Thank you Premier Wen

 

 

Premier Wen, when he was in Davos, said that China’s goal was to grow the economy by 8% this year. He then outlined the plan that the Chinese government was going to implement.

 

One of the results has been that Australia has had a trade surplus of AU$ 5.1 Billion for the 1st quarter of 2009. We may even have small growth in the economy. My personal sentiment is that we will have growth in 2009.

We are still running a current account deficit, so life is not perfect and this also means that we are more in to an orbit around the Chinese economy.

From the Courier Mail.

Mish Shedlock – Fiat World Mathematical Model

Mish Shedlock has written a most elegant post entitled Fiat World Mathematical Model.

This article should be read in full.
The intro –

In a fiat world, money is printed into existence by the central bank – in the United States the Fed. Given there is nothing backing up this money, it is inherently worthless. However, one can think of as real. It was printed (even if only electronically), therefore it exists.

In addition to the previously mentioned money supply, fractional reserve lending allows credit to be extended by banks and financial institutions on top of that inherently worthless money. Indeed, banks and financial institutions have leveraged credit to base money at ratios of 30-1, 50-1 or even higher.

It’s pretty amazing if you think about it: Credit is extended with 30-50 times leverage on inherently worthless paper.

As an Australian I love Mish for honouring Steve Keen of the University of Western Sydney.

There are a lot of points worth noting but I have selected the points that affect me every day.

Finally, it is important to consider the role of attitudes going forward. Attitudes affect the willingness of consumers to take on debt and banks to extend it.

Attitudes

Boomers are heading into retirement. A significant portion of their retirement plan (home prices) has already been wiped out. Another portion of boomer retirement plans is being wiped out in the stock market crash. Toy accumulation is out. Fears of insufficient saving is in.
Boomers will be traveling and spending less than they planned.
A secular shift to frugality and risk aversion in all age groups has begun. Signs are everywhere.
The lend to securitize model at banks is dead. So are toggle bonds where debt is paid back with more debt, and a myriad of other financial wizardry schemes.
Children who have seen their parents wiped out in bankruptcy or foreclosed on are going to have a completely different attitude towards debt than their reckless parents did.

Expect to see more frugality from parents and their children alike.

Because Mish lives in the real world consider what he raises at the end of his post.

Global Stimulus Kicker

There is yet another kicker to this model. And that kicker is the Eurozone, the UK, Japan, and essentially every county on the planet is all attempting some sort of stimulus plan or other. This is bound to cause a major distortion at some point, as no country has anything remotely close to an exit strategy for this. What kind of distortion and when cannot be certain because we are indeed in uncharted territory, worldwide.

Political Will vs. Consumer Psychology

What happens next depends somewhat on the political will of the central banks and politicians. However, it depends more on the psychology of the borrowers. If consumers and businesses refuse to spend and instead pay back debts (or default on them along with rising unemployment), the picture simply is not inflationary, at least to any significant decree.

The credit bubble that just popped exceeded that preceding the great depression, not just in the US but worldwide. Thus, it is unrealistic to expect the deflationary bust to be anything other than the biggest bust in history. Those looking for hyperinflation or even strong inflation in light of the above, are simply looking at the wrong model.

At some point the market value of credit will start expanding again, but that is likely further down the road, and weaker in scope than most think.

If there was a people’s choice category for the Nobel Prize for Economics I would nominate and vote for Mish Shedlock for his contributions to the understanding of the complexities of economics in the real world.

Heart Attack City 2 – Satyujit Das on the Economic Stimulus in Australia

From Breakfast program on the ABC 4 Feb 2009

(It looks like there has been a mis-spelling of Satyajit Das’ name.)

This makes the most sense I have heard this year even if it is very scary.

Hope for Success for Australia – 求成澳大利亚

求成澳大利亚

 

 

Premier Wen Jiabao, hope for Australia

Premier Wen Jiabao, hope for Australia

 

 

In Jan 2009, the CIA World book listed estimated growth rates for 2008 for the following regions.

China, 9.8%, (GDP PPP – USD$ 7 800 Billion)
South Korea, 4.3%, (GDP PPP – USD$ 1 312 Billion)
Australia, 2.5%, (GDP PPP – USD$ 825 Billion)
European Union, 1.5%, (GDP PPP – USD$ 14 960 Billion)
USA, 1.4%, (GDP PPP – USD$ 14 580 Billion)
United Kingdom, 1.1%, (GDP PPP – USD$ 2 281 Billion)
Japan, 0.7%, (GDP PPP – USD$ 4 487 Billion)

On Wednesday 28 January 2009, Premier Wen Jiabao delivers the speech that anybody with brains was waiting for. Premier Wen is not a failed businessman, he is not a lawyer or an actor by training. Premier Wen is a bureaucrat whose primary training was as a geologist. Premier Wen announces that China has been set the goal of 8% growth in GDP in 2009 and although this growth target would be difficult, it was achievable. A matrix of policies would be used to reach this target. The stand out feature was that the Chinese government was going spend the equivalent of 16% of the 2007 GDP or 4 TRILLION yuan over two years.

Thanks to the magic of Google (to achieve ball park estimates.)
4 Trillion Yuan is about USD$ 585 billion or AUD$ 878 Billion. It is of the same order as the amount of money the USA burnt in Iraq from Mar 2003 to Aug 2008.

If Australia was doing something similar and scale it to Australian terms, the Australian Government would allocating USD$130 billion or AUD $195 billion over 2 years at the problem.

When China (I am an optimist) achieves its goal, it is going to add USD $625 billion to their economy, or the equivalent of three quarters of the total of the Australian economy to the Chinese economy or one Saudi Arabia equivalent.

The good news for Australia is that a lot of crumbs will fall off the table. If you live in a resource state, it is possible that that you might even miss the recession.

I still find it mind-blowing that no Australian media outlet picked up on this three days later.

I apologise to all Chinese people that our Prime Kevin Rudd 陆克文 was not there at Davos to given Premier Wen a standing ovation at the end of his speech.

8% – Why Premier Wen Jiabao 温家宝 is my hero

Best New Years News

Premier Wen Jiabao

Premier Wen Jiabao

The best economic news this month has been from Premier Wen Jiabao 温家宝 .In his speech that Premier Wen gave at Davos yesterday 28 Jan 2009, Premier Wen annouced that China’s goal is 8% growth for 2009, he did qualify it by saying it would be difficult but it was achievable. Importantly his strategy is not just based on hoping Walmart will buy stuff but a lot of money will be thrown at improving infrastructure and health for all Chinese people.

Premier Wen is talking about spending 16% of  Chinas 2007 GDP in infrastructure developement. If Prime Minister Rud was to commit to the same thing then in Australia we would be throwing some of the order of  AUD $195 Billion dollars at our infrastructure.

If there is hope for the Australian economy, this is it.

I can’t believe the Australian, the Fairfax press, or the Australian Broadcasting Corporation have not made this one of their major headlines. Do any of these main stream media outlets believe that we will come out the recession by selling houses to each other.

Canberra, We have a problem! Cancel Davos!

It has just been announced that the prime minister will not be going to Davos this year. This has been an almost compulsory “knees up” for the worlds pollies.

Prime minister will not be eating this

Prime minister will not be eating this

The reason given is that the Australian economy is worsening.

I would suspect that there have been some serious cancellations of orders for coal and iron ore. This means all that is left of the Australian economy is selling houses to each other. It could be that the clouds on the horizon are those of a category 4 cyclone. Batten down the hatches and check the batteries.

In looking for background for this story.

Also

“And we’ve had units with sea views dropping back to $325,000 from $350,000.”

Mr Harris said it was a chance to join the market, as management options allowed buyers to earn 11 months of revenue from their paradise then enjoy it for about four weeks a year.

“It’s probably the best way to have a home here and have an income.”

Christie Leet, of PRD Nationwide Whitsundays, said it was the best market he had ever seen.

“I’ve been here for 21 years and it’s the best that I’ve seen as far as affordability goes,” he said.

“The prices are low and the lending interest rates are low as well, which means they have great affordability.

“And there are some very motivated sellers out there – it’s a buyer’s market.”

Mr Harris said the prices wouldn’t go much lower.

“I don’t think we’ll see a lower price at this point,” he said.

“It’s a buyers market and it’s your turn to bargain.”

From the Mackay Mercury Buyers market for Whitsunday views

Yup! – Housing crash has reached the Whitsundays. When real estate agents in that part of the world admit to 10% drop, you know there is blood in the water. Currently the biggest generator of income in this region is from people who work on the coal mines in the Bowen Basin. They can easily reach 6 digit incomes, what is not apparent is that half the income of the miners is the coal bonus. This can be cut at any time slicing $10 k to $25 k from the household income.

Heart attack city

I love Asia Times on Line (AToL). The quality of the articles have been consistently high.

One of their columnists Chan Akya just wrote an article “Honey, I switched the medication.”

The author suggests the rebalancing of the US economy and the Chinese economy. In my opinon the author is calling for controlled implosion that will occur anyway. The re-balancing of the US economy could shrink the economy by as much as 30%. The Chinese economy could shrink by as much as 20%.

This is definitely a case of desperately hoping somebody is wrong but fearing that they are right. The Australian economy would also shrink (by as much as 20%), at worst case an Argentinian level crisis.

I wonder what guinea pig tastes like?