Thought Bubbles from the Deep

[DeepState]

Most people in the street do not understand the issue. The budget issue is not politicians or labor or liberal or this or that. It is middle class welfare and people getting money they do not need. Boom time cannot occur perpetually.

I see that the perspective is that pensions are to be used as a societal safety net only.

No one wants to tackle the issue that is destroying the budget. Middle class welfare.
The issue with gov spending is hardly ever income, most of the time it is spending.

This is because the tax base is shrinking and the parts of society which require benefits are increasing. This is leading to a structural budget deficit acceleration. It gets worse just by standing still on the legislative front. What is happening to cause this is not some structural increase in the real value of pensions. It is primarily due to demographics.

Our budget is hardly being destroyed. The worst situation at the moment is the loss of the AAA rating. Hardly diabolical. Australia has many strategic 'assets' available to it. Bankruptcy of the nation is just hyperbole.

Unfortunately even you have resorted to these qualitative arguments which I cannot argue against.

I am primarily a numbers guy and can read the balance sheet of the nation as you can. Nonetheless, I am aware that the numbers are a reflection of decisions taken and help to inform decisions. Those decisions reflect values. Your values, in relation to pensions is to see them as a safety net only, reserved for those most in need.

Australia and many other parts of the world see pensions as safety nets but also the benefits of societal dividends. We can have a situation in China where your safety net is your kids and that's about it. Or, on the other hand, Finland, where you will receive a universal income no questions asked, no matter how much you have. It is a choice and it reflects societal values.

I'd like to be between China and Finland. Closer to Finland.

The issue is about Middle class welfare, not people who have suffered a bad life, that is the outlier in Australia. A person with wealth should not be getting benefits full stop.

A person with wealth probably paid a heck of a lot of income tax to accumulate that wealth. However, we are at the juncture of addressing dire needs on one hand and provision of a societal dividend. My perspective is that both ends are reasonable, but a societal choice based on its values.

Legal tax transfers do not make it sustainable or reasonable. I reject that argument because it is legal and I can do it then therefore I should.

My point was to highlight that transfers happen all over the place. There are always niches which are exploited. This is why the most reliable taxes are those on consumption and land. In this way, pensioners with extra assets or income are paying more tax than than others in their age cohort who are not in the same position. Land tax and council rates on a $2m property is not to be sneezed at vs a small unit.

I do not condone tax evasion, but have zero problem with tax minimisation within the law. Tax is not a principals based thing. It is a formula. In many regardss it is like determining the rules to manage the international order where all sorts of values come together to decide major international issues. Rules based is the way. "Even though the rules say that OT should pay $150k in tax this year, I feel that OT should pay $200k in tax this year"....no.

Remember the pension is a benefit meant for people who are struggling not people who have strategically placed the money by spending, gifting or in the main residence. People should support themselves not be having decent estates given tax free to their children.

That statement reflects your values....it is not an error to pay a pension to anyone.

If it is not stopped the buck will keep getting passed. We have to live in reality. Later generations will get hit because of the greed on people who already have money.

Japan, with Gross Debt to GDP of 220%+ and a rapidly shrinking population, has an interest rate of zero. What cost would you be referring to? Government debt is very different to corporate debt.

 

[OmegaTrader]

I see that the perspective is that pensions are to be used as a societal safety net only.




This is because the tax base is shrinking and the parts of society which require benefits are increasing. This is leading to a structural budget deficit acceleration. It gets worse just by standing still on the legislative front. What is happening to cause this is not some structural increase in the real value of pensions. It is primarily due to demographics.

Our budget is hardly being destroyed. The worst situation at the moment is the loss of the AAA rating. Hardly diabolical. Australia has many strategic 'assets' available to it. Bankruptcy of the nation is just hyperbole.




I am primarily a numbers guy and can read the balance sheet of the nation as you can. Nonetheless, I am aware that the numbers are a reflection of decisions taken and help to inform decisions. Those decisions reflect values. Your values, in relation to pensions is to see them as a safety net only, reserved for those most in need.

Australia and many other parts of the world see pensions as safety nets but also the benefits of societal dividends. We can have a situation in China where your safety net is your kids and that's about it. Or, on the other hand, Finland, where you will receive a universal income no questions asked, no matter how much you have. It is a choice and it reflects societal values.



A person with wealth probably paid a heck of a lot of income tax to accumulate that wealth. However, we are at the juncture of addressing dire needs on one hand and provision of a societal dividend. My perspective is that both ends are reasonable, but a societal choice based on its values.



My point was to highlight that transfers happen all over the place. There are always niches which are exploited. This is why the most reliable taxes are those on consumption and land. I do not condone tax evasion, but have zero problem with tax minimisation within the law.




That statement reflects your values....it is not an error to pay a pension to anyone.



Japan, with Gross Debt to GDP of 220%+ and a rapidly shrinking population, has an interest rate of zero. What cost would you be referring to?

One final hooray before I stop ranting.

Demographics is only part of the picture, expectations of entitlement are larger than expectations of taxation. We have immigration to help solve the population growth gap unlike japan etc.


You can't have both. This is not only pensions but family benefits as well.

Morally it is bankrupt to say along as it is within the law. That is why the budget is stuffed, hammered by overseas legal company loopholes and capital gains and then sliced on the other side by legal welfare loopholes. Boom time is over, organic growth cannot keep pace.

In 10 years time at this rate the debt will continue to be exponential(growth).

The decisions make keep people happy in the short but they are not sustainable in the long term.

If they are not sustainable then they need to be changed.

I do not have faith.

 

[DeepState]

One final hooray before I stop ranting.

Demographics is only part of the picture, expectations of entitlement are larger than expectations of taxation. We have immigration to help solve the population growth gap unlike japan etc.


You can't have both. This is not only pensions but family benefits as well.

Morally it is bankrupt to say along as it is within the law. That is why the budget is stuffed, hammered by overseas legal company loopholes and capital gains and then sliced on the other side by legal welfare loopholes. Boom time is over, organic growth cannot keep pace.

In 10 years time at this rate the debt will continue to be exponential(growth).

The decisions make keep people happy in the short but they are not sustainable in the long term.

If they are not sustainable then they need to be changed.

I do not have faith.

I don't see you as ranting. This is an informed position.

I think the expectations of entitlement are being wound back. Just today, we have another clamp down on Centrelink. Earlier, we saw cuts to welfare post election. Superannuation savings are enormous and continue to grow. These are expected to reduce the strain on the aged pension.

I think it is very healthy that matters as you have raised are actively debated. I think your position is reasonable. The assets test, I think, is a hole.

For government debt, what matters is not 10 years, but 50-100 years or more. If it can roll the debt to a time when it can pay it down, like when the dependency ratios flatten and the population is larger (which is not even in 50 years), things get better again as the structural elements balance out. Yes, it will be easier if the tax burden is lower. Once again a Generational Transfer values decision and something the government explicitly considers.

I am intrigued by your perspective on the morality of tax. Nothing stops you from paying more to the government than is requested. Particularly given you feel that the income side is not being addressed and it is something that we should morally address on behalf of future generations. Extra tax now will help future generations....please give generously! Together with the morality of expenditure, you seem to consider the federal budget as a moral issue. Maybe it is within a single family....move it to the levels of councils, states, nations...and that gets murky when the various shades of morality decide that their view is the only moral one.

I think that governments and democracy are not set up well to tackle long range problems that require near term sacrifice. It is an issue. What we need is a generation of Keating, Kennett and Lee Kwan Yew coming through in succession for the next 20 years to show strong leadership with long range perspectives.

 

[OmegaTrader]

I am intrigued by your perspective on the morality of tax. Nothing stops you from paying more to the government than is requested. Particularly given you feel that the income side is not being addressed and it is something that we should morally address on behalf of future generations. Extra tax now will help future generations....please give generously! .

I think we all know deep down what is right and wrong.

ahahha
Can you give me a job reference, then I can start donating !!!

 

[DeepState]

I think we all know deep down what is right and wrong.

ahahha
Can you give me a job reference, then I can start donating !!!

I know that the concept of "know" is very tenuous indeed. What is 'right' is also very tenuous. You have your morals. Good. Do that as long is at doesn't cross mine.

From your closing comment, I get the impression that you might be at the earlier part of your career and understandably looking for a reduced tax impost and some respite post-baby boom wake. Your generation suffers the most. You are totally cactus, actually.

You need more than a job reference. You need a Cougar. I won't question the morality of that pathway.

 

[DeepState]

RBA Gov Lowe made a speech today about the housing market.

The consensus opinion on housing goes as follows:
- Borrowed too much
- Houses too expensive
- Going to break our banks
- Got to stop this

Lowe offered a different view:
- House prices aren't doing anything particularly odd.
- Supply will increase and help level out prices.
- Increased level of borrowing are just choices
- These choices don't look like they are unstable for the most part. They stick.
- Much of the increase in debt levels is concentrated in the hands of the wealthy, who can hack it. The average figures make things look much worse than they are
- APRA bank stress tests indicate that the banking system will survive very bad property markets. Solvency of the banks is not an issue.

Basically, housing is not seen to be a really serious risk to the economy. It's hard to know what the right price is for houses and the RBA has no targets in mind to say that Price to Household Income should be X.

Of greater concern for Lowe (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending if interest rates should rise.

All up, this speech made it clear that the RBA will not attempt to raise rates to fend off asset inflation. They don't even see it as a problem. They have indicated that, if they raise rates, it will be very very gentle because consumers are now far more interest rate sensitive than before.

As housing supply grows and various things happen to slow the foreign demand, acceleration of borrowing will become more limited and these things balance out.

Overall, this was a dovish speech. It puts talk of remediation of loan growth via interest rate hikes into perspective...and the bottom drawer for now.

 

[Skate]

RBA Gov Lowe made a speech today about the housing market.

The consensus opinion on housing goes as follows:
- Borrowed too much
- Houses too expensive
- Going to break our banks
- Got to stop this

Lowe offered a different view:
- House prices aren't doing anything particularly odd.
- Supply will increase and help level out prices.
- Increased level of borrowing are just choices
- These choices don't look like they are unstable for the most part. They stick.
- Much of the increase in debt levels is concentrated in the hands of the wealthy, who can hack it. The average figures make things look much worse than they are
- APRA bank stress tests indicate that the banking system will survive very bad property markets. Solvency of the banks is not an issue.

Basically, housing is not seen to be a really serious risk to the economy. It's hard to know what the right price is for houses and the RBA has no targets in mind to say that Price to Household Income should be X.

Of greater concern for Lowe (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending if interest rates should rise.

All up, this speech made it clear that the RBA will not attempt to raise rates to fend off asset inflation. They don't even see it as a problem. They have indicated that, if they raise rates, it will be very very gentle because consumers are now far more interest rate sensitive than before.

As housing supply grows and various things happen to slow the foreign demand, acceleration of borrowing will become more limited and these things balance out.

Overall, this was a dovish speech. It puts talk of remediation of loan growth via interest rate hikes into perspective...and the bottom drawer for now.

Hi DeepState

You nailed his speech perfectly -- but -- I would change one of your your sentences slightly to reflect Lowe's comments more accurately:

[Of greater concern for] Lowe's major concern (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending [if] when interest rates [should] rise.

 

[skc]

Of greater concern for Lowe (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending if interest rates should rise.

Why do central banks around the world care about inflation? Is it because they want to make sure that the cost of living is being kept under control for the general public?

If that is the case, why doesn't/shouldn't house price form part of input to the calculation of inflation? Being unable to afford a house is as bad as being unable to afford food or petrol or electricity.

 

[Trembling Hand]

Lowe is sending a signal to the Government that the housing affordability problem is their problem, not his. He is disowning the need to be the fixer and placing it very fairly at the foot of the people who frigged it up in the first place... neg gear, discount capital gains, no capital gains, low supply, first home owners subsidy etc

Smart

 

[craft]

Why do central banks around the world care about inflation? Is it because they want to make sure that the cost of living is being kept under control for the general public?

If that is the case, why doesn't/shouldn't house price form part of input to the calculation of inflation? Being unable to afford a house is as bad as being unable to afford food or petrol or electricity.

The cost of consuming housing in the form of rent, maintenance etc is included in the CPI to something like the tune of 20%+ of the basket. They don't care about house prices as part of Inflation targeting because a house is treated as a stock(asset) not a flow(consumption). As far as the Inflation targeting is concerned it is ambivalent to what level the rent / buy cost benefit analysis takes prices of the asset to clear the market.

It's only as/if house prices impact on rents that that the central bank will feel the need to get involved with it's interest rate tools - until then increases in the house to rent ratio is somebody else's problem and I bet the bank hopes somebody else does fix it before they have to and hopefully in a way that avoids them having to get the mop out.

There is a train of thought that says the market is pretty bad at pricing assets sometimes and that asset inflation targeting should also exist to improve economic stability (I guess sort of what you are implying) - For all its faults and bubbles I hope it stays the way it is with the central banks role not to target asset levels but to mop up asset pricing busts when they occur with lender of last resort liquidity, because what's the alternative? Politicians/bureaucrats setting asset prices.

 

[DeepState]

Hi DeepState

You nailed his speech perfectly -- but -- I would change one of your your sentences slightly to reflect Lowe's comments more accurately:

[Of greater concern for] Lowe's major concern (who made his name on allowing for financial stability in policy setting beyond inflation and employment) was that the level of debt now in place would lead to a much greater than usual reduction in spending [if] when interest rates [should] rise.

Thank you for improving the accuracy of this statement, Skate. Cheers.

 

[DeepState]

Why do central banks around the world care about inflation? Is it because they want to make sure that the cost of living is being kept under control for the general public?

If that is the case, why doesn't/shouldn't house price form part of input to the calculation of inflation? Being unable to afford a house is as bad as being unable to afford food or petrol or electricity.

I have come across this argument twice this week and it can't be a coincidence. I tend to reside within Craft's statements. However, some very smart people (you being one) have suggested otherwise. Some monetary thinkers line up very strongly with you. Austrians make the same argument.

 

[craft]

The blue line is corresponding quarter increase of the housing component of CPI.

The way they calculate housing costs for CPI excludes changes in land value, existing house price changes and mortgage interest. But it does include price changes to build/renovate or rent as per the relevant populations.

The orange line is the selected living cost index for employee housing costs which pick up costs more like how you might think about home owners costs in real life with mortgage interest on both land and existing dwelling purchase being the measure of consumption cost rather than the change in price to buy new or renovate. Rent is still the cost for the non-owner population. Housing costs are much more sensitive to mortgage interest rates on this index - but its not much use to the RBA in setting interest rates for consumption because its reflexive to interest rates.

 

[DeepState]

High rise appt approvals down a whopping 50% m/m in latest Aust Housing approvals release.

 

[Gringotts Bank]

High rise appt approvals down a whopping 50% m/m in latest Aust Housing approvals release.

50%? Must be enormous oversupply. If Chinese investors start selling it's going to create a nasty bear market.

 

[skc]

I have come across this argument twice this week and it can't be a coincidence. I tend to reside within Craft's statements. However, some very smart people (you being one) have suggested otherwise. Some monetary thinkers line up very strongly with you. Austrians make the same argument.

Perhaps it is a coincidence. It's not my original thought... I read something about it and thought it had some merit. Craft's explanation that CPI already has a component for housing expense shows how uninformed I am. And base on this new information (to me), I don't think I will advocate the inclusion of house price in CPI.

I guess there is no inherent right answer in how CPI should be determined... or indeed what should be a central bank's mandate. Should the mandate include the avoidance of bubbles? My guess is it shouldn't, for the simple reason that they wouldn't do a particular good job at it.

 

[DeepState]

Does the strong re-election of Rouhani change the politics of the M-E re:Israel and oil?

 

[Value Hunter]

Certain monopolies are regulated. Their profitability is set with reference to things like CAPM. They provide a vital service to the community and the government is concerned that private wealth does not extract an excessive rent from doing so.

Should finance be such an industry? In some ways the banks are subject to this. By increasing the capital requirements and setting capital adequacy factors to different kinds of loans and assets, their profitability and riskiness is contained. In the pre-GFC period, the degree of leverage permitted was clearly too much. Today, that figure is vastly lower. However, that is only one kind of leverage and many more types can be created which circumvent this.

One way to do so is via derivatives whose treatment is varied. The GFC was made much more complex due to the way that the entities were related...via a web of synthetic CDS and other things. One way to protect against that is to treat OTC derivatives in a similar way to ET derivatives...keep collateral and have central clearing house. And there are moves in that direction.

If something becomes too big to fail, all sorts of weird incentives take place which puts everyone at greater risk but makes the people doing it very rich. The antidote is... to shrink things so that nothing is to big to fail. There is still much work to be done here. The implicit cost to society for bearing this risk has been estimated and the idea is to either pass it back to the bank or shrink the bank such that the wider society is not bearing the cost for keeping the thing running.

There's heaps more stuff, but hopefully you see that there have been significant steps towards addressing the matters you have raised but keeping the industry very much a capitalist driven one albeit with more safety rails now than before.

I think one matter which has not been raised is that of regulatory arbitrage. Bottom line, finance pays very well and it attracts very clever people who have strong incentives to make money. They outgun the regulators every day of the week. It's almost like trying to regulate the internet or tech companies. Good luck.

We do need much stronger governance at banks. We do need excessive compensation to be reigned in. We need fund managers to hold management heavily accountable rather than just sell the stock. We need the fund manager clients to actually invest in a way which rewards this. There is a whole chain and society gets what it gives.

Are the profits to finance out of step with the actual production? I would argue that farmers play a very important role. Without food, we die. Yet they mostly get paid poorly. Engineers build bridges and no movement of goods could occur without transport....paid like crap. Financiers create loans and securities, and trade them...some get paid boatloads. Fair?

Doesn't seem like it on face value until you ask yourself whether this is some closed shop union. Absolutely not. Entry into very high paying jobs in finance, management consulting etc. is heavily democratised. No one cares if you are half Russian/Chinese (it's actually a positive in quant) with green eyes, etc, and 4'8" with parents from Tejekastan. If you are smart, work your arse off, can find a way to get stuff done in chaos...you will be hired and your will be promoted rapidly if you can make the firm a boat load of money....or set up your own firm. Period. The old school tie is long gone. You'd think that this would eventually equilibrate the value chain to what it should be.

To set up a fund manager takes virtually no capital. I can build one in a week. So can heaps of others. Yet the fees remain high because people are prepared to pay it. No one forces them to. Why do investment bankers get paid tens of millions for advisory fees in M&A, most of which actually destroy value?

The capitalist system is supposed to figure out who gets what on the basis of who has the best bargaining power. So, if you think that the spoils to finance are out of step, we should ask why people pay for the service at that level, because it most definitely is not some form of unregulated monopoly.

Deepstate we all know that funds management is not a "free market". The fact that huge amounts compulsory superannuation flow into the funds management sector skews things greatly.

People who don't have the capital or knack to set up and operate a self managed super fund will be forced to use an industry or retail fund and get gouged on fees (at least on a look-through basis).

Also some employers even force employees to invest in a certain super fund because of an enterprise bargaining agreement with the union or some other such agreement (e.g. Bunnings employees must have their super payments paid to REST super). Yes technically the employee could then after rollover the money constantly to a super fund of their choice but that is a headache that many people with modest balances do not want to go through.

This is in addition to the fact that financial repression caused by the RBA and the government and banks all working hand in hand pressures people to invest in riskier assets when they lack the knowledge or correct attitude to do so.

Real term deposit (or savings account) rates after deducting inflation and a tax rate that a typical investor would pay are arguably negative. So while technically these people do have a "choice" the choice is between a small guaranteed loss or investing in riskier assets in the hope of earning a return. Arguably under a more "free market" system with a hard currency, higher interest rates and lower tax rates, real after tax interest rates would likely be higher and people would be able to earn a real return by investing in term deposits and would not need to invest in stocks or property, etc.

 

[craft]

Real term deposit (or savings account) rates after deducting inflation and a tax rate that a typical investor would pay are arguably negative. So while technically these people do have a "choice" the choice is between a small guaranteed loss or investing in riskier assets in the hope of earning a return. Arguably under a more "free market" system with a hard currency, higher interest rates and lower tax rates, real after tax interest rates would likely be higher and people would be able to earn a real return by investing in term deposits and would not need to invest in stocks or property, etc.

Why should their be a positive risk free rate? Is there a moral or economic reason that money should make more money for nothing? If anything there are good fairness and resource sustainability reasons why it shouldn't.

 

[Value Hunter]

Yes Craft there are moral and economic reasons that money should make money "for nothing". The reason being is that it is not actually risk free and it is not doing nothing, it is lending the money to the bank. If you put your cash in a storage vault (i.e. doing nothing) you earn no return/interest. If you lend your money to the bank a.k.a. savings account then there are always the risks of: bank failures, bail in's, sovereign defaults, capital controls, currency devaluations, changes to the tax system, changes to government guarantees on deposits, etc. In addition to this a positive real interest rate encourages higher savings rates in the economy. If people were rewarded for saving they would probably do it more. Are you saying that an economy with a high savings rate is in no way superior to an economy with a low savings rate? In addition to this do people not deserve a reward for delaying or foregoing consumption? Which is not an easy thing to do. Without enough people willing to delay consumption our current capitalist system would not exist.

I have had the chance to travel to countries in South America where cultural attitudes are different and people and many businesses even for the most part live for the day and do not worry about the future or invest in the future. Let me tell you it ain't good for the economy or society in general.

In addition high savings rates among the local population means that local banks need less offshore/wholesale funding (at least as a percentage of their funding requirements). This is good for banking system stability.

Another argument is that if savings accounts gave decent returns less people would be property speculators and house prices might be somewhat lower/more affordable then they are today. Also stock prices would be lower, meaning that long-term investors like you and I could buy shares cheaper.