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  • Article – Can anything cure the ailing American economy? : third wave group
    credit into the economy giving reluctant consumers the wherewithal to spend The chief deflation fighter is the Federal Reserve which traditionally adjusts a benchmark overnight rate for banks that influences rates on car loans mortgages and other forms of credit The Fed pulled this lever long ago and has kept its target rate near zero since late 2008 The Fed has also been more creative During the worst of the financial crisis the Fed relieved American banks of troubled investments many linked to mortgages to give the banks room to make new loans This engendered the sort of debate likely to fill doctoral dissertations for generations Most economists praise the Fed for confronting the possibility of another depression But the Fed added to the nation s debts provoking talk that it was testing global faith in the dollar The dramatic expansion of the national debt which began in the Bush administration via hefty tax cuts and two wars has ratcheted up fears that one day creditors like China and Japan might demand sharply higher interest rates to finance American spending Those rates would spread through the economy and inflict the reverse of deflation inflation or rising prices as merchants lose faith in the sanctity of the dollar and demand more dollars in exchange for oil electronics and other items So far the reverse has happened As investors lose faith in real estate and stocks they are flooding into government savings bonds keeping interest rates exceedingly low Still inflation worries occupy the people who control money not least the governors of the Fed The Fed has been seeking a graceful exit from its interventions aiming to unload its cache of mortgage linked investments and likely in the far future lift interest rates But the recent disturbing economic news has delayed those plans This month the Fed said it would take the proceeds from its mortgage linked investments and buy Treasury bills to keep longer term interest rates down The Wall Street Journal reported that this decision came amid substantial disagreement among the Fed s governors suggesting that future action will be constrained by fears of inflation Republicans in Congress have embraced further tax cuts and less spending as the answer to the weak economy while accusing the administration of squandering stimulus spending on efforts that brought little gain Some conservative analysts liken the government s reliance on spending and credit to imbibing another cocktail to take the edge off a hangover In this view the weak economy should be welcomed for the discipline it imposes forcing a paring back of unsustainable spending while building up savings that can finance investment and later feed healthy economic growth The recession is the cure for the disease that affects the economy but the politicians don t have the stomach for it says Peter Schiff president of Euro Pacific Capital a Connecticut based brokerage house They re going to keep stimulating the economy until they kill it with an overdose The hyper inflation that results

    Original URL path: http://www.thirdwavegroup.com.au/general/article-can-anything-cure-the-ailing-american-economy/ (2013-02-03)
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  • Tidal Report – 29 Aug 2010 – Bernanke confounds again : third wave group
    remains very accommodative and financial conditions have become more supportive of growth in part because a concerted effort by policymakers in Europe has reduced fears related to sovereign debts and the banking system there We agree with Karl Denninger s colourful response You re smoking crack dude Twelve per cent of GDP in deficits here and you call this accommodative I call it idiotic and that which can t go on forever won t We re arguing when it goes boom not if A first option for providing additional monetary accommodation if necessary is to expand the Federal Reserve s holdings of longer term securities As I noted earlier the evidence suggests that the Fed s earlier program of purchases was effective in bringing down term premiums and lowering the costs of borrowing in a number of private credit markets This is the now famous quantitative easing that the Federal Reserve embarked upon However uncertainty about the quantitative effect of securities purchases increases the difficulty of calibrating and communicating policy responses Another concern associated with additional securities purchases is that substantial further expansions of the balance sheet could reduce public confidence in the Fed s ability to execute a smooth exit from its accommodative policies at the appropriate time Even if unjustified such a reduction in confidence might lead to an undesired increase in inflation expectations A second policy option for the FOMC would be to ease financial conditions through its communication for example by modifying its post meeting statement We ll go with Alan Kohler s response to this policy option In other words spin C mon Ben you re better than that Words A third option for further monetary policy easing is to lower the rate of interest that the Fed pays banks on the reserves they hold with the Federal Reserve System What Bernanke s speech was silent on was the real reason for the slowing US economy private sector deleveraging that is occurring following an unprecedented accumulation of debt From the 1987 stockmarket crash when Alan Greenspan Ben Bernanke s predecessor blew his first bubble until 2009 when the US hit peak debt the US private sector added 34 trillion in debt while nominal GDP grew by only 9 trillion Professor Steven Keen explains it this way Debt reduction is now the real story of the American economy just as the real story behind the apparent free lunch of the last two decades was rising debt The secret that has completely eluded Bernanke is that aggregate demand is the sum of GDP plus the change in debt So when debt is rising demand exceeds what it could be on the basis of earned incomes alone and when debt is falling the opposite happens Ignoring this growth in debt championing it even in the belief that the financial sector was being clever when in fact it was running a disguised Ponzi Scheme was the greatest failing of the Federal Reserve and its many counterparts around the world

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-29-aug-2010-bernanke-confounds-again/ (2013-02-03)
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  • Tidal Report – 21 Aug 2010 – The crisis has not been contained : third wave group
    again it is wrong to assume that the PIIGS debt crisis in its entirety has in any way been dealt with Make no mistake the current PIIGS debt crisis is not contained and the only way to get rid of it is by cutting budget deficits much quicker and much more dramatically than what is being done currently The German budget cuts are a good start but they are not enough Saxo Bank points out that budget deficits kill growth an argument we have run many times before Contrary to the common perception running big budget deficits kills growth and that is especially the case in a cash strapped environment like the one we are currently in It is perhaps the most distinct feature of this crisis that small and mid sized companies are almost completely cut off from financing Yes corporate bond issuance has been ample until recently but that is drying out with the lack of risk willingness and small caps rarely participate in corporate bond markets Not only is this a problem in Europe but it is proving to be a particularly recalcitrant problem in the US where the Flow of Funds report from the Federal Reserve shows that the continued spending by government is almost completely offset by corporate deleveraging The reckless government spending continues to make GDP figures look nice in the short run but it comes at the cost of long term growth and it increasingly builds larger imbalances says Saxo Bank This is what is meant when it is suggested that Fed intervention is akin to pushing on a string More pertinently to Australia the Saxo Bank outlook suggests that commodity currencies such as the Aussie dollar will increasingly come under the spotlight Traditionally in economic boom and bust cycles commodity currencies are considered high beta plays on global risk and growth As Saxo notes the assumption is that they will see the highest growth rates and interest rates during good times but will also see the fastest decline rates on the downside of the growth cycle as capital flows reverse due to quickly contracting interest rate spreads and as key commodity prices fall with a contraction in key domestic export industries The Australian dollar is offered up as an example of this boom bust phenomena on commodity currencies something we have pointed out before As global growth was suddenly in doubt in 2008 AUDUSD to take a popular example tumbled from a 25 year high to a five year low in the space of a couple of months It is their take on the future outlook for commodity countries however that is most interesting and of the most concern and yes housing bubble is mentioned But what about economic fundamentals in countries like Australia and Canada during and after the crisis On that account growth actually performed very well as neither country had the degree of overleveraging in their banking system As well as central banks around the world quickly moved to

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-21-aug-2010-the-crisis-has-not-been-contained/ (2013-02-03)
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  • Tidal Report – 15 Aug 2010 – Double Bubble Trouble : third wave group
    Deflation would signal double failure by the Fed it failed to prevent the crisis and then failed to stop deflation It would also destroy investment portfolios if the Japanese experience were repeated in the US the S P 500 index on Wall Street would fall by half That s what extreme pessimists are predicting while urging us to get out of the market How can this be Can t the US stimulate its way to prosperity The reality is the end game is up From 2007 2009 the US government spent more on stimulus and bailouts in percentage of GDP terms than it did on the Gulf War Operation Iraqi Freedom the Vietnam War the Korean War and World War I combined The result An anaemic economy at best and an astounding level of debt There are now no more bullets left to fire In July the International Monetary Fund released its annual review of US economic policy and pronounced the US effectively bankrupt The US fiscal gap associated with today s federal fiscal policy is huge for plausible discount rates Adding that closing the fiscal gap requires a permanent annual fiscal adjustment equal to about 14 per cent of US GDP The fiscal gap is the value today of the difference between projected spending and projected revenue in all future years To put 14 per cent of GDP into perspective current federal revenue totals 14 9 per cent of GDP Therefore closing the US fiscal gap from the revenue side requires an immediate and permanent doubling of personal income corporate and federal taxes as well as the payroll levy An almost impossible task So instead the Federal Reserve is buying up US debt pushing treasuries to levels approaching those found at the height of the 2008 Lehman Brother s panic when people fled to the safety of US government bonds As financial commentator Ray Merriman opines Why would they the Fed take Treasuries back to the level of the 2008 crisis days if the economy was improving and stabilizing as the White House and its Economic Dream Team continues to insist Somebody is not telling the whole story to the American people and the world Don t take my word for it Take the word of the San Francisco Federal Reserve Bank report issued last week stating that the probability that the US economy will slip back into recession over the next two years is higher than that of economic expansion I am not sure what the results will be from these decisions of the past three weeks and especially last Tuesday It seems clear that this government and this central bank are still following the ghost of John Maynard Keynes They are pushing the pedal to the metal as they rev up the depleted engine of a deteriorating economy for one last run The Wall Street Journal concurs Yesterday the Fed decided it won t shrink its balance sheet which would have resulted in monetary policy moving from

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-15-aug-2010-double-bubble-trouble/ (2013-02-03)
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  • Tidal Report – 8 Aug 2010 – The Descent of Man? : third wave group
    in defiance of the US in the Middle East setting the seal on the end of empire What are the implications for the US today The most obvious point is that imperial falls are associated with fiscal crises sharp imbalances between revenues and expenditures and the mounting cost of servicing a mountain of public debt Think of Spain in the 17th century already by 1543 nearly two thirds of ordinary revenue was going on interest on the juros the loans by which the Habsburg monarchy financed itself Or think of France in the 18th century between 1751 and 1788 the eve of Revolution interest and amortisation payments rose from just over a quarter of tax revenue to 62 per cent Finally consider Britain in the 20th century Its real problems came after 1945 when a substantial proportion of its now immense debt burden was in foreign hands Of the pound stg 21 billion national debt at the end of the war about pound stg 3 4bn was owed to foreign creditors equivalent to about a third of gross domestic product Alarm bells should therefore be ringing very loudly indeed in Washington as the US contemplates a deficit for 2010 of more than US1 47 trillion 1 64 trillion about 10 per cent of GDP for the second year running Since 2001 in the space of just 10 years the federal debt in public hands has doubled as a share of GDP from 32 per cent to a projected 66 per cent next year According to the Congressional Budget Office s latest projections the debt could rise above 90 per cent of GDP by 2020 and reach 146 per cent by 2030 and 344 per cent by 2050 These sums may sound fantastic But what is even more terrifying is to consider what ongoing deficit finance could mean for the burden of interest payments as a share of federal revenues The CBO projects net interest payments rising from 9 per cent of revenue to 20 per cent in 2020 36 per cent in 2030 58 per cent in 2040 and 85 per cent in 2050 As Larry Kotlikoff recently pointed out in the Financial Times by any meaningful measure the fiscal position of the US is at present worse than that of Greece For now the world still expects the US to muddle through eventually confronting its problems when as Churchill famously said all the alternatives have been exhausted With the sovereign debt crisis in Europe combining with growing fears of a deflationary double dip recession bond yields are at historic lows There is a zero sum game at the heart of the budgetary process even if rates stay low recurrent deficits and debt accumulation mean that interest payments consume a rising proportion of tax revenue And military expenditure is the item most likely to be squeezed to compensate because unlike mandatory entitlements social security Medicaid and Medicare defence spending is discretionary It is in other words a pre programmed reality

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-8-aug-2010-the-descent-of-man/ (2013-02-03)
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  • Tidal Report – 1 Aug 2010 – Stimulus did not save us : third wave group
    series the Australian Bureau of Statistics publish the only one indicating there wasn t a recession was the real or price level adjusted national expenditure series In the US a recession dating committee of the National Bureau of Economic Research uses a battery of macro economic measures not just the somewhat arbitrary two successive quarters of negative real GDP If the behaviour of Australia s business cycle in the aftermath of the GFC had been assessed by an independent committee of economists with reference to a broader range of macroeconomic indicators in this way a recession albeit mild would most likely have been declared for 2008 09 But this would not have been of great concern because due to greater labour market flexibility unemployment did not rise anywhere near as much as in the recessions of the early 80s and early 90s The second more important question is whether fiscal stimulus did actually stave off recession on the basis of the narrow and somewhat arbitrary definition favoured by the media two successive quarters of negative real GDP growth as conventionally measured Interpretations of the success or otherwise of the tectonic shift in the role and stance of fiscal policy have to date had more to do with faith in alternative macro economic theories But what do the latest national accounts data for the critical December 2008 and March 2009 quarters tell us The answer here has big implications for the conduct of fiscal policy during inevitable future crisis episodes and can be obtained directly from the ABS annual national accounts release Catalogue 5204 0 An examination of this data is all that is necessary in deciding whether extra government spending succeeded or failed in preventing recession as narrowly defined during the September 2008 to March 2009 interval And contrary to common lore what the data shows is that when the GFC most affected real economic activity around the world it was a dramatic turnaround in Australia s trade balance that mainly offset falling private investment including inventory rundowns not extra government spending or household consumption assisted by federal cash handouts at the time Private consumption did increase minimally in the December 2008 and March 2009 quarters no doubt due in part to cash handouts But the minor improvement in household consumption is dwarfed by an unusual rise in net exports and is less than the private investment turnaround in the March quarter In turn the private investment improvement was due to a significant reversal of inventory rundown in part due to increases in farm stocks arising from a breaking of drought Fiscal stimulus also involved direct federal government spending initiatives yet the data shows there was no net contribution from federal spending in the December 2008 and March 2009 quarters though there was a nugatory contribution from state and local consumption spending Aggregate public spending has risen in subsequent quarters but due to administrative delays in implementing new programs the extra spending arrived after the worst of the GFC had

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-1-aug-2010-stimulus-did-not-save-us/ (2013-02-03)
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  • Article – Deflation, not inflation, is the real threat : third wave group
    the biggest housing crashes and their consumer price data tell the story Ireland is in outright deflation 2 7 percent and Spain is on the brink 0 1 percent On the surface falling prices sound good That is certainly the case when they are the result of technological improvements But the deflation we are talking about here has implications for economic growth and stock market returns That s because deflation increases an economy s real debt burden This inevitably leads to rising defaults which in turn damages the banking sector because banks must write off the bad debts or just ignore them as is the case of the US where regulators have given banks the option The upshot of all this is banks lending criteria becomes much more stringent and the provision of credit to the economy slows down This is pretty much the scenario playing out in the US and Europe now When you consider that the global economy just had its biggest injection of non wartime stimulus ever it should be more than a little worrying that deflation remains a threat It probably won t be long before we see Ben Bernanke head of the US Federal Reserve re start the policy of quantitative easing which is another way of saying money printing But I don t recall any time in history where money printing worked or led to the creation of real wealth so I can t see it happening now It will certainly help the banks though While Australia is not at risk from consumer price deflation the stock market certainly is Our market marches to the beat of Wall Street Given the wildly optimistic forecasts for FY11 earnings from Wall Street analysts there is definitely downside risk for share prices once reality sets in In

    Original URL path: http://www.thirdwavegroup.com.au/general/article-deflation-not-inflation-is-the-real-threat/ (2013-02-03)
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  • Tidal Report – 25 Jul 2010 – Banks now expressing caution : third wave group
    lessons that we took from global financial crisis is that a banking system heavily reliant on offshore funding is a banking system that can potentially be exposing itself to risks and therefore the extent to which the banking system might try to reduce the amount of offshore wholesale funding does create some trade offs between where the banking system allocates it capital Now out of the current regime there s an incentive where capital is scarce for that capital to be lent to the household sector rather than the business sector Mr Healy went on to say that this all comes about because mortgage lending is more profitable than business lending As a result of an international agreement called the Basel II Capital Accord 2007 2008 which requires banks to have different levels of capital dependant on the risk of the lending and with housing deemed to be lower risk the banks in effect get more bang for their buck from mortgage lending Consequently Mr Healy says It is much more profitable to allocate your capital to the household sector versus the business sector You have the perverse situation where it is actually more profitable and attractive to banks to lend to a weekend holiday home because of capital rules than it is to support a small business Mr Healy does not believe we have a housing bubble in Australia One would not expect one of our leading banks with their enormous exposure to household lending to say otherwise The bigger issue for me or equally important issue for me is ensuring that we are building a broadly diversified economy by supporting small businesses and not taking comfort from the fact that whilst our economic indicators today are certainly very healthy and that s very good news we mustn t lose sight of the fact that it s a resource boom that s helping that and we ve got to look forward to the future and ask ourselves are we investing in businesses and other industries in building a diversified economy and in particularly promoting the role of the small businesses Forty five per cent of NABs loan book is to the household sector Westpac and the Commonwealth Bank are running at about 60 per cent In 2000 every 1 000 of home lending was matched by roughly the same amount for business Today that ratio has shifted to about 1 000 600 in favour of housing Consequently small business is struggling to get finance and having to pay a higher price for that finance Peter Strong executive director of the Council of Small Business of Australia says banks are currently charging as much as 2 percentage points more for small business loans than they are for standard mortgage rates Speaking today on Inside Business Mr Healy again reiterated that one of the unintended consequences of the Basel II Accord is that the bias has led to increased household lending Banks can on average do 3 to 4 times more

    Original URL path: http://www.thirdwavegroup.com.au/tidal-report/tidal-report-25-jul-2010-banks-now-expressing-caution/ (2013-02-03)
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