacity to take direct stakes in banks will help break this link. Looking further ahead, monetary union needs to be supported by financial integration in the form of unified supervision, a single bank resolution authority with a common backstop, and a single deposit insurance fund.

The euro area also needs greater fiscal integration—it is not tenable for seventeen completely independent fiscal policies to sit alongside one monetary policy. To complement its “fiscal compact”, the area needs some form of fiscal risk-sharing, which would allow for common support before economic dislocation in one country develops into a costly fiscal and financial crisis for the entire euro area.

A number of financing options are available to support such risk sharing, including the creation of euro area bonds or bills or, as proposed by the German Council of Economic Advisors, a debt redemption fund. Political agreement on a joint bond to underpin risk sharing would help convince markets of the future viability of European economic and monetary union.

Policies in the rest of the world

Let me now turn to my second broad area—policies in the rest of the world. I have dwelt on Europe only because it is at the epicenter of the current crisis and thus key to the global outlook. But other economies have at least as important a role in getting to a better outcome.
The United States, as the world’s largest economy and the center of the global financial system, has a special responsibility. Yes, it is recovering, but at a timid pace, and unemployment—while declining—remains unacceptably high.

The key policy priorities must be to relieve the burden of household debt and to deal decisively with the issue of public debt.

On housing, we have been calling for ways to make mortgage debt sustainable, including programs to facilitate write-downs. I understand the legal and political complexities but the current strategy is not working satisfactorily, and we need a rethink.

On public debt, American policymakers need to find a way past the partisan impasse, grasping all reasonable means of bringing down tomorrow’s deficits—including by reforming entitlements and raising revenue—without bringing down today’s economy.

This brings me to another worrisome tendency in many quarters—to view fiscal policy as a morality play between profligacy and responsibility. Political and market commentary is too often cast in these terms. Yet markets themselves have been schizophrenic about fiscal tightening, at times rewarding it with lower interest rates, and at other times recoiling at the implied growth slowdown and pushing up interest rates.

To reiterate our advice: credible measures that deliver and anchor savings in the medium term will help create space for accommodating growth today—by allowing a slower pace of consolidation.

What about other countries and regions?

In Japan, there is no way to avoid a credible consolidation plan that brings down public debt in the years ahead. Japan also needs reforms to raise long-term growth.

Countries with current account surpluses, whether advanced or emerging, also have a role to play—primarily by shifting to domestic demand to support global growth. After all, global deficits will shrink only if surpluses shrink too.

Here, China can help itself and the global economy by continuing to shift growth away from exports and investment, toward consumption. To get there, I’m thinking of such measures as fiscal support to household consumption and expanding social safety nets, and liberalizing the financial system. These are all reforms that the Chinese government itself has embraced.

One more point: We must not let financial regulation slip off the policy agenda. We simply cannot carry on with the financial sector that gave us the global financial crisis. We need a safer and more stable financial system, one that serves rather than destabilizes the real economy. While policymakers have made a lot of progress, they still need to complete the reform agenda and ensure that the new standards are implemented in a way that is consistent across countries.

The role of the IMF

Let me now turn to the role of the IMF, my third and final issue.

Clearly, a cooperative path means that all countries must work together with a common diagnosis toward a common solution.

A key role of the IMF is to lay out the inter-dependencies between countries and push for a cooperative outcome.

But the IMF can provide much more than analysis, advice and exhortation.

It can also provide financing when needed. I am convinced that we must step up the Fund’s lending capacity. The goal here is to supplement the resources Europe will be putting on the table, but also to meet the needs of “innocent bystanders” infected by contagion, anywhere in the world. A global world needs global firewalls.

In the coming years, we estimate a global potential financing need of $1 trillion. To play its part, the IMF would aim to raise up to $500 billion in additional lending resources. Right now, we are exploring options and consulting the membership.

In addition to resources, the IMF can also provide a “commitment mechanism” to lock in good policies when funding is not needed. Italy’s request for IMF monitoring of its policies is a good example of this.

Finally, because there has been so much loose talk about special “European bailouts”, let me reiterate a few points. Our financing is for all members, euro area or otherwise. We only lend to individual countries that request support and make strong policy commitments. That said, any support we provide to euro area countries must be anchored in a clear policy framework for the entire euro area. To safeguard our members’ resources, we have a responsibility to lend into sustainable debt positions. Our role is to catalyze, not indefinitely replace, private financing.

Conclusion

Let me wrap up. Although we all know what must be done, I realize that none of this will be easy. I understand the great political challenges facing policymakers.

I understand the frustration of the Europeans, who have built such a remarkable project out of the ruins of World War II. No, monetary union did not get everything right, but the global financial crisis that started across the Atlantic exposed its vulnerabilities more starkly. I also understand why Europeans feel that the difficult decisions they have taken are not being sufficiently recognized.

I also understand the frustrations of the rest of the world. Just as they were picking up the pieces after the 2008 crisis, they watch their recovery being blown off course by trouble in Europe. They wait for a resolution to this crisis that never seems to come, on a continent they feel is rich enough to resolve its problems on its own.

I understand the pain felt in those European countries that need to adjust, and the difficulty of sharing the burden in a way that is socially fair. But I also understand the feelings in countries that have been thrifty, asked to help those who could have managed their economies more prudently.

But what we must all understand is that this is a defining moment. It is not about saving any one country or region. It is about saving the world from a downward economic spiral. It is about avoiding a 1930s moment, in which inaction, insularity, and rigid ideology combine to cause a collapse in global demand.

The longer we wait, the worse it will get. The only solution is to move forward together. Our collective economic future depends on it.

More than most, Germany understands the virtues of determined solidarity. Through its experiences with its Soziale Marktwirtschaft and unification, it showed what can be accomplished by bringing everybody together in service of the common good. The world needs a strong leadership role from Germany today, and it is Germany’s core interest to provide such a role.

Let me end with a quote from Goethe: “It is not enough to know, we must apply. It is not enough to will, we must do.” (Es ist nicht genug, zu wissen, man muß auch anwenden; es ist nicht genug, zu wollen, man muß auch tun). This is the challenge of our year ahead.

Thank you very much.



Fiscal Monitor Update


World Economic Outlook Update


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Monday, January 23, 2012

Stimulus programs work. We need them ready - Access

Australia needs to be ready with a new economic stimulus program the moment Europe “blows” a leading economist says.

Deloitte Access director Chris Richardson uses this morning’s quarterly Business Outlook to implore political leaders not to let “talkback radio swamp smart policy,” should Europe take a turn for the worst.

“Australia’s fiscal stimulus last time was a striking success,” he writes. “It simply wasn't seen as that in the court of public opinion. That gap between reality and perception threatens a poor reaction by the punters if a new stimulus is needed in 2012.”

Access says its central scenario is that Europe's leaders “muddle through in a way that doesn’t stop Europe having a recession, but does avoid a deep recession and bank failures.”

But it says the risk is “almost as high” that Europe could ‘blow’ sparking bank busts and a new global financial crisis.

If that happens Australia should abandon its commitment to a small budget surplus in 2012-13 and instead embrace a “huge” budget deficit.

“We should be willing to do what worked last time,” he told The Age. “We shouldn’t let talkback radio decide what worked and what did not.”

The cash handouts worked very well... The school building programs worked less well, but not for the reason many people think.

“The problem wasn’t waste. The real waste occurs in a recession when people lose their jobs. Someone who is out of work for two years might not ever return to the workforce. That’s waste. The problem with the Building the Education Revolution program was it took too long. It was stimulating the economy beyond the point it was needed. Speed is essential.”

If Mr Richardson had his way interest rates would play a bigger role in fighting the next financial crisis and fiscal stimulus a smaller role. “But that doesn’t mean fiscal programs should have no role,” he said. Infrastructure projects should be “shovel ready.”

While the $15,000 First Home Owner Bonus was effective, Mr Richardson would be cautious about offering it again.

“First home owner programs are the crack cocaine of fiscal stimulus. They usually work a treat. But they make young couples spend too much on their first home, making their lives miserable down the track.”

Should the world avoid a new crisis Deloitte Access forecasts improved Australian economic growth of 3.2 per cent this financial year concentrated in the mining states. Victoria’s economy would grow 2.1 per cent, the NSW economy 2.3 per cent. A separate Commonwealth Securities State of the Statesreport released this morning puts Victoria in the second rung of economic performers along with the Australian Capital Territory. Western Australia is on the top rung, and all the other states in third place.

Published in today's Age


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You work in the finance sector. You've felt secure...

NSW is facing the worst year for its financial sector since the global crisis. Even without an escalation of the problems in Europe thousands of CBD jobs are at risk.

“Sydney’s finance sector businesses grew fat and lazy during many years of double digit credit growth through to 2007,” Deloitte Access Economics says in a report released this morning.

Although banks and finance sector firms rebuilt their workforces after the global financial crisis, many were “now reassessing their cost base — they think they have too many employees.”

“They thought we would return to double digit credit growth,” said report author Chris Richardson. “It couldn’t have gone on forever. Borrowing had been climbing 10 to 12 per cent per year while national income had been climbing 5 to 6 per cent per year. Instead we are saving. The party is over, and the realisation has only really dawned in the last six to nine months"...

Already Westpac is preparing to axe 1000 middle management positions and the ANZ has sacked 130 back office staff.

Mr Richardson said the damage would be felt most keenly in Sydney.

“Sydney is home to half the finance sector businesses in Australia. The sector accounts one in three Sydney CBD jobs,” he said.

“If Europe blows up, the finance sector cutbacks will be even deeper.”

Deloitte Access Economics is forecasting NSW employment growth of just 0.5 per cent this financial year, half the national average. The economy would grow at 2.3 per cent, well down on the national rate of 3.2 per cent.

This morning’s [MON] CommSec State of the States report places NSW in the bottom rung of economic performers along with South Australia, Tasmania, and Queensland. Western Australia is alone on the top rung. Victoria and the Australian Capital Territory share second place.

Mr Richardson said at the same time as the financial sector cut back the public sector would shrink as a result of Commonwealth cutbacks and a state government decision to “tread water”.

Retail was “not doing much,” and the manufacturing sector - vital to Western Sydney - was winding back.

The big plus for NSW was that its residents were heavily mortgaged, and so extremely sensitive to interest rates. “The lower rates will help in NSW more than anywhere else,” Mr Richardson said. “The overall outcome might not be too bad. But the finance sector will go from being a support to being a drag.”

Published in today's SMH


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Friday, January 20, 2012

Get teary again. Celebrate Peter Veness

In today's Canberra Times:


Press Gallery journalist 'much loved'

BY CHRIS JOHNSON

Most journalists are aware that theirs is a privileged role. To witness first-hand events of importance and to be entrusted with accurately reporting them to the wider community is a position both envious and accountable.

Political journalists in particular are cognisant of the fact that their audiences rely on them to impart true accounts about those who would lead the nation.

No reporter was more aware of that responsibility than was Peter Veness, a highly respected and much-loved member of the Canberra Press Gallery, who died on Sunday night after battling a rare form of brain cancer, diagnosed in 2009.

He didn't quite reach his 28th birthday, yet he was vastly wise beyond his years.

Veness - Pete - was a good friend of mine and I can only write this obituary from that perspective.

This cannot be a dispassionate piece of writing, because Veness was not a dispassionate person.

A larrikins' larrikin by any reckoning. Loud and boisterous, yet with a heart as big as his cheeky grin.

And a sensitivity that could make you weep.

He loved to sledge his mates, but he would do anything for them. He taught all his blokey friends that it was okay to say ''I love you brother'' and really mean it.

Veness arrived at the national capital in 2006 after having earned his stripes as so many young journalists do, in regional Australia.

Proud of his innings at Bathurst's Western Advocate newspaper, the young Veness subsequently joined wire service Australian Associated Press and was assigned to the Canberra bureau in Parliament House.

''You know what a big deal it is for me to be in the gallery?'' he would often confide. ''I'd better not stuff it up.'' Far from stuffing things up, Veness filled his role with professionalism and enthusiasm.

Possessing a keen news sense, he could always be relied on to dig up the quirky and uncover the newsworthy in almost any situation.

During the 2007 election campaign, while covering the John Howard trail, he was one morning the only reporter to rise before 4am to join the then prime minister on one of his famous walks.

The journalists were housed for the night at a resort in the Adelaide hills because there were no rooms left in the city's CBD hotels.

Howard was in the city more than an hour's drive away and if any reporter wanted to join him on the optional early constitutional, it would mean a very early rise.

Most decided to pass, but not Veness.

As it turned out, he got to spend half an hour trying to keep up with Howard while enjoying a one-on-one conversation with him.

''I don't agree with everything he does politically,'' Veness said later in the day. ''But, you know, I kinda like the guy.''

The next week we were on the Kevin Rudd trail and after following him around for a few days, Veness sidled up to me one afternoon and whispered with a smile, ''I don't agree with everything he does politically. But, you know, I kinda like the guy.'' Always the even-handed reporter.

Everyone more than ''kinda'' liked Veness, which is why it hit the Press Gallery hard with the news of his diagnosis. His courageous battle was an inspiration to watch, not least because he insisted he was not the inspiring type.

Combining his loves of music and literature, Veness sometimes wrote album reviews and artist interviews using the pen name Sal Caulfield - mixing his favourite fictional characters Sal Paradise from On the Road and Holden Caulfield from The Catcher in the Rye.

Born in Canberra before moving to Batemans Bay, Veness had a close family.

After his high school days at Gilgandra, Veness and his family settled in Bathurst, where Veness studied journalism at Charles Sturt University. It was from where he sought out again the sweetheart he first met at Gilgandra, Bec Bignell.

Long-time partners, they married after his diagnosis.

He loved his work, he loved his sport, loved his books and his music. But what Veness loved the most was his wife, his family and his friends.

And yep, ''love you too brother''.


Chris Johnson is chief political correspondent for The Canberra Times








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Bleak Christmas? For job seekers it was the worst in 20 years

TECHNICAL NOTE: Why did the seasonally adjusted unemployment rate stay steady at 5.2 per cent in December while the seasonally adjusted number of people in work fell 30,000? The standard explanation is "more Australians are giving up on looking for employment". In this case it is wrong. The clue as to why lies in seasonal adjustment. Most Decembers the number of people looking work but not finding it jumps. In 2009 it jumped 26,000. In 2010 it jumped 2500. In the December just passed it jumped 23,700 - not shabby and certainly not more Australians "giving up on looking for employment". The jump was heavily seasonally adjusted down to a fall of 3600 most probably because of the unusual seasonal behaviour I describe below.

A surprise decision by retailers to shy away from the usual Christmas practice of hiring extra workers has given Australia the worst jobs performance in two decades, sparking talk of two more interest rate cuts within months.

Bureau of Statistics figures released yesterday show instead of the usual boost of 161,000 mainly-temporary workers in December, employment climbed just 115,000 at the end of the year.

The Bureau says women aged 15 to 24 bore the brunt of the cautious approach, making 2011 the worst Christmas for young people wanting part-time jobs in more than 20 years.

The poor end to the year meant employment grew not at all during 2011, falling slightly by 100 jobs over the year. Its the first time jobs have been lost over the course of a calendar year since the aftermath of the last recession in 1992.

The outcome is dramatically at odds with the May budget forecast of 500,000 new jobs in two years and also at odds with the forecast in the December budget update of 114,000 new jobs during 2011-12... With the financial year half over employment has climbed 8100.

Acting treasurer Bill Shorten put a brave face on the figures saying they reflected global headwinds, the the high dollar and cautious consumers.

Australia was “not immune from developments in Europe”. A further deterioration in conditions overseas “would inevitably put pressure on the Australian labour market”.

Victoria and NSW bore the brunt of employer’s caution. Victoria has lost 11,300 jobs over three months, NSW 2000 jobs and South Australia 1600 jobs.

The mining states and territories continued to do well, Queensland putting on 5600 new workers, the Northern Territory 2500 more workers and Western Australia 1600. The ACT put on 800 and Tasmania 700.

Australia’s unemployment rate remained steady at 5.2 per cent. A statistical quirk pushed Victoria’s seasonally adjusted unemployment rate down from 5.5 to 5.2 per cent as the number of people saying they were looking for work fell faster than the number of people employed.

Deutsche Bank economist Adam Boyton said the real risk for employment was that sectors other than retail which have been hording labour while the dollar is high decide to follow retail and make do with less staff.

Opposition leader Tony Abbott said the state of the jobs market made it “crystal clear now is the worst possible time for the world’s biggest carbon tax”.

“The Australian economy, for all its comparative strength, created no net new jobs in calendar 2011. This is a very disappointing result.”

The figures show that although employers have been cautious about hiring new workers they have been asking their existing staff to put in more hours. Treasury estimates show that if instead they had put on more staff to work the extra hours employment would have climbed 96,000 during 2011.

The Reserve Bank board meets to vote on interest rates on February 7. The meeting will also have before it this week’s dismal World Bank forecasts, International Monetary Fund forecasts to be released next week, and inflation data out next Wednesday expected to show inflation falling. The futures market is pricing in two more rate cuts by May.

Published in today's SMH and Age


JOB LOST...

In the last three months

Victoria: 11,300 jobs lost
NSW: 2000 jobs lost
South Australia: 1600 jobs lost

...OUTWEIGHED JOB GAINED

Tasmania: 700 jobs gained
ACT: 800 jobs gained
Western Australia: 1600 jobs gained
Northern Territory: 2500 jobs gained
Queensland: 5600 jobs gained

Trend figures, three months to December ABS 6202.0



Weakest Job Market in Almost 20 Years - Commsec



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Thursday, January 19, 2012

Peter Veness, the hidden parts


During his final days at Clare Holland House Kevin Rudd phoned and read him psalm after psalm.

Labor MP Andrew Leigh held his hand and stayed with him as if time had stood still. Bishop Stuart Robinson prayed and held his hand. The priests at St Johns came over to offer communion. Friends poured in from all over Australia.

In Peter's hands when he died were the blue teddy bear that had comforted him through three or four years of hospital visits fighting cancer, and a small wooden cross.

Peter Veness was - is - a truly wonderful human being. You can read tributes to him here and here.

He was frightened and brave.

What the tributes gloss over is that he was a Christian. He talked to God and wanted to know him.

He was Chair of St John's Parish Council. He was studying theology at St Mark's.

God made him strong for other people, for his wife Bec, and strong enough to stand up to the cancer that just weeks ago game back for one final attack.

To downplay his faith in Jesus in assessments of his life and his effect on people is to downplay an important part of who he was.

I love Peter. So many of us do.

He'll be remembered at 10.30 this morning at St Johns, and afterwards at the National Press Club.






Here is a feature Peter Veness wrote for his employer AAP in 2009:

I have cancer. I am 25 years old.

By Peter Veness

First it was in my brain and now it's spread to my spine.

I had brain surgery to remove the tumour from my head, which had been missed six months earlier; eight tumours then appeared on my spine.

The doctors give me little hope.

Stuff the doctors who have already killed me; they don't tell me when to die.

These are the same doctors who told me they would eat their hats if there were any tumours on my spine.

Well, get out your knives and forks, boys, and chow down on those Akubras. It's ridiculous that they talk like this but it's exactly what happened to a close friend who was told she almost certainly had cancer only to be diagnosed with a completely different disease that could almost certainly be fixed with antibiotics.

Yes, these diseases are no doubt difficult but surely doctors should not offer such certainty without first doing the science.

The other fun is monthly MRI scans of my brain and spine. An MRI is a small, loud tunnel the patient is fed into and then left there to wonder what is going on for as long as it takes.

At the last visit it took more than two hours and about 10 attempts at finding a vein before the nurse knocked the needle out anyway but at the end the news was good, the cancer hadn't grown.

Amidst all of this is the gut-ripping nausea, from chemotherapy, that keeps you on a constant feed of different drugs, none of which work too well most days.

These regular processes, the reminders that cancer is inside me, are my frustration and my necessary schedule amidst a lot of fear.

I am getting married to the woman of my dreams on September 5.

A few days after being diagnosed with brain cancer, I borrowed mum's sapphire ring and knelt down in the hospital's chapel. Bec thought I was falling over, my balance blown from surgery, but I begged her for patience.

"Will you marry me?"

"You already know the answer."

"Well can I hear it then?"

We were told to bring the wedding forward and are already planning to renew our vows on the day we initially planned to wed late next year.

Sometimes I am angry, other times sad but this I know.

Desperately; with hunger, determination and struggle, I am living a life of no regrets and most definitely our wedding is a part of that.

We've invited the long-lost aunty and the mates we haven't seen in years; having cancer hands an extra urgency to everything. It also seems to give you extra rights, extra legitimacy to do outrageous things.

I have recurring memories of being dunked by waves on the NSW south coast where I spent my childhood nearly drowning and spitting out sand.

Despite the pain in my back from a biopsy on my spine, I am going to drive down the mountains from Canberra to the sand and let one giant wave hit me, drag me under the white foam and bash me.

It's a silly memory, I know, but I would regret not doing it if it is to be for one last time. I don't want to jump out of a plane, sail around the world or climb Mount Everest but I fear spending my final months on the couch watching daytime TV through an inability to make decisions, a fear of moving.

My counsellor - a specialised cancer patient counsellor - must deal with the most harrowing stories every day, and encouraged my life of no regrets. She has had to harshly remind me the likely outcome of all of this is death.

Live a life of no regrets. Don't die wondering.

Even when life is consumed by thoughts of death, of leaving my most loved, of lying in a coffin, of being lowered six feet, there are ways of smiling.

Old, silly jokes still bring a smile to my face and the sight of just about any dog makes me joyous from a childhood spent spilling all my secrets to my loyal blue heeler Bert.

There is one final wish I haven't mentioned.

To live.

I pray at night, asking my God the seeming simplest of questions: "Will you save me?" I haven't heard back yet.

I often ask myself, what about those times when I'm not fulfilling a wish, not doing something on the bucket list?

There are times spent watching inane night-time TV and putting a load of washing on or, like last week, returning a broken vacuum cleaner for replacement.

These aren't things you dream of doing when your life is given a shortened deadline.

The mundaneness of life continues even when you're dying.




Click to Read More...

World Bank: We're on the edge of a new GFC

Australian authorities are taking seriously a World Bank warning of new financial crisis so severe it would eclipse the chaos that followed the collapse of Lehman Brothers in 2008.

World Bank lead economist Andrew Burns yesterday called on vulnerable nations to prepare for the worst and refinance loans now rather than waiting until funds dry up.

“If there are countries that have important amounts of financing coming due in the months and years ahead maybe now is the time to prefinance that debt, prepare the loans and get that money while financial markets are still relatively active,” he told reporters unveiling the Bank’s latest six-monthly assessment of global prospects in Beijing.

The World Bank has halved its previous 2012 forecast for economic growth in high-income countries and is forecasting negative growth for the collection of nations that use the euro as their currency.

It’s concern is that financial markets could stop working if lenders refuse to roll over European debts.

“A much wider financial crisis that could engulf private banks and other financial institutions on both sides of the Atlantic cannot be ruled out,” the report says. “Should this happen the ensuing global downturn is likely to be deeper and longer-lasting than the recession of 2008/2009.”

“Countries do not have the fiscal and monetary space to stimulate the global economy or support the financial system to the same degree as they did in 2008/09... While developing countries are in better shape than high-income countries, they too have fewer resources available. No country and no region will escape.”

Australia, not specifically mentioned in the report, has a relatively good budget position and a better ability than most to ward off a downturn by interest rate cuts and increased government spending as it did in 2008.

But the Bank says commodity-exporting nations such as Australia will find their budgets hit by much lower prices.

Its central forecast is for oil prices to fall 5.5 per cent this year and non-oil commodity prices to slide 9 per cent. It has modelled worse scenarios - one for a 20 per cent slide in oil prices and a bigger slide in minerals and energy prices.

Each of its scenarios is worse than envisioned in the government’s December budget update, calling into question the government’s forecast of a 2012/13 budget surplus.

Acting Treasurer Bill Shorten said the budget would “obviously be hit”.

“The past year was difficult and disappointing for the global economy. The outlook for 2012 looks even more challenging,” he said responding to the World Bank report.

“But the Australian economy is now around 7 per cent larger than it was prior to the global financial crisis. By way of comparison, the United States is just back to – or above – where it was. We have a proven track record having fought off the global recession and the worst the world can throw at us.”

The Bank is forecasting worldwide economic growth of just 2.5 per cent this year, down from its previous forecast of 3.6 per cent. Anything less than 3 per cent is commonly defined as a global recession.

World trade would grow by only 4.7 per cent, down from 6.6 per cent in 2011.

China would continue to grow strongly, but by 8.4 per cent, down from 9.1 per cent. High income nations would grow by just 1.4 per cent half the previously forecast 2.7 per cent.

A separate Westpac consumer survey released yesterday found confidence still weaker than it was before the November and December rate cuts despite a slight uptick in January. Four in every ten consumers surveyed believed their family finance had worsened over the past year. Only two in every ten believed they had improved.

Specialty Fashion Group, which runs the women’s chains Katies, La Senza and Millers, reported worse than expected December half sales and said if current conditions continued it would have to close 120 of its stores over three years.

Published in today's SMH and Age






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Wednesday, January 18, 2012

If you share suspect files can you be arrested and whisked off to the United States?

Yes. But only if you are unlucky.

Convicted NSW file sharer Hew Griffiths is watching events in the United Kingdom with a sense of foreboding.

A judge has ruled that a 23-year old British student who built an online site for sharing TV programs can be extradited to the United States to face trial and up to 10 years in jail, even though he never been there.

It’s thought to be the first time in Britain, but Hew Griffiths knows it can happen. He was bundled on a plane to the US in 2007 in what he believes was a pointless show of power that did nothing to stem on-line piracy.

“No-one ever thought such a thing could happen back then. If I had been charged at home I might have got a six month suspended sentence and a $1000 fine, maximum,” he told the Herald form his central coast home.

What he got was six months in a US prison after three years in Sydney’s Silverwater jail attempting to fight extradition...

He says the US was much better than Silverwater. It was safe, quiet and well-run.

Although he made no money from helping distribute pirated software and games, under US law he was deemed to have traded in stolen software and liable for ten years in jail.

He struck plea bargain because there was no choice.

“I would have been tried in the state of Virginia. It’s just a hop, skip and a jump from Washington, very conservative, and full of government employees. Federal prosecutors have a 90 per cent plus strike rate.”

“This guy’s best bet would be to give up and go there. He’s not going to win the case, but if he delays the prosecutors will throw the book at him. If he offers a deal there won’t be a problem. All they want are political brownie points. They don’t really want to tie up their prisons.”

Sheffield Hallam University computer science student Richard O’Dwyer plans to appeal the extradition ruling arguing that his website TVShack.net broke no British law because it merely enabled people to download TV programs rather than hosting them.

Mr Griffith believes US authorities know the prosecutions are pointless, but they want to be seen to be acting on behalf of firms such as Adobe, Microsoft and News Corporation.

“There’s more piracy than ever. Most people face no risk. It’s like a massive school of fish facing a shark. It’ll only ever eat a couple, there’s safety in numbers.”

“But if they go after you, you’re gone.”

Published in today's SMH and Age


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Coffee calculator. One cup per day will cost $2000 over the life of a uni degree

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Here's the link.


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Tuesday, January 17, 2012

Mortgages. Why we're fixing.

Financial markets are banking on at least three more rate cuts over the next six months, but an increasing proportion of home borrowers appear not to care.

The latest borrowing figures for November - compiled just after the first of the two end-of-year rate cuts - show a jump in the proportion of borrowers locking in their repayments at fixed rates for two or more years.

Fixed loans climbed from 10.6 per cent of new housing loans before the November cut to 11.1 per cent, the highest proportion since the financial crisis in 2008.

A separate count by mortgage broker AFG backs up the Bureau of Statistics finding and suggests the trend continued beyond November.

In December 19.2 per cent of AFG loans were issued at fixed rates, up from 8.2 per cent six months before.

UBS interest rate strategist Scott Haslem says the uptake of fixed loans isn’t as pessimistic as it might seem...

“It doesn’t mean people think rates will rise and it doesn’t even mean they don’t expect them to fall again,” he told the Herald. “It’s just that fixed rates have become better value - it’s becoming cheaper to grab the bird in the hand.”

As recently as June last year a typical fixed three-year mortgage charged 7.35 per cent. By November the rate had fallen to 6.4 per cent.

“The decision facing a borrower in November was whether to go for a fixed loan at 6.4 per cent or whether to take out a variable loan that had just fallen from 7.55 to 7.3 per cent and might fall further.”

“You would have to expect four more rate cuts over three years to make the variable rate look better than fixed, and even then you would have to expect the lower variable rates to hold for three years.”

Mr Haslem said the low fixed rates were not particularly expensive for banks to fund. The three-year bond yield has fallen to 3.1 per cent.

“Everybody seems to be cutting global interest rates because the global economy is going through problems. Banks are able to cut their two to three year loans because the cost of two to three year money has gone down.”

The number of new home loans to owner occupiers jumped 1.4 per cent in November. Excluding loans for refinancing new loans climbed 2.5 per cent. But the number of new loans for home construction fell for the third successive month, sliding a further 0.4 per cent.

“Real estate agents will love the fact that more people are interested in established properties,” said Commonwealth Securities chief economist Craig James. “But builders, tradespeople, building material suppliers and homemaker stores will be more concerned about the absence of those wishing to build.”

“Home buyers are actually pretty cautious. The proportion of loans approved but not taken up has climbed 11 per cent over the past year. Buyers are getting their finance in place then waiting.”

Much of the November bounce was in NSW spurred on by the stamp duty concession for first home buyers which expired in December. First home buyers made up 24 per cent of new NSW loan approvals compared to 20 per cent nationally.

Other figures released yesterday built the case for further rate cuts. The TD Securities inflation gauge climbed 0.5 per cent in December but recorded the weakest quarterly growth in three years. TD Securities is forecasting an underlying quarterly rate of just 0.2 per cent when the official figures are released next Wednesday.

Published in today's SMH and Age


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Monday, January 16, 2012

'We warn the Tzar': Gillard lectures Europe

Heaven knows why

Prime Minister Gillard has rubbed salt into the wounds of European nations reeling from weekend credit downgrades, declaring they had it coming to them for avoiding tough decisions.

Speaking after Standard and Poor’s stripped France and Austria of their prized triple-A ratings and downgraded Italy, Portugal, Spain, Cyprus, Malta, the Slovak Republic and Slovenia Ms Gillard said the moves were the “price to be paid” by governments who had put off reforms.

“For too many years, European governments have deferred the nation-building productivity-enhancing reforms which Australia has made the foundation of our dynamic and resilient economy,” she said in a Sunday statement.

“In stark contrast to Europe,” Australia had strict fiscal rules that would return it to surplus in 2012-13.

European leaders should “swiftly undertake structural reforms to boost their economic potential and lift growth”.

“They must implement credible medium-term plans to put their budgets on a sustainable footing, because taxpayers rightly expect governments to manage their money prudently,” Ms Gillard said.

But leading Australian economist Shane Oliver warned that swift action to repair European budgets could cut growth further...

‘‘Fiscal austerity leads to economic deterioration and budget deficits blown out. It has the effect of worsening the economic outlook,’’ the AMP economist told the Herald.

Shadow treasurer Joe Hockey lambasted Ms Gillard for the intervention saying it was “a little rich” for the prime minister to lecture Europe.

“She and her treasurer have presided over a massive blowout in Australia's debt and turned strong budget surpluses into record deficits. Voters won't forget pink batts, cash for clunkers, building the education revolution and $900 cheques to dead people,” he said.

The United States has had its credit rating cut from triple-A to double-A in August without an intervention by the prime minister.

The downgrades leave Germany the only major economy using the euro to maintain a triple-A rating. Portugal and Cyprus have had their ratings cut to junk status.

The decision endangers the triple-A rating used by the European Financial Stability Facility to borrow cheaply and lend to struggling eurozone members. France is the Fund’s second-biggest guarantor.

Ahead of the downgrade the head of the French central bank Christian Noyer appealed to Standard and Poor’s to strip Britain of its top rating before France.

"They should start by downgrading the United Kingdom, which has higher deficits, as much debt, more inflation, and less growth than we do, and whose credit is collapsing,” he said.

British Deputy Prime Minister Nick Clegg told French Prime Minister Francois Fillon the suggestion was "unacceptable" and asked him t "calm the rhetoric."

The UK has been spared the latest downgrade, not being part of the so-called eurozone that that uses the shared European currency.

The Australian dollar is at close to an all-time high against the euro after the downgrades, buying 81.41 euro cents.

Published in today's SMH and Age


FROM THE PRIME MINISTER:

The credit rating downgrades we've seen in Europe reflect the price to be paid by national governments who have put off the tough reforms needed to secure strong and sustainable long-term economic growth.

For too many years, European governments have deferred the nation-building productivity enhancing reforms which Australia has made the foundation of our dynamic and resilient economy.

European leaders must swiftly undertake structural reforms to boost their economic potential and lift growth.

They must implement credible medium-term plans to put their budgets on a sustainable footing, because taxpayers rightly expect governments to manage their money prudently and global financial markets demand responsible fiscal management.

That's precisely why when we put in place our recession beating stimulus, we also put in place the strict fiscal rules that have us on track to return to surplus in 2012-13.

This is in stark contrast to Europe which is facing deficits as far as the eye can see and net debt 10 times that of Australia.

In fact, Australia just recently achieved the coveted, gold plated AAA-rating from all three global ratings agencies - for the first time in our history - the contrast with Europe could not be more stark.

While global volatility will inevitably impact us here at home, Australians can take confidence in our rock-solid economic fundamentals: we’ve got strong growth, contained inflation, low unemployment and very low debt.

The Government will keep taking the tough decisions needed to secure a strong, productive and sustainable Australian economy for the future.



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Thursday, January 12, 2012

Holiday Reading. Economics, "the most male of the social sciences"

"The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need. For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial. It is probably no accident that economics is by far the most male of the social sciences."

I agree with John Kay's description. I am less sure he has identified a fatal flaw. Yes, models are unrealistic - that's the point. A model that included everything wouldn't be a model, it would be reality. Simple models are good ones. But he is right, some people who use them have confused them with reality.

Kay begins:


The Map is Not the Territory: An Essay on the State of Economics


by JOHN KAY

The reputation of economics and economists, never high, has been a victim of the crash of 2008. The Queen was hardly alone in asking why no one had predicted it. An even more serious criticism is that the economic policy debate that followed seems only to replay the similar debate after 1929. The issue is budgetary austerity versus fiscal stimulus, and the positions of the protagonists are entirely predictable from their previous political allegiances.

The doyen of modern macroeconomics, Robert Lucas, responded to the Queen’s question in a guest article in The Economist in August 2009.[1] The crisis was not predicted, he explained, because economic theory predicts that such events cannot be predicted. Faced with such a response, a wise sovereign will seek counsel elsewhere.

But not from the principal associates of Lucas, who are even less apologetic. Edward Prescott, like Lucas, a Nobel Prize winner, began a recent address to a gathering of Laureates by announcing ‘this is a great time in aggregate economics’. Thomas Sargent, whose role in developing Lucas’s ideas has been decisive, is more robust still.[2] Sargent observes that criticisms such as Her Majesty’s ‘reflect either woeful ignorance or intentional disregard of what modern macroeconomics is about’. ‘Off with his head’, perhaps. But before dismissing such responses as ridiculous, consider why these economists thought them appropriate.

In his lecture on the award of the Nobel Prize for Economics in 1995,[3] Lucas described his seminal model. That model developed into the dominant approach to macroeconomics today, now called dynamic stochastic general equilibrium. In that paper, Lucas makes (among others) the following assumptions: everyone lives for two periods, of equal length, and works for one and spends in another; there is only one good, and no possibility of storage of that good, or of investment; there is only one homogenous kind of labour; there is no mechanism of family support between older and younger generations. And so on.

All science uses unrealistic simplifying assumptions. Physicists describe motion on frictionless plains, gravity in a world without air resistance. Not because anyone believes that the world is frictionless and airless, but because it is too difficult to study everything at once. A simplifying model eliminates confounding factors and focuses on a particular issue of interest. To put such models to practical use, you must be willing to bring back the excluded factors. You will probably find that this modification will be important for some problems, and not others – air resistance makes a big difference to a falling feather but not to a falling cannonball.

But Lucas and those who follow him were plainly engaged in a very different exercise, as the philosopher Nancy Cartwright has explained.[4] The distinguishing characteristic of their approach is that the list of unrealistic simplifying assumptions is extremely long. Lucas was explicit about his objective[5] – ‘the construction of a mechanical artificial world populated by interacting robots that economics typically studies’. An economic theory, he explains, is something that ‘can be put on a computer and run’. Lucas has called structures like these ‘analogue economies’, because they are, in a sense, complete economic systems. They loosely resemble the world, but a world so pared down that everything about them is either known, or can be made up. Such models are akin to Tolkien’s Middle Earth, or a computer game like Grand Theft Auto.

The knowledge that every problem has an answer, even and perhaps especially if that answer may be difficult to find, meets a deeply felt human need. For that reason, many people become obsessive about artificial worlds, such as computer games, in which they can see the connection between actions and outcomes. Many economists who pursue these approaches are similarly asocial. It is probably no accident that economics is by far the most male of the social sciences.

One might learn skills or acquire useful ideas through playing these games, and some users do. If the compilers are good at their job, as of course they are, the sound effects, events, and outcomes of a computer game resemble those we hear and see – they can, in a phrase that Lucas and his colleagues have popularised, be calibrated against the real world. But that correspondence does not, in any other sense, validate the model. The nature of such self-contained systems is that successful strategies are the product of the assumptions made by the authors. It obviously cannot be inferred that policies that work in Grand Theft Auto are appropriate policies for governments and businesses.

Yet this correspondence does seem to be what the proponents of this approach hope to achieve – and even claim they have achieved...

Read the full thing



While we are at it, here's an "anthropologist's view":

Life among the Econ

by Axel Leijonhufvud:

"The Econ tribe occupies a vast territory in the far North. Their land appears bleak and dismal to the outsider, and travelling through it makes for rough sledding; but the Econ, through a long period of adaptation, have learned to wrest a living of sorts from it. They are not without some genuine and sometimes even fierce attachment to their ancestral grounds, and their young are brought up to feel contempt for the softer living in the warmer lands of their neighbours. such as the Polscis and the Sociogs. Despite a common genetical heritage, relations with these tribes are strained-the distrust and contempt that the average Econ feels for these neighbours being heartily reciprocated by the latter-and social intercourse with them is inhibited by numerous taboos. The extreme clannishness, not to say xenophobia, of the Econ makes life among them difficult and perhaps even somewhat dangerous for the outsider. This probably accounts for the fact that the Econ have so far-not been systematically studied. Information about their social structure and ways of life is fragmentary and not well validated. More research on this interesting tribe is badly needed..."

Here's the pdf of the original 1973 journal article.







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