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EYE-BALL Guru on – The Great Big Financial Swindle – Part III – GFC Bailout has only postponed the inevitable –

January 2, 2013
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Latest GURU Posts:


29th Dec – The Great Big Financial Swindle – Part II – The ‘Budget Surplus’ Backflip – Swan tells his own Porkies …


– 22nd Dec – The Great Big Financial Swindle – Part 1 – The ‘Budget Surplus’ Backflip – Swan serves up Senator Wong


– 14th Dec – The Walls are crumbling – Government admits High A$ policy is hurting –


– 4th Dec – Retailers and bureaucrats don’t understand – high A$ value responsible for off-shore purchases –


– 19th Nov – Government Expenditures Part I – Department of Prime Minister and Cabinet – DPMC – STAFFING –


– 3rd Nov – Shareholders – Holding back the world – scared money – scared boss’s –


– 31st Oct – Finally – RBA bubble head opens his mouth – He says – $A intervention not needed –


– 25th Oct – Foreign Minister Bob Carr & Wife – An Australian asset –


– 25th Oct – Communications Minister Stephen Conroy – one of Gillard’s Lap-dogs – untrained and unleashed –


– 24th Oct – Climate Change Minister Greg Combet – The Carbon Tax – emissions Trading scheme –


– 24th Oct – Treasurer Wayne Swan – Mini Budget Part 3 – The Clangers keep coming …


– 23rd Oct – Treasurer Wayne Swan – Mini Budget Part 2 – Mortgaging Australia’s Future to appease his ego


– 22nd Oct – Treasurer Wayne Swan – Mini Budget Part 1 – paints a false mirage to protect his legacy –


– 21st Oct – Penny Wong – On the mid-year accounts –


– 16th Oct – The First Home Owners Grant – the fallout and a reflection on a stupid stupid Government policy …


– 10th Oct – Tony Abbott Talks the Talk – but he is on empty when it comes to detail –


To see more GURU posts:

click here …


Title:
– The Great Big Financial Swindle –
– Part III –
– GFC Bailout has only postponed the inevitable –
| Author: EYE-BALL Guru | 2nd Jan 2013 |
The most recent OECD report on Australia’s economic outlook was released on the 14th Dec 2012. The report represents some 140 pages of reproduced ABS and other domestic think-tank compiled data.   It’s front page presents a summary of the collected data and highlights some interesting statistics.

[Click here to download the report as a PDF file …]

The Front Page Snapshot: [Click on image to enlarge in a new window.]

We all hear how Mr Swan loves to talk up the GDP growth numbers and boast his and the Government’s achievement in producing those numbers.

Under Labour GDP has grown to $1.487 trillion – see snapshot above – he often chides the Opposition over whether they have the ability to manage a $1.5 trillion dollar economy … meaning that he does and they don’t.

The GDP that gets the figure to $1.5 trillion is GNI – Gross National Income + Imports + exports.  The GNI is $353.6 billion as at Sept 2012 – the national debt stood at $250.1 billion – source linked here – that represents a debt/GNI ratio of 71%.

I hear economists and other ALP supporters arguing that Australia’s financial position is so much better that the rest of the world.  They based this calamitous comment on the fact that the Australian debt/GDP ration sits at around 26%, when most of our major trading partners is near 100% and above.   Those same economists argue that this is reason to allow the Government to spend more money to save the economy from slipping into recession.

What absolute tripe … Australian commerce is coming to a screeching halt – not because of a lack of Government stimulus since the GFC – some $300 billion in new debt confirms this … but all because the rest of the world sees us as too expensive a Nation to deal with.

Our labour costs, our currency value, our trade imbalance, our reliance on others to produce the goods we want … Australia has never been more vulnerable to an economic Armageddon than is is right now … and yet the so-called elite of economic forecasters have no fear of what lies ahead.

The GFC impact was delayed here in Australia – that delay can no longer be held at bay – it is coming and the spending firstly by Rudd, and then the gluttonous irresponsible splurges by Gillard and her gang of bohemian snot-noses, has now place Australia smack in the middle of the ‘overflow’ equation.  We have ventured too close to the cliff edge and gravity is working us closer – we will not nor cannot stop what is about to happen in this Nation.

The OECD report commentary is ‘dunny’ paper for the future … it’s based on past numbers and forward estimates provided by the Australian Treasury and ABS – the Treasury no longer has any creditability on economic forecasting given the so-called $160 billion in erroneous predictions of revenues the Government blame as the reason for the most recent budget surplus backflip.

The ABS use the Treasury numbers and modelling to form a great many of their numbers … it’s all tainted – and this OECD report is about as useful as a torch in a dark room with flat batteries.

Here is a fact – in the 2012-13 year the Government has forecast the interest cost in servicing the debt owed at $12 billion, up from $11.4 billion in 2011-12.  That is assuming interest rates stay where they are or fall further.

A 1% rise in interest rates adds $2.5 billion to the current interest cost,  5% adds $12.5 billion and more than doubles the budget forecast.

To access the chances of future interest rate increases one has to be a realist – economic growth will not drive up interest rates – nor the threat of inflation indicator increases, but as Australia’s economic woes  becomes more visible to the rest of the world, foreign capital inflows parked here because of the decade long resource ‘cash and carry’ trade will take their profits and move on the the next safe-haven.

This can be explained further when we revisit the reasons why the Government saw th need to guarantee the Banks during the height of the GFC crisis in early to mid 2009.   During this period the A$ fell from near parity to below A$0.60c … in a matter of weeks – this was foreign investors withdrawing their investment funds in a panic move because they saw the ‘resource trade’ as finished.  The Government had to issue the guarantee to stop ‘moms and dad’s’ also withdrawing their funds …

Bank security is a fickle thing – panic throws all logic out the window … yet that panic only comes when everyone realises they are at risk on being the last cab off the rank to act.

The only thing that will keep those off-shore funds on-shore is a rise in interest rates here at home – or a fear that where-ever they take their funds will increase their risk exposure.

When Mr Swan boasts about his ‘pipeline’ of future investments he proves his stupidity … Brazil, Mongolia, and Africa are months away from providing everything Australia provides in its mineral wealth and export volumes to the rest of the world – at a fraction of the cost to produce the same ore here in Australia.

If other Nations around the world stabilise as Australia begins its own economic meltdown, interest rates will rise very quickly in competition to try and keep those off-shore funds here.

None of the economic forecasters are expecting interest rate increases – but during the late 70’s and 80’s we had interest rate rises from single digits to in excess of 20%.   This triggered the Keating ‘recession we had to have’ and that killed the ‘inflation’ fueled pressures and allowed interest rates to fall.

It took another five odd years to have commercial Bank interest rates safely back under 10% and since then it has been steady as she goes …

A hiccup here and there and the whole equation balance of global investment flows becomes a dogs breakfast fight for those funds.

With the ‘thick-tanks’, not ‘think-tanks’ at Treasury and the RBA,  who by the way wear all the responsibility for the mis-management of the high A$ policy over the last 10 odd years,  are all hoping for events to fall their way, as opposed to researching and advising policy that will assist insulating this Nation from the impending disaster.

THE TRADING ECONOMICS CHARTS:

Trading Economics is a global resource and provided free or paid-for economic data for Nations and their economic performances – use this link to view a summary page of all Australia’s economic indicators and a further reflection of the OECD data – again provided by the ABS and the Australian Treasury.

The chart and summaries below present some of the OECD data – [click all charts to enlarge in a new window]:

  • Gross Domestic Product [GDP] growth – not to be confused with Gross National Product [GNP], or Gross National Income [GNI].   The ABS produce A$ value numbers, whereas Trading Economics produce US$ value numbers.
  • The below GDP chart shows Australia’s GDP growth has almost doubled during the worst financial crisis ever in history. How can that be … nobody talks about Government spending and its impact on GDP numbers – when Politicians boast about economic growth when GDP numbers are released – one has to laugh at their claims of responsible economic management.
  • The GDP growth numbers since 2008 are a result of ‘credit card’ type debt accumulation.
  • Be very wary of Mr Swans claims that he saved Australia from the GFC … in his own mind he thinks he is the ‘greatest Treasurer ever’, the reality is that he is the dumbest ever because he ‘does not understand what he does not understand’.

GDP Chart [US$]:

  • The A$ v US$ relationship … please note the rapid depreciation in early 2009 in the chart below when global investors unwound their ‘cash and carry’ resource based trades.

A$ v US$ chart:

  • Movement of official interest rates by the RBA … in the aftermath of the initial GFC impact that saw the A$ fall because of the flow of capital out of Australia, [see the 2009 area on the above chart] – the RBA was spooked at the ferocity of the capital outflow.
  • They feared a crisis in Banks being able to raise funds given the lack of confidence in the Banks as seen in off-shore Nations.
  • You will recall the 2009 deposit guarantee introduced by the Federal Government to give depositors confidence in Australian Banks and to try and hold deposit levels – but how to replace the foreign capital was their bigger challenge.
  • Make no mistake – the RBA was desperate to contain the capital outflows – so much so that they felt the only way to induce the foreign capital back to Australia when markets began to stabilise was to create an interest rate buffer margin between Australia, and the rest of the investment world.
  • The A$vUS$ chart above shows the dive in the A$ value and the evidence of the capital outflow.
  • In response to the A$ fall and as seen in the Australian Official Interest Rate chart below – the RBA first moved to reduce interest rates in the face of the GFC crisis as did every other Nation – but then in later 2009 it began to increase official interest rates as a response to attract the funds back on-shore.
  • Make no mistake – this interest rate ‘buffer’ differential was deliberate and as a result, the inflow of off-shore funds again created a massive currency capital appreciation for those brave enough to take the opportunity.
  • Let it further be made clear – the RBA decided to sacrifice home owners and the cost of their mortgage interest to attract this off-shore money. A line can be drawn and stated that the off-shore investors profited whilst the domestic housing market paid the price of the ‘higher interest rates’ put in place to keep the off-shore funds on-shore.
  • The RBA has not disappointed off-shore investors since, guaranteeing at every opportunity with media releases that lower interest rates were not an option during 2009 – 2011. Once the world again saw China importing Australian ore – the flood gates opened for this off-shore capital in-flow … as things turned out the GFC was to be a Western economic disease …

RBA Official Interest Rates:

  • As the above chart shows the 2012 reduction in official interest rates is matched with the holding pattern in the A$ appreciation – i.e. A$1.10 to A$1.00 trading range.
  • One might venture to say that the RBA is testing offshore investor’s resolve – because as sure as eggs break when you drop them, if the RBA fumbles this cat and mouse game with off-shore investors where the interest rate differentials is the only current reason for off-shore investors to remain in A$’s – if they get it wrong, then the outflow of capital will happen all over again.
  • Perhaps not at the same rate as happened in 2009 – it can be said the world is a much more dangerous place now when it comes to assessing risk/reward investment.  Where could this capital go and remain safe if it exited Australia?
  • Australia’s AAA rating whilst eagerly sought in good times, has for the last few years been the attraction for these volatile off-shore investors. It has been a monster negative for domestic borrowers resulting in $100’s billions in interest costs alone being passed onto Australian mortgage holders.
  • This is something Mr Swan could never get his head around nor explain to the Australian public. His continuing beefcake performances as an ALP man working for the ‘Aussie battlers’ could never conceded that he oversaw one of the biggest modern international heist of wealth ever in the history of financial scams.
  • The real cost of this RBA imposed interest rate differential will never be known – the equation of how domestic Banks would have had to pay for funds on international markets to replace the capital outflows has too many variables to consider. Instead the RBA took the bullet and responsibility to save the Australian economy.
  • The reality of this ‘game’ is still being played out … Australia’s GFC crisis is still ahead of us and if the RBA and Swan continue to play silly buggers for too much longer, the housing bubble will burst here as it did in the US and other places, placing the Banks under immense pressures as almost 70% of their loan book in in residential mortgages.
  • To highlight the interest rate differential between Australia’s rate increases in the post GFC period – compare the RBA moves with that of other Nations …

USA Interest Rates:

UK Interest Rates:

EuroZone Interest Rates: [Data series only goes back to 1998 – when €Euro commenced.] – note the small period post GFC when they lifted Official Interest Rates for a short few months to try and attract capital to the region …

Swiss Interest Rates: [Data series only goes back to 2000.]

Japan Interest Rates:

China Interest Rates: [Data series only goes back to 1996.] – a different story altogether – has the highest official interest rates of all the above series –

The biggest issue associated with the interest rate differential game being played out is the RBA’s persistent concerns over inflation re-emerging.

This is 80’s and 90’s thinking and an overflow from old style economics.   This highlights the archaic methodology of the RBA ‘think-tanks’ … they fail to understand that inflation is now a global infection – not so much about domestic policy but about global trade – and that trade being completely linked to labour costs and the domestic cost in currency terms to trade with one another.

There is no risk of inflation in Australia with the current value of the A$ – reducing interest rates on the back of this knowledge risk’s the off-shore investor funds exiting … given the value of the capital appreciation i.e. profits – in their A$ position they will jump at any reason to.   The RBA had blundered badly and they continue to fail in their economic policy advice to the equally dumb Treasurer Wayne Swan.

If you are ‘long’ Australian property – your have reasons to be concerned – the best advice on offer would suggest to sell A$ assets and buy off-shore – i.e US property looks good and when the A$ crashed as it surely will – you’ll double your money when you consider the fall in Australian house prices, and the incumbent appreciation of your US$ house value.

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Have your say where it counts: – contact your Local Federal Representative via the links below and let them know how you feel about this, or any other topic that you feel strongly about – or you can just post a comment below and let off some steam.


The EYE-BALL Guru …

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  1. barry
    January 2, 2013 at 10:48 am

    The only reason Australia is in trouble is the government we have .

    This country could be flourishing , and a guiding light for the world .

    Instead , we have a bunch of idiots at the helm , trying to bring us into a unified socialist world, where everyone except the chosen few will be begging for food and shelter.

    Rotten to the core , and Australians are very slow wakening to the fact .

  2. January 3, 2013 at 8:34 am

    Not in complete agreement with your opening statement – no matter how we see ourselves as a Nation we need to sell what we produce … and import what we can’t produce …

    The summary is the world is now a global marketplace and Australia’s labor cost, and the high value of the A$ make us very uncompetitive … Brazil, Mongolia, and Africa will be supplying the world with Ore and other minerals and competing with the same buyers we are selling to .. they will win because of our high cost of production … and this is where I agree that the ineptness of this Gillard Government has failed … they just don’t see it … there is not a visionary amongst them … this global marketplace is made for Asian economies … cheap and plentiful labour.

    Can you see this Government telling the workforce they have to take massive pay cuts to make the Nation competitive – the alternative is to drive out foreign capital to devalue the A$ … either equation creates domestic havoc – this Government nor the Howard/Costello Government saw this happening .. and it did start in the early 2000’s under Howard and Costello – hell they had the best of the mining boom and did nothing with the funds other than to pay down debt and prop up the underfunded ‘Future Fund’ – the super fund for politicians and other fat-cat public servants.

    Leadership is about trying to secure a Nation’s future for decades to come … Keating’s floating of the A$ when Bank deregulation was happening at the same time was a good thing … but it does not sit well within the modern marketplace when China fixed its currency to the US$ 20 odd years ago … and now gives them a monster competitive edge over the rest of the world as the US weakens … this has been happening in an accelerated way since the GFC …

    The RBA and the Treasurer never saw it happening during Howards tenure, and see it even less under Swan … he and Gillard couldn’t balance a cheque book let alone understand how to balance a budget.

    As a consequence they have not prepared our own market forces for the fallout … they’ve all been asleep at the wheel thinking mining was gonna pay for everything … idiots the lot of them and on that I agree with you.

    I would not say ‘rotten to the core’ – but I would say that they are Neanderthals without a thinking brain between them all …

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