Keynesians are defined as people who follow the teachings of John Maynard Keynes. By definition, and because of the nature of my degree, and in particular because I did my studies more than 30 years ago, I am a Keynesian. I was taught basic Keynesian economic theory, including theories about Supply and Demand. However, that is about as far as I go where the definition is concerned, because I do in fact believe that Keynesian economics failed by the mid-1970s and the reason for this failure was in fact Stagflation.
Economic theory should not be something that is considered to be static. If Keynes had not died so soon, perhaps he would have revised further his own ideas. I do know that he revised some of his ideas after his interaction with Hayek, and this is a point that I never see acknowledged by those who take an anti-Keynesian stance.
What I am going to argue here is that the anti-Keynsians are guilty of building up a straw man and then knocking it down with their own ideas. What I am going to point out is that many anti-Keynesians are guilty of having the narrow view of the world at large, seeing as they do everything through an American prism.
The first thing to point out, therefore, is that Keynes was an Englishman. His observations of the world economy were based upon his own English and European experience. As such, I argue that Keynesian theory needs to be studied not via the American prism of an economy but through the British experience instead. By necessity, this includes examining the rise of unionism and its impact upon the British economy during the era in which Keynes lived. This is also relevant to the Australian experience, but there are some differences.
The second thing I am going to point out here is that Australia had recognized the role of unions from the beginning of Federation, and had in place a system whereby the Arbitration Commission (now extinct) had set a minimum wage for all wage earners. I can write more about the Australian experience rather than either the British of the US experience when it comes to wage earners or I should say Labour.
The Australian Arbitration Commission was very influential when it came to the setting of rates of pay. Up until about the 1980s Australia had a system where the national unions and employers would take a case before the Commission that always ended up setting the minimum wages. In the end, this system served to fuel wage inflation… but I will try to get back to this point. The point I want to make is that in Australia we did have in place a system where the wages for an apprentice and the lowest paid workers were set by the Arbitration Commission. The system itself was inflexible and inefficient because there were many factors not taken into account with regard to raising the minimum wage. In other words, what appeared on the surface to be a win for the workers, when the minimum wage was increased, usually had a cost in terms of jobs lost as some employers struggled to pay the new wage rates, or if jobs were not lost, then prices rose in response to any increase in pay.
It is this last point that I believe is the key as to why some aspects of Keynesian economic theory began to crumble by the late 1960s. Australia had followed Keynesian theory from the 1930s, and the government was reasonably successful in dealing with various problems. When government debt began to get out of control there would be a tightening of the belt or a contraction, in other words a credit squeeze, and at other times there was a little bit of an expansion. It all worked whilst Menzie was Prime Minister, but by the time Gough Whitlam grabbed power, Australia’s economy had begun to go into decline.
Under Menzies, as well as under such Premiers as Bolte, Australia was relatively prosperous. There was some moderate expansion programs that included building of the Westgate Bridge in Melbourne, as well as Warragamba Dam, the Snowy Mountains Hydro-Electric Scheme and other projects. All of this was investment in infrastructure and government paid for such schemes by the issuing of Treasury bonds.
However, when Whitlam took over the reins of government, his whole Ministry spiralled out of control when it came to spending taxpayer money. There were a lot of unfunded schemes, especially in relation to education, as well as the introduction of the Universal Health Scheme known as Medibank. Funding for Medibank was to come from the imposition of a levy that all taxpayers were supposed to pay. It is worth pointing out that largely unfunded schemes like Medibank (now Medicare) sound like a good idea until implemented and that is when the rorts begin to happen. A lot of doctors were prosecuted for rorting the bulk billing side of the scheme. A lot can be said about other forms of rorts but that is beside the point here.
As well as the out of control spending of the Whitlam Government, something which was controllable, there were other events that were not controllable in this era. The first of the uncontrollable events was the first oil shock. The 1960s was the first time that Islamic terror was splashed across our headlines. It was the era of aircraft being blown up. This had one type of impact upon oil supplies etc. but the oil shock was caused not by Islamic terrorism, but by the oil cartel known as OPEC. The OPEC countries are mostly Middle Eastern nations, but it also includes the USA. The cartel used to get together to determine the price per barrel of oil that we had to pay to get hold of unrefined oil. Thus, we have a group that was not exactly a monopoly controlling how the market behaved. The second oil shock occurred after the fall fo the Shah of Iran.
Whilst Whitlam was not entirely to blame for Stagflation, especially in Australia, his out of control spending was in fact a major factor in the prolongation of the Stagflation. As well as the impact of OPEC, Australia and he world was facing a period of inflation. In Australia I believe that the inflation is best explained a cost-push inflation because of the factors most responsible for the inflation including: sudden high wage increases due to never ending union demands for higher wages, the OPEC oil shock, and government taking up more than their fair share of the pie available for borrowings.
Keynes never had the opportunity to observe these economic patterns because these were events that occurred a lot time after his death. Had he been alive, then I feel certain that he would have modified his theories according to what he could observe after his theories were put into practice. The Keynesian solution worked for a time, but over time the solution stopped working. The failure of the Keynesian solutions is something that needs to be examined in some depth.
I am arguing that both anti-Keynsians and Keynesians are wrong in their outlook. The anti-Keynesians are blaming the wrong guy, and there are alleged Keynsians who wrap up their Marxism, using Keynesian theory to hide their real objectives (yes I am referring to Krugman who has pretensions to being a Keynesian when in fact his theories are Marxist in origin). The straw man built by the anti-Keynesian never in fact applies fully to Keynesian theory. The Marxist also never applies Keynesian theory but does in fact cherry pick what is convenient to their way of thinking.
My argument is that we need to examine government policy and government expenditure to see why Keynsian theory when applied in our modern society has been such a spectacular failure, and that any further implementation would continue to bring about the wrong results. Doing this unfortunately requires looking at the lunacy that is Green policy.
First of all, I apologize for the lack of posts. This year is an election year in the USA, and there is not much there that I wish to discuss at this point in time. The US economy as far as I am aware remains weak and it continues to have a problem with burgeoning government debt, with no end in sight because the US Senate will not pass a budget!! There are some new developments in Europe and especially with a renewed Greek crisis. However, I do need to spend some time on the Australian economy.
For a long time, I have pointed out that much of what we have been experiencing is similar to the situation in the 1970s when Gough Whitlam came to power, and nothing has changed in the past year to change my mind on that subject, except of course we are now seeing the nastiness and ugliness of an attempt at class warfare that has been started by the Gillard government. I am not addressing the topic of the class warfare, rather I want to address the stupidity of the Gillard government and its introduction of a tax on the air that we breathe.
The US is already aware of what happens when some bright spark (read that rather stupid Nancy Pelosi) says that you have to pass the the legislation to know what is in it. Well, here in Australia something similar happened when the tax on the air that we breathe was introduced. Insuficient time was spent on vetting the legislation. It was introduced and passed at some haste. Needless to say the whole thing is a lemon, a white elephant and it will do nothing to save the world from the predicted doom and gloom of the green (really sick) doomsayers who claim that the world will end if average temperatures are raised by 1/2 of 1/4 per cent… or something like that, over the next century. The climate debate is also not the subject of this particular post. What is relevant is the impact of this tax upon the Australian economy.
It needs to be pointed out that a price on carbon of $23 per tonne is absolutely ridiculous, especially when those silly contracts in Europe are worth no more than about $5 per tonne. It is also worth pointing out that it is really ridiculous that some people seem to be self-satisfied and smug by letting the world know that they either drive a Prius or have purchased a timber plantation (or whatever the sign on the back of their car proclaimed that allowed them to claim that they were emission neutral – what a load of tosh!!). What is more significant is that the tax itself is going to have a very negative impact upon the Australian economy over the next 15 years.
Whilst in my view I continue to see indicators pointing to stagflation, not all of the indicators have pointed in the same direction so it would seem that my thoughts on the subject might still be a little bit premature…. or are they? Let’s take unemployment as an example here. In the 1970s unemployment was very high. By the time that I graduated from university even graduates were not guaranteed finding employment in their chosen field. In fact the positions available to accounting and economics graduates were extremely tight because the big accounting firms were not hiring new staff in any great numbers. The level of unemployment for graduates by 1976 was at an all time high. The lack of jobs for graduates was indeed a signal that something was very wrong within the economy. Whilst I am not up with the current situation for graduates I can comment upon a slightly different aspect – the hidden unemployed. It has remained pretty much the same, and the percentage right now is probably as high as it was in 1975-1976. The hidden unemployed is usually defined as those who have given up looking for work. It should include all those who are not eligible for unemployment benefits but who want to work. These are people who are enrolled with employment agencies. The discrepancy in unemployment numbers as determined by say Roy Morgan research and the official figures from the ABS is something like 5%, and this actually takes in some of the hidden unemployed (those enrolled with the employment agencies). Australia has other structural employment problems as more and more people find themselves in part time work rather than full time employment. In other words, the number of under-employed has been rising.
Another indicator for stagflation is rising inflation. Surprisingly inflation remains a non-problem, or does it? What I would look at here is the basket of goods. The basket of goods since the 1970s have changed. What the government has done, to disguise the inflation rate has been to remove items from the basket of goods and add others. This is not the whole story because in the electronics side of the equation there have been decrease in the prices of goods. Normally, this takes a few cycles after a product has been introduced. As an example take the price of HDTVs which are imported from Japan, South Korea, Malaysia and other Asian nations. When they are introduced the price is normally high, but leave the purchase for a year or two after introduction and the prices have dropped dramatically. This can be explained by at least 2 factors: a change in the exchange rate that has made imports cheaper, and an increase in competition for the goods. So perhaps this is a reason that the level of inflation has not been so dramatic, but then again I have my doubts because items such as doctor fees and prescriptions have continued to rise, as have increases in the price of petrol, the cost of our utilities such as gas and electricity as well as rates. The Reserve Bank continues to moniter inflation, adjusting the interest rates as required. All the same at this point in time there is no measurement available relating to the impact of the tax on the air that we breathe.
The remaining indicators are related to any increase in industrial disputes as well as increases in wages that is not justified by a rise in the cost of living. There has been an increase in the number of industrial disputes after industrial laws were changed to once again favour the unions. Of anything we will see a greater impact from this industrial down the track because of lags in the economy. I would think that within the next 12 months we will have a better idea about what effect, if any industrial disputes have had on the economy. One thing is certain, and that is we do not have right now the kind of disruption that we had during the 1970s when it was a union free-for-all.
Despite the fact that the indicators do not totally suggest stagflation, I continue to believe that if Australia does not reverse some of its policies then we will have stagflation and the effects this time around will be even more prolonged because of the impact of the rise in government debt for our nation. This is probably what David Murray, the former Future Fund Chairman and CEO of the Commonwealth Bank means when he warns about the difficult economic times ahead in Australia.
As a result of these developments I will be keeping a sharper eye on the Australian economy than I have done in the past 12 months, because I forsee that Australia could be heading for a downward spiral and it is not in a strong enough position for a fast recovery. This is not 2008 when we had the GFC in full swing and Australia was relatively insulated because of the budget surpluses of the Howard Government – these surpluses were wasted by the Rudd Government and in particular by that goose, Wayne Swan. There are other problems such as the fact that the expenditure on the NBN white elephant remains off balance, and then there is the over-estimation for taxation reciepts by billions of dollars.
The BBC reports that there has been a very big drop in Government borrowings in the present year. The financial position is being helped by two things: (1) the levy on bank balance sheets and (2) a significant drop in public sector borrowings.
It is my contention (and yes it is just theory not necessarily fact), that when the Public Sector have the lion’s share of the investment dollar, that the private sector suffers. This is because the Investment pie is limited, which means any increase in Public Sector borrowings reduces the amount of investment dollars available for the private sector. When the private sector is not able to borrow money to expand this leads to a contraction of the economy as the private sector will not be able to employ more people, or it has to let staff go in order to meet other debt requirements.
In other words, what I am contending is that Government Stimulus action does not work because it takes investment money out of the private sector, which means that the economy is disrputed. What I am arguing here is that the “stimulus” money does not come from tax receipts but from further public sector borrowing. In other words, Government action does not impact in a favourable way within the economy and it actually makes matters worse, not better.
My theory is not based upon the current experience, but upon the experience of the late 1960s, early to mid 1970s when there was global stagflation. Most economists address the stagflation by referring to the oil price shocks, however, I see this as a miniscule reason for the stagflation. There were two price shocks, one around or prior to 1972 and other during the Iran Revolution. In recent years we have experienced more oil shocks for a variety of reasons, but Saudi Arabia has actually pumped out more oil to keep the market smooth. The price of oil is really not as important as some believe, because we do not have any real control over the prices that the cartel (an oligopoly) agree to charge for their output.
One thing that was common in that period, in Australia, the USA and in the UK was that each country had a government that was into prolifigate spending. In the USA it started under LBJ, and Nixon had to try and rein in the spending, followed by Carter, another profligate spendder. In Australia it started at the end of the 1960s when McMahon was Prime Minister, followed by the prolifigate spending of the Whitlam era. In the UK it was the Wilson years of profligate spending. It is my view that the stagflation arose because of the difficulty of providing investment dollars to the private sector because the money available for investment was being swallowed up by the public sector.
During that same period, especially here in Australia, we had rising inflation, strikes and demands for higher wages which were granted because the ALP were in charge, followed by a further rise in inflation. Even though this looks simplistic, by 1974 the stagflation was actually quite evident, and these factors explain why it was a wage-price inflation which was fuelling the problems within the economy. By the end of 1975, and beginning of 1976, here in Australia most jobs had dried up, especially with regard to the requirement for newcomers in the field of accountancy (there were no jobs available for the majority of graduates). This was the point where we had the beginning of the Fraser government which also led to a wages freeze being implemented. (Nixon also imposed a wages freeze).
The turnaround in Australia occurred only when public sector borrowings began to drop and the budget was balanced or was turned into a surplus. Here in Australia this was a gradual process because we went from the Fraser government to the Hawke-Keating government when public sector borrowing got out of hand once again. Note: under Keating as Treasurer there were extremely high interest rates which were very, very painful for mortgagees. We got through those extremely high interest rates, which were greater than 17% before they began to fall again. Credit card borrowing interest rates were above 20%. Under the Howard government the Federal Budget went from deficit to surplus, but that has been frittered away by the KRUDD-Dullard governments.
So long as the rise in wages is kept under control, that is, it is related to a shortage of skills and not from some annual or bi-annual increases, then inflation itself is more or less kept under control. The way in which the Reserve Bank has been handling any inflation has been to increase interest rates, but in the present conditions the policy of the Reserve Bank which is to operate through interest rates alone can be quite harmful. The uncertainty that exists today has led to consumers holding off their major and minor purchases as long as possible.
We are yet to see the impact of the proposed carbon-dioxide tax. I have no doubt that the imposition of such a tax will have devastating consequences upon the economy. It will not bring about prosperity. It will cause massive increases in some commodities (which the government model has not predicted), and this is because a number of unknown factors have not been included in any modelling. Take for example the cost of refrigerant for supermarkets. This is something that will be taxed. Can you see how the price of frozen items will rise? Can you see how that will impact upon the cost of meat and dairy products?
As we continue to head towards stagflation, the last thing we need is this particular tax which will cause a massive downturn in the economy. (again this is theory, but so is any model that claims an opposite scenario).
Public sector borrowing eats into the investment dollars, which in turn leads to a decrease in private sector borrowing and expansion within the private sector. The end result of this cycle is that business is not in a postion to continue to hire. At the same time taxes on employment also hold back businesses from permanent hiring. Most businesses have to keep below a certain staff level in order to avoid the higher taxation costs. A reduction or the dropping of such taxes would increase the levels of employment.
I am posing this question, not because I consider J.M.Keynes to have had the answers, but because the alleged followers of Keynes are not paying attention to what Keynes actually wrote!!
First of all, it is necessary to be very clear that the application of Keynesian theory had failed by the late 1960s. I have always maintained that the Keynsian solutions for unemployment were only useful in the short term, not the long term and I look to the way in which Australia applied the levers to the economy prior to the election of Gough Whitlam in 1972. The pattern prior to 1972 was: inflation, credit squeeze and stable employment. The goal had been full employment and for the most part after the second world war the Australian economy had been relatively stable. Then the electorate, who had no idea about a number of issues that had torn the ALP apart in the 1950s decided that there was a need for a change. What a mistake.
Second, my theory is that when government takes “initiative” and “stimulates” the economy when it is not necessary, this actually has an adverse affect on the private sector. In the long term the result of such measures in inevitably the drying up of available investment dollars for the private sector. When investment dollars for the private sector dries up, this ultimately leads to an increase in unemployment, but at the same time it also leads to a lack of consumer confidence because workers begin to fear losing their jobs. Ultimately the lack of consumer confidence leads to a lack of spending for goods and services, which then leads to the necessity of more lay-offs, thus increasing the number of unemployed.
Third, individuals who claim to be Keynesians, such as Dick Krugman, do not in fact expound Keynesian theory. Instead what they offer is like a Prius – it is hybrid Keynes, with a large dollop of Marxism added into the mix. Keynes actually wrote that he thought that his theory worked best in a Communist style economy, but he never advocated that western economies such as the UK, Australia, New Zealand, Canada and the United States should in fact become Communist or Marxist. Keynes was in reality a capitalist. His proposals for unemployment via government assistance were only meant to be implemented in the short term, not the long term. Keynes was not responsible for the measures undertaken by Roosevelt, neither is he responsible for the twit ideas of Krugman and co who have been advising the worst President ever in the United States.
The world has been watching the kabuki theatre that took place in Washington D.C. To be honest, from an outsider point of view, this debt ceiling and the way in which a “budget” is determined is very foreign. Here in Australia, because our Parliamentary system is based upon the Westminster system, it is the Government, that is the party with the majority that must produce a budget. This happens once a year. For a very long time the budget was announced in August, but this was changed to about May each year. The budget is actually prepared by the Public Servants who run Treasury, with some input from the governing politicians.
For the most part the budget gets passed by both houses of the Parliament. The one time in my memory where there was a refusal by the Senate to pass the budget was in 1975 and the drama was all a part of the dismissal of the Whitlam Government – the majority of Australians gave their verdict on December 2 1975 when Malcolm Fraser was returned with a landslide victory. The reason that this happened was to do with the various scandals that had erupted at the time, and in particular the Khemlani affair.
The whole process in D.C. seemed to not make a lot of sense and for a variety of reasons. Østupid has been pushing for tax increases, but my question here is: what would J.M. Keynes recommend? Keynes had advocated that in a time of war taxes needed to be increased to pay for wartime equipment and the increase in defence personnel, and at other times taxes should be lowered. What Keynes had not factored into his economic theory was the Welfare State. There was no real welfare state when Keynes was alive. He did recommend that the government needed to provide short term assistance for the unemployed, but he did not factor in for long term unemployment. The truth is: a country cannot support or sustain the welfare state unless there is full employment. I think that this is something that has been neglected by the Socialist governments everywhere. They see workers, especially the middle class as some kind of cash cow to be squeezed, but they never seem to see the full picture.
The absurdity of the kabuki theatre in D.C. would have to be Østupid lecturing Americans about “living beyond their means”, when in fact the national debt is not about what the general public borrows and spends, but is about what government is spending which is well beyond the level of the taxes that are being collected. There are many issues involved. Probably the most important that arose in 2009 was the ramming through of the health insurance Abominablecare bill. Health insurance should be a matter for the individual, not government. If government wants to provide assistance for the less well off, then that should be done through the programs already in existence – Medicare and Medicaid. Here in Australia we have had the same kind of thing, and quite frankly the government interference has led to a product that is not affordable for many people. On top of that the quality of the service provided has deteriorated whilst there are people who think that they should get assistance for things like IVF. Paying out for these expensive IVF treatments, and at the same time paying for abortions (in my view this seems to be hypocrisy) ultimately means that fewer dollars are available to treat cancer patients or patients with other diseases. It is a vicious cycle.
Australia is facing yet another form of kabuki theatre – the proposed tax on the air that we breathe in the belief that this will somehow change the climate – which has had the ultimate effect of reducing consumer confidence. The reduced consumer confidence has led to a decrease in sales, which in turn has led to job losses, which has led to a decrease in tax revenue collected. Ultimately if the tax is implemented, the effect will be prices going through the roof. I have no doubt that this will lead to the double digit inflation that we have not seen since the 1970s.
The conditions for stagflation are: high interest rates, high unemployment and high inflation. The governors of the Reserve Bank are keeping a lid on the high interest rates by their decision to not increase those interest rates in response to the changes in the consumer price index. However, what will they decide once this tax is implemented? If they decide to try and stop the inflation by raising interest rates then we will have a return to the 1970s which we have been avoiding. Any rise in interest rates will in turn hurt small business owners in Australia with many making the decision to leave the market place due to the rising costs caused by price increases in utilities such as electricity.
So again, in these circumstances, what would Keynes recommend? Would Keynes agree with the appalling government decisions that have allowed government debt as a percentage of GDP to get out of hand? Would Keynes recommend a tax on the very air that we breathe? Would Keynes go along with the “green economists” who advocate for such a tax? Would Keynes advocate something like the ETS scheme? Or would Keynes have seen through this kind of scam, and have been one of the economists who speaks up against it? Would Keynes have recommended going off the gold standard?
Australia has a problem – we have a Marxist Prime Minister by the name of Julia(r)-the Marxist – Gillard (Dullard). This particular woman grabbed power last year when she stabbed Kevin Rudd (equally inefficient) in the back. We went to the polls in August and the result was a hung Parliament. That bitch, Gillard, was willing to deal with the devil (Bob Brown of the Green Party) in order to grab power and to continue her wrecking ball game. There is very little difference between the disaster in the USA and the impending disaster in Australia. In 2007 when Krudd won the election, Australia was in a good financial position. However, it took very little time before KRUDD had run through the budget surplus and created a large budget deficit – this of course is what ALP governments tend to deliver to the Australian public. It has been one failed program after another, and all of them costing far more money than was necessary, due to wastage and stupidity of the Public Servants who are overseeing these programs. At least when I was a public servant, we had some controls over spending via the contracts system that had been put in place (even though it can be argued that even this could lead to corruption). The controls under Paul Keating as Prime Minister were superior to what is in place right now.
Julia Gillard lied to the voting public. During the election last year, the bitch stated that she would not implement a carbon tax. SHE LIED. She is now in the process of attempting to implement a tax that will have dire consequences for the Australian economy and for families that are already struggling because of higher electricity and gas charges. All of this is happening because of a non-existent crisis that the Marxists are claiming is real – that is Climate Change or Global Warming or whatever the euphamism for the redistribution of income happens to be this year. The fact is, the earth is not warming like it is claimed by climate alarmists. The fact is that this is just one giant scam.
If the tax is so necessary, why are they trying to work out a “compensation package”? The fact is that any industry that is hit with this unnecessary tax is going to pass on the costs to the consumer. The logical consequence is going to be cost-push inflation.
As I have been writing on this particular blog, I have tried to come back to the things that caused the prolongation of the stagflation of the 1970s, and I have tried to compare that situation to the present. One of the indicators of the 1970s was cost-push inflation, due in part to the union demands for higher wages, which was fuelled by inflation. It was a wages-price spiral. It was the Fraser government that attempted to bring this under control through the implementation of a wages freeze. The Whitlam government had attempted to control prices through the implementation of the Prices Justification Tribunal, but that tribunal did nothing to bring prices under control because of the nature of the inflation. It is obvious that if the cost of production rises because of both increases in materials and labour, then the price of the product must also rise. In other words, you cannot control one element without controlling the other elements. BIG FAIL.
The twist in the current situation is that too much attention is being given to Green or Watermelon policies. The Watermelons have an agenda that is designed to hurt the community as a whole. Their economic policies absolutely stink to high heaven. They have absolutely no idea when it comes to the consequences of their total stupidity. It is the Watermelons who have been pushing for the carbon price or carbon tax, and it is the Watermelons who have been pushing inefficient methods of producing energy, such as windpower, whilst at the same time rejecting other methods such as hydro-electricity, as well as attempting to get rid of the coal powered stations such as Yallourn and Hazelwood in Victoria, with their bullshit lies that these are heavy polluters, and as such these power stations are somehow responsible for the normal changes in the climate and the weather.
What is even worse, is that Australia exports its coal to countries such as China and India where there is no effort to control the “pollution” from their power stations. The Watermelons want to shut down the coal mining industry. If this happened then this would hurt the Australian balance of trade. The watermelons have already severely affected our live meat exports to countries such as Indonesia and the Middle East. It is as if they also want to shut down the rural industry as well. All this because they live in an ideological vaccuum.
If the bitch of a Prime Minister is not stopped, and if the Greens are allowed to continue to hold the country to ransom with their nonsense, then the consquences for the economic well-being of Australia will be absolutely dire. This is because those policies are affecting the industries that actually export product to other countries. We need to have exports in order to pay for our imports. The proposed carbon tax will also harm our exports, making the Australian products too expensive on the open market.
First of all, I want to express that I think it absurd that Østupid would contemplate “loaning” funds to Greece. The fact is that unless Greece introduces far reaching reforms they will never dig themselves out of the current hole and throwing money at the Greek government will not cure their financial woes. Greece is a Communist country, and those protesting are anarchists and Marxists. These are the people that are currently helping to destroy the Greek economy, especially with their willfulness and inability to accept that things have to change. The welfare system in Greece is one of the worst in the world from the point of view that there are not enough taxpayers because Greece allows people to retire at around the age of 45. This has to change in the future and the retiring age needs to be adjusted to at least 60 years if there is going to be any long term improvement in the Greek economy. I have previously highlighted where Greece is nothing more than a welfare basket case. This is why a country that is in ever greater indebtedness than Greece should not even be contemplating giving money for yet another bailout, where the debt is unlikely to be repaid. (I will write more on this when I have read through the available material).
Second, one solution being proposed has been nixed by the chairman of Europe’s Central Bank, Jean-Claude Trichet:
Germany’s finance minister, Wolfgang Schauble, wrote to Trichet, the IMF and his eurozone partners this week to propose a swap in which private debt holders would trade in their Greek government bonds for new ones, giving Greece an extra seven years to work through its debt.
But ratings agencies argue it might be impossible to conduct such a swap on a voluntary basis, while Moody’s warned a Greek default could impact the ratings of Ireland and Portugal, the two other eurozone countries that have had bailouts.
Jean-Claude Trichet, chairman of the European Central Bank, heightened the sense of disharmony at the centre of European politics after he warned that only a voluntary agreement among all parties holding Greek debt would get the ECB’s seal of approval.
Trichet added to the gloom when he also signalled a rise in euro base rates next month that will push up the cost of borrowing for Greece and other debt-laden eurozone countries. A quarter-point rise to 1.5% in July was deemed a certainty after Trichet said the central bank was in “strong vigilance” mode over inflation, using a code word to signal that a rate hike is probably only a month away.
Bond yields also jumped, with the Athens administration now expected to pay 25.08% interest over two years if it tried to borrow from the financial markets.
Investors had earlier digested the news that Greece’s crisis-hit economy expanded by a sickly 0.2%, down from a previous estimate of 0.6% – revealing the economy shrank at an annual rate of 5.5%.
Greece is expected to plunge back into recession this year as austerity measures bite, with the European Union and International Monetary Fund now both predicting a 3.8% contraction. Unemployment figures released on Wednesday showed that 16% of the Greek workforce is now jobless; among 15-24-year-olds, the unemployment rate is an extraordinary 42%.
From what I am reading, and I have no idea if I am correct, it would appear that Europe is in trouble as inflation starts to take hold. On top of that, the debt-ridden Greece has a very high unemployment rate, and it faces a massive 25% interest rate if it seeks to borrow on the open market. These are all of the indicators that point to stagflation.
Since the issue is really about stagflation, it seems to me that the wrong approaches and remedies are being pursued. This is probably because of the adherence to the Keynesian prescriptions. I suspect that if they were following the Hayek prescriptions that they would be equally stuck, because stagflation requires a different approach than the old Keynesian approach.
In all probability what is happening is that the flaw of initiating a eurozone in the first place is being highlighted. The eurozone seems to be leading the European economies down the toilet, especially when each of those countries are committed to the the Socialist aims of a welfare state. In this situation it is innovation that is being stifled because private investment in corporations is being stifled as Government takes a larger slice of the money available for investment.
I think that what is required is a new approach that will link big government with the stifling of the rest of the economy. Until economists are willing to take the stagflation of the 1970s seriously they cannot deal with the current situations, especially when big government as well as Marxist ideas have contributed to the demise of world economies.
The economy in the USA remains more or less moribund. The official unemployment rate has once again increased to 9.1%, but of course the hidden unemployed – those who are no longer looking for work – means that the unemployment rate is a lot higher than the 9.1%.
According to this report, Larry Kudlow has a few things to say about the state of the US economy as a result of the latest figures. It is anaemic. Kudlow actually identifies a few factors which were present in the 1970s when we went through a period of prolonged stagflation:
“We’re not creating jobs,” he said, adding that “the energy spike, the energy price shock and the commodity price shock is basically eating into the economy.” For this he blamed the Federal Reserve and stimulus spending.
As some of my readers had pointed out, the Spanish people are not lazy like the Greeks and they do work hard. To date Spain has not gone the same way as Greece, Ireland and Portugal, but it is on the precipice. Spain has gone from a booming economy to one that has been a bit of a disaster in the time span that Zapatero has been Prime Minister. At the weekend Zapatero’s Party was given a good kick where it hurts the most at the polls. They did not fare very well in the regional elections.
In taking up the story about Spain, the UK Guardian has up an article on what their writer thinks went wrong. The writer seems to have the delusional idea that Keynesians are always correct in their analysis and policy prescriptions. Obviously the writer knows nothing about the causes of the stagflation in the 1970s, because the failure of the Keynsian type policies are directly linked to that stagflation.
What really struck me about this article is that it seems that Zapatero took advice from the failed and ultra left-wing Marxist economist Paul Krugman. Good grief, no wonder the Spanish economy has been doomed. The Krugman prescriptions are an absolute disaster.
The ABC news site is running with a story that mortgagees, that is home owners and others who have a mortgage will soon be hit with higher interest rates because of the continuing global financial crisis.
Up until now, Australia had been somewhat isolated from the crisis. In fact I had argued that the “stimulus” in 2008 was totally unnecessary because Australia did not have a problem – it was a problem for the USA and Europe at the time. I should add here that my husband was one of thousands made redundant or who lost their jobs in the November (his redundancy was delayed until January 2009) of 2008 as some companies such as QANTAS responded to their own crisis needs.
Australians are being hit by a rather stupid Federal Government who wants to increase our taxes over non-existent climate change (they do not seem to understand that it is called “weather”). As a result we are being burdened with the likelihood of a new carbon tax that will cause an increasing amount of stress and strain on families. Many of us are also burdened by the introduction of a flood levy that covers the butt of the Queensland government because it does not have disaster insurance. If tha levy had been a fair one, then the burden would be shared by all taxpayers. Well it is not, and it was a tax on the middle class a la the usual Marxist pap.
This is what the ABC has to say about the coming interest rate hikes:
Analysts say the increasing cost of funding for the banks will mean higher interest rates, creating another headache for consumers already under pressure from rising rents and utility prices.
Investors bailed out of banking stocks on Monday morning, wiping $8 billion off the banking index.
They are concerned that bank profits are coming under pressure from the rising cost of sourcing wholesale funds offshore, particularly from Europe.
James Rosenberg, a private client stockbroker with Macquarie Bank, says the whole banking sector was affected by the bailout.
“I think ongoing issues in sovereign debt, particularly in the Iberian and Mediterranean nations, are leading to a view that there will be a scramble for wholesale funding,” he said.
“And given the Australian banks have a wholesale funding gap, the costs of it will be putting them under pressure and we’re seeing a pretty broad sell-off across the sector.”
The Australian banking sector may not be under threat yet, but the risks remain for homeowners.
Mr Rosenberg says the banks have a history of passing their cost increases onto customers.
“[The] simple fact is that Australian banks have to source a lot of their funding offshore,” he said.
“As the rises in that funding cost go on, some of it is often passed on to shareholders and some of it to customers.”
He predicts mortgage holders will be hit by a sharp rise in interest rates.
“There has been quite well-publicised history recently of banks passing on rate rises over and above the Reserve Bank rises,” he said.
“That’s because they don’t source their funding primarily from the Reserve Bank; they’ve sourced a lot of it from overseas.
If this report is correct, and there is yet another hike in mortgage interest rates, because Australian banks are sourcing gap funds from overseas, and having to pay higher interest for those funds, then this will be yet another sign that we are hitting a period of stagflation.
The measures taken in 2008 are now starting to come home to roost. This is because the Government borrowings have increased and the Government budget is in deficit instead of surplus. This is due to the wasteful spending which is still not being brought under control. Giving $900 tax rebate to people who do not pay taxes was not going to help a non-existent problem in Australia. The schools building program is well over budget due to the misappropriation of money (what has been built for the money expended is very small i.e. the builders were overcharging for their services). The Insulation program was a total disaster and a bungle and there was a lot of waste – there has been some clawback on the money expended. The Solar panel installation program is also a debacle and with some of the same problems associated with the insuatlion program – unscrupulous people cashing in on the free money. The NBN network rollout is another disaster in the making, especially when it is more than likely that there will be a very slow uptake for the services (the pricing so far is very high).
The end result of these disasters and bungles happens to be that we Australians will be paying for the Government waste through our taxes, but we will be paying a much higher price as stagflation begins to take hold.
This is further evidence that the mistakes of the Whitlam government have been repeated with steroids, and that as a result of these mistakes Australia is about to enter a period of prolonged stagflation. Once the increase in interest rates begins to hit, one can expect further increases in prices leading to higher inflation, followed by an increase in strikes and demands for higher wages, as more and more Australians will find themselves floundering because they are being squeezed.
None of this would have been necessary if the government had been one that was committed to a balanced budget. However with the ALP in charge, and a Marxist as Prime Minister, the aim of a balance budget is nothing but a pipe dream.
Personally, I like the idea of Christine Lagarde getting the post. She has a well rounded career and she would bring a fresh face to the role. She has the respect in Europe as well.
However, there are some countries that seem to have other ideas about who should lead the IMF. As regards to the opinions of the Goose (Wayne Swan) from Australia, he is such a bad Treasurer that his opinions should not matter in the slightest. He is one person who has absolutely no idea about what is required in the top job. Put it this way, I would value the opinion of Paul Keating (a man I detest anyway) over that of the Goose.
If the person is chosen on merits then Christine Lagarde should remain the number one contender. Amongst the other names being mentioned is the failed politician UK Gordon Brown. It is well known that he aspires to this type of role, but, he does not have the support of the present leadership in the UK. On top of that Gordon Brown messed up the economy in the UK in both of his roles.
Socialism and pushing socialism through the IMF is not going to help the world’s woes. At present the IMF has a big problem in Europe. It really does need someone with credibility in Europe to head the group. Gordon Brown does not have that credibility. Christine Lagarde has the credibility. The people being pushed from Singapore and other countries do not have that credibility. There is one other new contender from Brussels.
Some of the issues that I have with the IMF structure includes the heavy socialist emphasis. The challenges of the eurozone has meant that there has been a need to catapult some of the present ideas. Keynesian economics will not work in a time of stagflation. This is the lesson that should have been learned from the 1970s and the 1980s when the stagflation was prolonged. There is a need for a different set of responses to the crises that occur.
For too long Europe has turned to socialism (which is not quite the same as Communism) in order to offer a raft of welfare benefits to their communities. What most of these governments have forgotten is that there is a need to have people working in order to gather taxes, and there is a need for business and industry in order to have people working. Policies such as high taxes on business do not work because in the long term employers make the decision to leave the marketplace. When this happens the consequence is a drop in tax revenue as well as higher unemployment which in turn leads to higher welfare benefits.
Europe also has another problem that desparately needs attention: open borders attracts the wrong kind of immigrants. This can be seen in countries such as Spain, France, England and Germany, as well as in Norway and Denmark. These immigrants see this as an opportunity to place their wives on welfare, and they soak up all of the other welfare state benefits such as free medical, free education etc. etc. If this is not kept under control, inevitably it leads to a break-down in the whole system. At the root of this problem is taxation, or rather taxation receipts.
Under Dominique Strauss-Khan the IMF has steered a number of European countries towards putting in place austerity measures that are supposed to bring about a restructure of their economies. Those governments can only be compliant if the people are compliant and stop their protests that cause disruption, and in the instance of Greece, become extremely costly in terms of property lost, as well as lives lost due to the riots. The Greek attitude has not been conducive to the necessary reform required. Greece is the typical example of a country where the expenditure on welfare outstrips by a long shot the taxation receipts, but the lazy Greeks do not seem to understand the implications of their own bad welfare system.
I am not against some form of welfare buffer for the most vulnerable in the community. There is a need to protect such individuals. I am not against short term unemployment benefits for those who are able-bodied. I do think that government needs to have other structures in place that will help the unemployed find work. What I am really against is the expenditure of government funds on projects such as wind farms that are inefficient and will never deliver according to government expectations. The windfarms do not increase employment, but decreases employment in some sectors.
The watermelon policies and the claims regarding AGW or climate change need to be challenged, and governments everywhere need to stop wasting money on bogus research. This also means that I am against the use of IMF funds going third world countries, where such funds would only be wasted upon dead in the water projects whilst those third world countries continue to purchase arms and kill their own people.