Stoking a fire with gasoline: why Wall Street shuddered

Why did the US sharemarket suddenly tank?

For the same reason that ours might, one day, although there are no signs of it yet.

The US jobs market is on fire. In the past year the United States has hired an extra 2.1 million workers, and not just because of Trump. In the previous year, under Obama, it hired an extra 2.5 million. All up, since the low point in 2009 the US has taken on an extraordinary 18 million additional workers, an extra 14 per cent.

It has pushed the US unemployment rate down from 10 per cent to 4.1 per cent, where it has stayed for four consecutive months. So low is 4.1 per cent that, with the exception of a few months under President Clinton at the height of tech stock mania at the start of this century, you need to go back to 1969, when astronauts first walked on the moon, to find it bettered.

It's low enough to be well below the official best guess of the so-called "natural" rate of unemployment, below which wage rises fuel accelerating inflation. We've got a so-called natural rate in Australia. The best guess is that ours is about 5 per cent, and, although we have been making in-roads into unemployment, we're not down there yet. The US is down there, well into what would normally be lift-off territory for wages and prices, but here's what's strange: all through 2017 and 2016 and 2015 wage growth scarcely budged. It hasn't moved too far away from 2.5 per cent.

Just as in Australia, without a takeoff in wages there's been no reason to fear a big increase in official interest rates. The US Federal Reserve has pushed up rates five times since the improving US economy allowed it to begin moving its Federal Funds Rate away from zero in 2015, but not aggressively. There has been precious little inflation to contain.

Until Friday. US average hourly earnings per employee jumped, enough to push up the annual growth rate to 2.9 per cent. Inflation, and much higher interest rates to contain it, suddenly became real. The US bond rate (which is the market's best guess of future short-term rates) surged. The 10-year bond climbed to 2.8 per cent, up from 2.4 per cent four weeks earlier.

That's a real cost to any business that needs to borrow long-term, and a real cost to the US government, which will need to borrow big to fund Trump's tax cuts. It means the value of US businesses is suddenly lower, because they are valued with reference to their earnings and the bond rate.

It meant shares were suddenly worth less, because when human traders began offloading shares to reflect the new reality the robots took over, automatically selling to protect themselves. Over two days share prices fell 6.4 per cent. On Tuesday night they regained some of that loss, but the future looks different now; more normal, with the value of shares less likely to keep rising as a consequence of low inflation holding interest rates back.

As popular as they have been with business, Trump's planned tax cuts will have themselves pushed up bond rates. The US government needs to borrow hundreds of billions of dollars more because it isn't fully funding them, in contrast to Australia where the Coalition's tax cuts are meant to be funded by making savings elsewhere and allowing other taxes to remain relatively higher so that company tax rates can be pushed relatively lower.

And Trump's tax cuts will hurt in a more fundamental way. Cutting tax is a great way to boost the economy. If the unemployment rate was 10 per cent it would really help. It would lift the economy without stoking inflation. But when the jobs market is on fire and the unemployment rate is about to hit an unnerving 4 per cent, it will add gasoline and make the flames fly higher.

It'll mean even higher interest rates. Trump is rolling out a policy that should be held in reserve for bad times when times are increasingly good. As the International Monetary Fund noted last month, the US will have to tighten its budget in future years to meet the higher interest costs, perhaps in worse times. It is why it has downgraded its forecasts for US growth beyond 2020. It's the opposite of what's normally regarded as prudent management, which is to borrow when times are bad (as Australia did during the global financial crisis) and to repay when they are better (as Australia is trying to do now).

What it'll mean for us is higher Australian government borrowing rates. Our 10-year bond rate peaked at 2.9 per cent on Monday, up from 2.6 per cent four weeks earlier. All other things being equal, the personal income tax cuts we've been promised have become less affordable.

Trump gives the impression of playing with fire rather than managing it. We don't know where it will lead.

In The Age and Sydney Morning Herald

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Trump's sugar hit to boost world economy - IMF

A sugar hit from the Trump administration's US tax cuts is expected to propel world economic growth to 3.9 per cent in 2018, the best result in eight years.

In an update to its forecasts presented to the World Economic Forum at Davos in Switzerland, the International Monetary Fund said the global economy should grow by 3.9 per cent in 2018 and 2019, up from the 3.7 per cent per year it forecast in October.

Half the upgrade was due to the $US1.5 trillion ($A1.88 trillion) in tax cuts. Its forecasts assume that the hit to US tax revenues will "not be offset by spending cuts in the near term" meaning that the economies of the US and the countries it trades with will benefit as the US budget deficit deteriorates.

It has lifted its forecasts for US growth from 2.3 to 2.7 per cent in 2018 and from 1.9 to 2.5 per cent in 2019.

Beyond 2022 it is expects lower than previously forecast US growth as the next US administration attempts to get the deficit under control and as the "temporary exceptional" five-year tax write-off for investment in business assets expires.

"This short-term growth boost will have positive, albeit short-lived, output spillovers for US trade partners," said IMF director of research Maurice Obstfeld. "But it will also likely widen the US current account deficit, strengthen the US dollar, and affect international investment flows."

Treasurer Scott Morrison welcomed the temporary upgrade saying it "directly contradicts Labor's claim that the Trump company tax cuts have nothing to do with the uptick in economic growth around the world".

"This backs up our positive outlook for Australia's economy in 2018. It is why this government will continue to seek support for our enterprise tax plan."

Only half of the government's $50 billion program of company tax cuts has become law. Company tax is set to fall from 30 per cent to 25 per cent for small and medium-size businesses, but not for big ones.

Mr Morrison said he wanted Australians "to seize the opportunities ahead, rather than be left behind".

The IMF believes the US tax cuts will benefit countries such as China that supply goods and machines to the United States and countries such as Australia that supply the raw materials used to make them.

Much of the growth upgrade is due to a strengthening of the coordinated upswing under way since mid-2016.

The economies of 120 countries, accounting for three-quarters of world GDP, grew faster than expected in 2017 in "the broadest synchronised global growth upsurge since 2010".

Growth was especially strong in Germany, Japan, Korea, the United States, Brazil, China, and South Africa.

The report warns that, as important as lower interest rates have been to the recovery, they have left a legacy of debt, both government and private.

Professor Obstfeld said that although inflation and interest rates remained low for now, a sudden rise from current levels, perhaps due to "pro-cyclical developments" such as the US tax cuts, could tighten financial conditions and prompt markets to re-evaluate debt sustainability. Share prices would also be vulnerable.

A PricewaterhouseCoopers survey of 1300 chief executives released at the forum found 57 per cent expect better economic growth over the next 12 months, almost double the 29 per cent that expected it a year ago.

Among US executives the proportion expecting stronger growth jumped from 39 per cent to 53 per cent.

The US had cemented its position as the most attractive location for investment, named by 46 per cent of the executives, up from 43 per cent.

China was the second most attractive destination, at 33 per cent.

Germany, Britain, India and Japan were the next most attractive locations. Australia fell from the 10th to the 11th most attractive location, nominated by 5 per cent of chief executives.

In The Age and Sydney Morning Herald

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What if the nerds are reading Trump right?

The January meeting of the American Economic Association is to economics nerds what Star Wars conventions are to George Lucas fanatics. It's an opportunity for more than 13,000 of them to cram into hotels to swap ideas, make new friends and catch up on research.

Justin Wolfers prowled the halls. An Australian expatriate who's professor of economics at the University of Michigan, he told the Australian forecasting conference in Sydney this week: "There are more handsome people blessed with amazing social skills in that one building than you'll ever see anywhere else."

He asked them what was going on.

"Over the course of four days I literally did not meet a single North American economist who thought that anything good for the US was going to come out of the Trump administration," he said. "Not one."

Not a single nerd. But outside of the Chicago Hyatt Regency, in the world of actual business ...

Each month, the US National Federation of Independent Business asks 10,000 small business owners whether they think conditions will improve or get worse in the six months ahead.

The month before the election, 7 per cent more thought things would get worse than get better. Two months later, 50 per cent more thought things would improve. "That's an extraordinary turnaround of 57 per cent in two months," Wolfers said. "Small business people are just beside themselves with joy."

There has, he said, never been a more pure test of what matters most: the views of experts, or of real business people putting up real money who can make things happen because they believe things will happen.

"And it's not obvious who's right," he said. "Do we trust the guys who study this stuff for a living, or the guys who bet millions of dollars?"

These are the reasons to trust the experts.

• Trump has signalled interest in a war in the Middle East. The first Gulf war knocked off trillions (15 per cent) from the US stock market.
• Impeachment and all it entails is a real possibility – Trump has already lost a National Security Advisor.
• There's an increased risk of a new financial crisis, with Trump preparing to unwind the Wall Street Reform Act.
• And an increased risk of the US defaulting on its debt. Trump has already said he would consider "renegotiating" it.
• And the possibility of a trade war, and the collapse of a stable financial system.

Too extreme? Perhaps. But his point is we have to put some probability on these events, "just as a couple of years ago we had to put some probability on a reality TV host becoming president".

But how big a probability? Wolfers says before the election, smart people thought we should take Trump seriously, but not literally. They were wrong. Trump's biggest surprise has been his fidelity. "He really has begun to do the things he said he would do." The awful truth is we're going to have to take him literally and work through what that means.

In The Age and Sydney Morning Herald

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The US debt crisis. Apparently we have plans in our back pocket

Yea, sure

Apparently we have "back-pocket plans". Treasurer Joe Hockey said so in a US television interview.

But it's hard to know what those back-pocket plans are, mainly because we have no idea what would happen if the US failed to pay its debts. Would it push up the Australian dollar, would it push it down, would it send so much money flooding into Australia that foreigners were virtually paying us to take on our debt or would it dry up the flow so we couldn't borrow at all?

It's hard to know because it's unthinkable. The US is the world's biggest economy. Of course it can make the payments on its debts. Of course it will. Financial markets have pushed down the price of the US Treasury bills due to expire in the next few weeks as a precaution but after a few months the price returns to normal. Even money market traders - by nature excitable - aren't getting too excited.

My soundings tell me the officials Hockey says have ''back-pocket plans to deal with whatever arises'' aren't getting too excited either. US government debt is to international finance what the English language is to communication. It's the global standard. If it didn't exist it would have been invented. It's where savers put their money.

There's no fallback and there's no time to find one...

Tweet

And nor is there an actual deadline. On CNN there's a ''debt ceiling deadline'' clock in the corner of the screen, counting down the hours, minutes and seconds until 3am AEDT Friday, when the US is said to breach its self-imposed ceiling. But if the deadline passes and Congress doesn't relent and increase the ceiling, nothing will happen at first.

Some time later, on November 1, the US has some big bills to pay: $67 billion in social security cheques and military pay and interest on government bonds.

It might need to reprioritise if it's to avoid breaching the debt ceiling, perhaps delaying some of the payments or replacing them with promises to pay later. There's no hard and fast date. Even if the US did miss some debt payments, its lenders might choose to look the other way. It has missed payments before. Everyone knows it's good for the money. It has to be.

In The Sydney Morning Herald


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A win for Nate. A win for reality.

@jsmooth995

And boy has there been an assault on reality.

In his Andrew Olle lecture Friday night ABC broadcaster Mark Colvin described what's been happening this way:


"I'm talking about the way people can create their own reality stream.

It's particularly far advanced in America, because a quarter of a century ago they abandoned the fairness doctrine, a federal regulation which mandated a degree of balance on the airwaves.

So now you can run a creationist channel that rigorously excludes Darwinists from the airwaves - you can say again and again that Barack Obama was born in Kenya, and refuse even to look at the documentary evidence, and so on.

In 2004, the writer Ron Suskind wrote a famous piece in which he quoted a Bush aide - reliably believed to be Karl Rove - as follows:

"The aide said", wrote Suskind, "that guys like me were "in what we call the reality-based community," which he defined as people who "believe that solutions emerge from your judicious study of discernible reality." ... "That's not the way the world really works anymore," he continued. "We're an empire now, and when we act, we create our own reality. And while you're studying that reality judiciously, as you will we'll act again, creating other new realities, which you can study too, and that's how things will sort out. We're history's actors;and you, all of you, will be left to just study what we do."

I imagine most of us here tonight would categorise ourselves as the reality based community, but we too are beleaguered."


New York Times data geek Nate Silver was feeling beleaguered.

A few days back Paul Krugman took up his story:


"For those new to this, Nate is a sports statistician turned political statistician, who has been maintaining a model that takes lots and lots of polling data — most of it at the state level, which is where the presidency gets decided — and converts it into election odds. Like others doing similar exercises Nate’s model continued to show an Obama edge even after Denver, and has shown that edge widening over the past couple of weeks.

This could be wrong, obviously. And we’ll find out on Election Day. But the methodology has been very clear, and all the election modelers have been faithful to their models, letting the numbers fall where they may.

Yet the right — and we’re not talking about the fringe here, we’re talking about mainstream commentators and publications — has been screaming “bias”! They know, just know, that Nate must be cooking the books. How do they know this? Well, his results look good for Obama, so it must be a cheat. Never mind the fact that Nate tells us all exactly how he does it, and that he hasn’t changed the formula at all.

This is, of course, reminiscent of the attack on the Bureau of Labor Statistics — not to mention the attacks on climate science and much more. On the right, apparently, there is no such thing as an objective calculation. Everything must have a political motive.

This is really scary. It means that if these people triumph, science — or any kind of scholarship — will become impossible. Everything must pass a political test; if it isn’t what the right wants to hear, the messenger is subjected to a smear campaign."

Nate - for the most part - failed to strike back, or back away from his assessment (one arrived at by calculations rather than judgments by the way, like in Moneyball).

The end result? Darn near exactly what he predicted:

Reality (specifically, data) triumphed over people who preferred to choose their reality.

As Jon Stewart said last night: "This was the historic election between arithmetic, and belief. And belief wasn’t going down without a fight."

Watch the full eight minutes. It's worth it.

Essential reading:

. The war on Nate Silver, the after-action report - Brad DeLong


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Garnaut to miners. You've conned yourselves over China

Read his full speech below. It is very good.

Climate change advisor Ross Garnaut has lambasted mining executives for destroying shareholders funds in the blind belief China's demand for Australia’s big three exports would continue to climb.

While they had splurged on “wasteful overinvestment” China had been making good on its promise to cut its emissions intensity and had been sourcing iron ore from elsewhere.

“It happens that the Chinese structural change has had its most severe effect precisely on the three commodities which have been at the centre of the Australian resources boom - iron ore, metallurgical coal and thermal coal,” he told a Melbourne Institute conference.

“The awful reality is that parts of corporate Australia have dissipated shareholders’ funds by underestimating the seriousness of Chinese commitments to reduce the emissions intensity of economic growth.”

Speaking at the same conference Treasurer Wayne Swan warned of a “savage blow” to the global recovery unless Republicans and Democrats in the United States could agree on a way to prevent a crisis in December when large numbers of tax cuts would automatically expire.

Professor Garnaut said China had exceeded its ambitious emissions targets, cutting coal-fired generation by more than 7 per cent in the past year. A rapid expansion in hydroelectricity, and wind, biomass, solar and nuclear power had pushed down coal’s share of energy production from 85 to 73 per cent.

Australia’s iron ore exporters would soon have to compete with massive new Chinese-funded mines in West Africa created in part by Australia’s decision to block Chinese investment at home.

The forecasts for iron ore and coal exports in the government’s Asian Century white paper were barely believable, their credibility protected only by the presence of “low” projections along with so-called medium and high projections.

Gas and uranium would be far more important to Australia’s prosperity than the “diminished prospects for the staples of the early twenty first century”...

Mr Swan built on his September attack on the “cranks and crazies” he said had taken over parts of the Republican Party saying the “looming fiscal cliff” in the United States could plunge it back into recession.

The legislated unwinding of a decade’s worth of tax cuts and spending programs on December 31 would “left unattended, see the the US economy suffer a crushing annualised contraction of 2.9 per cent in the first half of next year”.

“Whoever wins the presidential election in less than a week’s time and whoever controls the Congress will have choices to urgently make,“ Mr Swan said.

“A few weeks ago I described in colourful terms the risk posed by those who were
pushing the most extreme points of view.”

“I got a lot of support for that speech, but some of my dependable critics misunderstood it as a political statement, when any economist or policy-maker following the fiscal cliff crisis knows all too well this is about risks.”

Mr Swan will fly to Mexico for the G-20 finance ministers meeting on the weekend and then to Washington for meetings with the head of the International Monetary Fund Christine Lagarde and the head of the US Federal Reserve Ben Bernake.

Professor Garnaut told the conference Australia had been blessed to have a mining boom immediately following the largest consumption and housing boom on record.

The immediate challenge was to “come down from our hump in incomes and expenditure without precipitating recession”.

In today's Canberra Times, Sydney Morning Herald and Age


Here's my favourite bit, about Japan:

"Some observers see Japan’s economic stagnation as a failure of the Japanese economy and polity. Many Japanese do not feel that their country is in crisis. Unemployment is low. Income is more equitably distributed than in the United States, although some Japanese are disturbed by increasing disparities. Health services are excellent by global standards and longevity incomparably high. Japanese enjoy high and subtle literacy and good education, and a rich cultural life. There is private financial and personal security and incomparable public security—natural disasters aside. To be sure, the ageing of the population slows national economic growth and reduces national strategic weight, and a more dynamic polity would remove some longstanding imperfections. But if Japan is the end point of modern economic growth, then modern economic growth is no bad thing."


Ross Garnaut 2012 Economic and Social Outlook Conference



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How to get a pulse on the economy. NY Fed to monitor Twitter.

Tender document below.

Tip for @RBAInfo: Get with it. You are following zero of us. Start.


NY Fed tender document

HT: @JustinWolfers

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Sheer unadulterated panic, and self-fulfilling - Adam Carr

"It was just sheer and unadulterated panic overnight. The fallout from the FOMC meeting continued and global markets were smashed. Barely a day or two into things and operation twist has already wreaked havoc on the globe (although stronger USD is good). The fear now, following the Fed’s increasingly desperate and useless actions - is that there is nothing left to stave off global recession.

Now at the moment we are not seeing any evidence of global recession. Growth by and large remains healthy although clearly, with the Fed just doing what it does, European politicians dithering and the constant media bombardment about crises and problems, many of which don’t even exist- the risks have risen markedly. The ‘crisis’ – pick one - has developed its own momentum, it is becoming a self-fulfilling prophecy, which of course makes it much more difficult to deliver solutions.

The impact of this has been most marked on the sentiment indicators so far, as we already know. So it is no surprise, with everything going on, that the European PMIs weakened again in September according to data released overnight. This is turn just exacerbated existing fears about global growth and weighed on markets. The manufacturing PMI fell to 48.4 from 49 which is the weakest result since August 2009 (average 51.5), while the services PMI fell to 49.1, the lowest since July 2009 (average 52.9). It’s clear then that we’ve entered into what’s known circularity, a downward spiral of self fulfilling fear, feeding on fear. And it’s very difficult to see a catalyst for change.

European equities were smashed as the Dax fell almost 5%, the FTSE was off 4.7% and the CaC was down 5.25%. In the US it wasn’t much better as the S&P500 fell 3.2%, the Dow fell 391pts (10733) and the Nasdaq fell 3.25% (2455) – SPI was down 1.9% (3890). The carnage was everywhere and every sector was hit, but basic materials (-6.2%), energy (-5.03%) and industrials were hardest hit.

Commodities, were absolutely #%a& on. Gold lost $34 to sit at $1738, silver fell 11.6%, copper was down 7.3% and softs were off almost 4%. Crude too saw some big moves with WTI off 6.4% ($80.4) and Brent off 4.4% to $105.5. A strong USD, the only positive from operation twist, is a key driver here as we’ve seen the Dollar spike 2.1% so far (0.8% last night). AUD then lost another 250pips to sit at 0.9748 (lowest since March 2011), euro was down 93pips to 1.3462, Sterling lost 114pips to sit at 1.5349, while JPY was down to 76.22 from 76.51.

The main implication of the weaker AUD is that it should gag those harping on about rate cuts here. These people had been arguing that the high AUD was hampering growth, restraining it and contributing to tighter financial conditions. For consistency then, the weaker dollar must, on their own arguments, reduce the need for the RBA to cut. Will be interesting to see what happens on that front. As I noted yesterday this at the least should be a period when our exporters are hedging aggressively. If the AUD goes lower still, then happy days, but if it goes higher, there is no excuse for whinging.

In a general sense where we go from here depends largely on the Europeans now. They could end this at any time if they choose and there is a lot of pressure for them to do so soon – leaders from 7 nations including Australia writing to the G20 asking for action. I’d note though (as I did last year) that for all the vacuous discussion about Greece defaulting - orderly or not - it is actually the most costly option, it is the worst option. Europe has already lost about €200bn in economic activity thanks to the ‘crisis’ (which compares to Greek debt of about €350bn) and it is obvious that the subsequent loss of economic activity (should Greece default), contagion, recapitalisations and costs of building a ‘firewall’ more generally (under the orderly default option), far outweigh any bailout. It’s basic math.

Yet supposedly intelligent people harp on about it as if it were the best or only option. The slogan is – ‘It’s inevitable’. Unbelievably, those who spruik this slogan refer to the Argentinean experience as a major default success story. Yet Argentina’s default didn’t change the need for austerity, it didn’t prevent the pain and in fact made it worse. Years after Argentina defaulted, the unemployment rate was still at 20%, youth unemployment much higher, and, a decade later, they have not been able to tap international debt markets. The scars run deep and for Greece it would be much worse. It is delusional to think of an ‘orderly default’ as a good option for Greece or Europe. On any, even rudimentary cost-benefit analysis, it doesn’t stack up."

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US$12.3 billion of ours at risk

Oh... it's been fixed

Australia has some US$12.3 at risk in US treasury holdings, split between banks, superannuation funds and the Reserve Bank.

Failure to break the impasse in Washington over the debt ceiling will lead to a write down in the value of the assets and leave the Australian owners vulnerable to missed interest payments.

US president Barack Obama is due to address the nation at 11.00 this morning eastern Australian time as the clock ticks down to the August 2 deadline to reach a deal on lifting the ceiling.

Failure to lift the ceiling will shutdown government services and potentially trigger a downgrade by ratings agencies and reverberate around the world.

US Treasury figures show the three biggest holders of US government debt are China with US$1.159 trillion, Japan with US$912.4 billion and the United Kingdom with US$346.5 billion.

Australia is the 34th biggest creditor on the US table complied in May... It has been rapidly winding down its holdings of US government debt from a peak of US$19.2 billion in June 2010.

Ahead of a critical week Treasurer Wayne Swan warned of the need for “very tough decisions” in the US and said while a new agreement by European leaders on sovereign debt was “an important step,” many countries were still facing a long and painful adjustment.

Australia’s share market is expected to open lower this morning after hefty losses on Wall Street Friday night.

The Dow Jones Industrial Average shed 96.87 points, or 0.8 per cent, to 12,143.24 points, while the broader S&P 500 Index lost 8.4 points, or 0.6 per cent, to 1292.28 points.

Australian shares capped their worst monthly performance in more than a year on Friday amid the fear of a US default.

HSBC chief economist Paul Bloxham said a possible downgrade of the United States’ prized AAA credit rating was ‘‘haunting’’ equity markets and would continue to spook investors for the next few weeks.

A downgrade could trigger a mass reshuffle of world funds and offloading of US assets.

‘‘A lot of fund managers, pension funds and hedge funds have mandates to have a certain amount of AAA rated securities in their portfolios. Probably all of them have US securities,’’ he said.

‘‘There would be a lot of reshuffling and heavy selling that could see bond yields increase. It’s not a comfortable situation to be in.’’

Westpac’s global head of fixed income strategy, Russell Jones, said whether US assets were dumped would depend on the legal obligation of AAA mandated investment managers to sell.

‘‘Thankfully it would appear that relatively few are legally obligated to do so,’’ he said.

‘‘On the other hand, to maintain the average ratings of their portfolios... they may have to liquidate holdings of lower quality assets, say junk bonds, and this could cause these markets to seize up.’’

Chad Padowitz, chief investment officer of Melbourne-based fund manager Wingate Asset Management said a credit downgrade would not be a ‘‘disaster scenario’’.

‘‘People would see through that. The US is still a better credit risk than many others,’’ he said.

‘‘At the end of the day, the US can print its way out of any debt problem because it issues debt in its own currency.’’

But boosting liquidity risked depressing the US dollar to a point where inflation exploded — a situation Mr Padowitz said America was nowhere near.

‘‘All their quantitative easing, the printing of money that they have done has been held on bank balance sheets, it’s not going into the economy. When that turns, when that creation of new dollars goes through the credit system and people stop deleveraging, that’s when you’ll have an inflation problem.’’

Published in today's SMH and Age


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Unto us a child was born

Barack Hussein Obama, to an 18 year old girl from Wichita and a 25-year old student from Kenya.

Did they know, could they have guessed?

It's a moving document:

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"Gillard's been brainwashed" - Latham

From Latham's impressive Financial Review column today:

"A curious feature of the Rudd government has been the compliance of Labor's Left on defence and foreign policy. In a high-profile speech to the Australian American Leadership Dialogue in Washington last year, Julia Gillard declared herself to be a rusted-on supporter of ANZUS, designating to the US: "a unique role . . . in the world we try to help to build, in the civilisation we want to persist and prevail".

There was a time, of course, when the Left criticised America for its human rights abuses, gun-toting social values and imperialist foreign policy. Now the titular head of its parliamentary faction has declared the US (and remember at the time, this was George W. Bush's America) to be a champion of global civilisation. I cannot allow the wrongness and hypocrisy of this statement to go unchallenged.

Over the years I have received tender messages from Gillard saying how much she misses me in Canberra. One of them concerned her study tour of the US, sponsored by the American government in 2006 - or to use her moniker - "a CIA re-education course". She asked me to "stand by for emails explaining George Bush is a great statesman, torture is justified in many circumstances and those Iraqi insurgents should just get over it".

She promised "to catch up when I'm back from the US and I'll show you my CIA-issued ankle holster".

I never got to see her ankles or her holster, but I will say this: you have to hand it to those guys in Washington, they have a way of making lefties like Gillard change their minds on foreign policy. Within the space of two years they converted her from a highly cynical critic of all matters American into yet another political sycophant. The poor woman has been brainwashed."

Here's Annabel Crabb's take.

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It's getting closer - RBA

The Reserve Bank believes China's economic recovery is already helping Australia and that the ailing United States economy could be "approaching a turning point".

The unusually upbeat pronouncement accompanied the Bank's announcement that it would keep its cash rate on hold for the third successive month while standing ready to cut it again "if needed".

Ahead of an update from the International Monetary Fund's due tonight the Reserve Bank said it believed the global economy was "stabilising", with "downside risks diminishing".

"Growth in China has strengthened considerably," it said. "This is having an impact on other economies in the region...

...including Australia."

In the Bank's first suggestion that it believes the United States economy could be about to pick up it says it sees "tentative evidence that the US economy is approaching a turning point".

While conditions in Europe are still weak, "the considerable economic policy stimulus in train around the world should support recovery", the Bank says, "although slowly at first".

The statement raises the possibility of an Australian economic recovery sooner than the Bank's current official forecast of early next year by describing Australian conditions as "not as weak as expected a few months ago".

While business borrowing has been shrinking, the Bank says demand for home loans and home prices are picking up and that interest rates are in any event very low by historical standards, despite some recent increases in bank margins.

The Bank credits both "fiscal measures" and its own lower interest rates with Australia's resilience in an explicit acknowldegment of the effectiveness of the government's multi-billion stimulus stimulus packages.

On reading the statement Commonwealth Bank economist John Peters said he now found it "hard to see the central bank moving to ease rates again in the near term".

JP Morgan economist Helen Kevans went further declaring that "the next move in the official rate will be up, rather than down".

"Previously, we expected two small rate cuts from later this year," she said. "Our view now is that, given the unprecedented policy stimulus in place, the Bank will not wait for the unemployment rate to peak before starting to take back the current policy accommodation".

The Bank's statement holds open the possibility of at least one more rate cut, saying that in assessing how it might use its scope to ease, it would "continue to monitor how economic and financial conditions unfold and how they impinge on prospects for a sustainable recovery."

Published in today's SMH and Age

Graphic

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Krugman: "There is now no way to view the people who ruled us these past 8 years as anything but monsters"

He is right.

Thank heavens it is over.

It had better be over.

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Rolling Stone on what has become of the United States

"It's over — we're officially, royally f...ed. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far."

It's here. 

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The edges of other catastrophes

The previous graph from the House Speaker's office compared this US recession with only the last two. This one, from Macquarie's Rory Robertson, compares it with earlier recessions as well (and does it in terms of the proportion of jobs lost, rather than the number:


This recession, while harder on jobs than the last two recessions, is tracking the behaviour of the early 1980s recession - we hope. But it could yet destroy jobs like the late 1950s and late 1940s recessions.

(The Weatherman points me to a neater, more political version of this graph.)

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Edge of catastrophe?

"Edge of catastrophe? What a load of tosh," writes a commentator.

Here's how things stand in the US right now, courtesy of the House Speaker's office (click to enlarge):

Time magazine's Karen Tumulty writes: If you are having trouble reading the fine print, the blue line shows job losses in the 1990 recession; the red line is 2001, and the green line is the path we are on now.

She adds: To clarify, these are not projections. This is actual job-loss data.

The Speaker's office explains:

"This chart compares the job loss so far in this recession to job losses in the 1990-1991 recession and the 2001 recession -- showing how dramatic and unprecedented the job loss over the last 13 months has been. Over the last 13 months, our economy has lost a total of 3.6 million jobs – and continuing job losses in the next few months are predicted.

By comparison, we lost a total of 1.6 million jobs in the 1990-1991 recession, before the economy began turning around and jobs began increasing; and we lost a total of 2.7 million jobs in the 2001 recession, before the economy began turning around and jobs began increasing."

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"When was the last time the Liberals in national opposition were responsible?"

So asks Nicholas Gruen, Australianising Paul Krugman who writes:

"The American economy is on the edge of catastrophe, and much of the Republican Party is trying to push it over that edge.”

Anyone reading our Reserve Bank's Quarterly Statement might be inclined to agree, about the attitude of our Liberal Party.

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So you want to work for Obama?

Here are seven pages of questions.

HT: The Interpreter.

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$700US billion - not too far short of Australia's entire GDP!

The world's biggest-ever financial bailout

CNN on the facts, as of Sunday:

"President Bush asked Congress on Saturday for the authority to spend as much as $700 billion to purchase troubled mortgage assets and contain the financial crisis. The legislative proposal - the centerpiece of what would be the most sweeping economic intervention by the government since the Great Depression - was sent by the White House overnight to lawmakers."

Paul Krugman on the lead up:

"On Sunday, Henry Paulson, the Treasury secretary, tried to draw a line in the sand against further bailouts of failing financial institutions; four days later, faced with a crisis spinning out of control, much of Washington appears to have decided that government isn’t the problem, it’s the solution. The unthinkable — a government buyout of much of the private sector’s bad debt — has become the inevitable."

Alan Koher on Australia's part in swift moving developments today:

"Australia’s stunning ban on all short-selling is a revolution that will likely flow around the world in a series of dominoes from tomorrow. The global hedge fund industry will effectively be shut down overnight. The business of securities lending will also shut down."

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How bad did things just get?

So bad that for a while yesterday a key part of the financial system stopped working.

Many Australian, Asian and European superannuation funds and corporations will not invest in the US unless they can hedge their currency exposure.

Hedging means protecting yourself against movements in exchange rates.

It comes at a cost, but it has always been available - until yesterday.

Yesterday it became impossible to hedge at any cost. No-one with access to US dollars would agree to use them in the forward market.

It meant no trade on any terms until the US market opened for business and the US Federal Reserve once again flooded its financial system with dollars...

The implications were beginning to sink in. The US dollar, previously the most- tradeable currency in the world, wasn't safe to deal in.

Because the US dollar is the benchmark by which other currencies are measured, it would be hard to trade in them as well.

Currencies could still be swapped at the going exchange rate (the so-called spot market), but Australian mining companies, super funds and exporters would be unable to buy protection against currency movements.

If it continued it would mean that many would find it safer to withdraw from international trade and investment.

Adding urgency was the time of year. Quarterly hedging contracts were about to expire.

Rather than wait even a few more hours for the US market to open, five central banks in Europe, Canada and Japan announced plans to sell as much as 180 billion US dollars to anyone who wanted them.

The US had agreed to funnel them the US dollars immediately. It was an emergency plan they had been cooking up for months.

It didn't involve the Reserve Bank of Australia this time, but next time it might - if there is a next time.

The very worst case is unthinkable - that financial flows between countries will stop. But a more likely outcome is in some ways worse - that trade will continue but that there will be less of it.

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