By Money Morning
Today and for the next two weeks your editor will write to you from the US east coast city of Baltimore, Maryland.
Or, as the cab driver insisted on calling it, Balymore.
But even though we’re 16,467 km from our usual writing hovel in St Kilda, we’re still keeping track of what’s happening back home… and what’s happening elsewhere.
Such as 8,192 km to our east where the outlook for Europe’s debt problems is worse than it’s ever been.
As we’ve pointed out before, one of the most effective indicators of risk and uncertainty is the level of interest rates.
If you look at the chart below, you’ll see Greek bond yields are higher than at any point since financial markets imploded in 2008:
Source: Bloomberg
Right now investors demand a 15% yield on 10-year Greek government bonds.
That’s much higher than the rate demanded 12 months ago when Europe’s debt problems started to make front-page news.
In other words, for all the talk about Europe working together and multi-billion-dollar bailouts, the problem has only gotten worse.
Another Euro bailout looms
So now Bloomberg reports:
“European Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area’s first sovereign debt restructuring…”
“Debt restructuring” is the polite word for default.
It means one of two things. Bond holders either take a hit on the principal repayment, or the coupon (interest payment) is adjusted. Either way it means bond holders will get back less than they thought.
As an investor that’s bad news.
But as bad as it may be, it’s better than forcing taxpayers to foot the bill again for the Greek government’s spending extravagance… especially when the taxpayers footing the bill didn’t get the benefit of the spending… because it’s the German, Fins and other European taxpayers who are paying for it.
Yet it’s not just the Greeks or the Americans with debt problems. Xinhua.net reports:
“[Treasurer, Wayne] Swan is due to release the budget on Tuesday, and some economists are predicting that it will include a deficit of about 56 billion U.S. dollars, compared with the 45.6 billion U.S. dollars predicted at the time of the mid-year budget review last November.”
While The Australian reports:
“One measure to be announced tomorrow will be a 60 per cent increase in skilled migrant intakes under the Regional Sponsored Migration Scheme, whereby employers can sponsor a skilled migrant on the condition they live and work in the area for at least two years.”
According to Mr. Swan this will be part of his grand plan to “convert a mining boom into an opportunity boom. The whole theme of everything I do is that we create prosperity to spread opportunity.”
Australia’s debt burden
When, we wonder, will the politicians figure out they’re the cause of economic problems, not the solution?
But that’s not his only idea. Again according to Xinhua.net:
“He [Swan] added that the budget would provide up to 5500 U.S. dollars write-off on the purchase of a new vehicle by small businesses.”
Hmm. Who does that help? Non-unionised small businesses or unionised car manufacturers?
It’s typical for a politician to think that pure spending is the answer to economic woes.
And don’t for a minute think Australia is fine, just because government debt is low compared to other nations’ levels. Australia has a whopping great private sector debt – as you know.
A debt that’s getting more expensive to service.
Money Morning reader Brett sent us the following news link:
“ANZ Banking Group boss Mike Smith warns banks’ borrowing costs may spike due to ‘massive’ credit market volatility as Europe’s debt crisis progresses.”
After the Christchurch earthquake and Queensland floods, you might remember your editor pointed out these events wouldn’t be good for either economy.
Many disagreed with us. They said it would be good for the economy because insurance companies would foot the bill.
As usual, those who argued the point couldn’t see what isn’t seen. They didn’t take into account that insurance companies and reinsurers would seek to recover their costs by increasing premiums.
Something insurance companies and reinsurers have already started doing.
While it’s not directly related to Europe’s debt problems, the point is interest rates in Australia aren’t just determined by what happens in Australia. Interest rates will rise here if investors can get better yields elsewhere.
Just as banks need to increase rates to compete for investor funds in the Aussie market, banks will need to increase the rates offered to bond investors in order to compete for funds.
Not only that, but it’s a poke in the eye to those mainstream economists who claim interest rates are at a new “structural low”. In other words, interest rates are low and will stay low… not so.
Anyway, back to our point. Look, your editor isn’t about to speak for Australia’s hundreds of thousands of small businesses. But we doubt if there’s more than half a dozen small business owners who believe buying a new car will increase business revenue and profits.
The only boost it’ll provide is to the unionised car manufacturers.
And the only small businesses that will benefit from it are those that will take the tax break on the car for “business use” but will most likely use the car for personal use. And fair play to them.
Redistribution of wealth
This shows the redistributive nature of taxes. Taxing individuals or businesses that don’t use a car for work – even though they may use a car to get to work – while giving a tax break to someone who can claim they use the car for business purposes.
In a nutshell, we’re not talking about government creating new opportunities. We’re talking about the government stirring the tax pot. We’re talking about taking food from Peter to feed Paul.
Peter starves. Paul becomes obese.
And as for the idea of funding immigrants to work in regional areas, again the government is trying to take credit for fixing a problem it caused. That is the abandonment of regional Australia by younger generations.
Why do younger Australians leave regional areas? A lack of job opportunities is one reason. But that’s only because red tape and regulations makes it hard for regional businesses to compete. And those businesses that take the biggest hit are typically those in the non-services sector.
Not only that, but it’s partly to do with the obsession with getting kids to university when they may be better suited to entering the workforce. That hurts small and large businesses.
Think about it. A kid who may be prepared to do blue-collar or white-collar work straight from school in his or her regional home town is less likely to consider it once they’ve got a degree to their name – that goes for city kids too.
In other words, government incentives and programmes designed to address so-called skills shortages are only required because the government distorted the market in the first place.
But again, it’ll just result in further distortions to the economy.
If Mr. Swan really wants to “create prosperity” and “spread opportunity” all he needs to do is get out of the way… left to the free market, prosperity and opportunity are automatic.
It just happens.
And for the next two weeks your editor is in the nation with one of the best historical records of free market prosperity and opportunity. A record that has been tarnished since the early twentieth century when Progressive politics took hold.
The fact is, prosperity and opportunity don’t need a helping hand from politicians. Especially not from a former lecturer at a second-rate Queensland university.
Back to the beginning
Which brings us back to where we started. Europe’s and the US’s debt problems. These debt problems were caused by programmes intended to “create prosperity” and “spread opportunity”.
And they’ve just ended up creating debt and spreading despair.
Think about it. When the US and Greek governments went on their spending binges, what was their justification for doing it? Did they say from the outset that all the lovely government-funded programmes would be squandered on short-term benefits that would result in long-term problems?
Or did they say they were creating prosperity and opportunity?
Some will claim politicians have good intentions. That they’re just trying to do the best for the people they represent. We disagree.
We believe they either knowingly implement unaffordable policies that result in future taxpayers footing the bill, or they’re just incompetent fools… or both!
So the idea of giving a tax break so small businesses can buy a new car or truck will lead to prosperity and opportunity is just ridiculous.
Just as ridiculous as the idea that giving a tax break to property investors leads to prosperity and opportunity.
Of course the property spruikers like to claim it leads to both, because without negative gearing investors wouldn’t invest in property and therefore there would be fewer properties available for rent.
In a word: nonsense.
Negative gearing just takes from one bunch of taxpayers and gives to another.
Just like any other form of government interference it distorts the economy and destroys prosperity and opportunity. However, unlike most, your editor doesn’t believe negative gearing should be outlawed.
That may surprise you. But it shouldn’t. We’re in favour of anyone reducing their tax bill. The last thing we’d want is for more cash to end up in the hands of federal politicians.
The only thing we object to is someone paying for someone else’s tax cut.
What we’d prefer to see is tax breaks for everyone. A better – but still flawed – option would be to make owner-occupied mortgage repayments and rent payments tax deductible.
But even that would create distortions in the economy, and would likely result in a further inflation of the property bubble. But it just goes towards making our point. That any interference designed to close loopholes only results in more loopholes.
That’s why free markets are best. The market decides what works rather than relying on political intervention.
And so, the only answer is to eliminate the single cause of these problems – interventionist governments. Simple eh!
Anyway, we’ll be back tomorrow with more from the US. In the meantime, as we write it’s Sunday afternoon and so we’re going to take in what Baltimore has to offer. Including a visit to Camden Yards to see the Baltimore Orioles in action.
Cheers.
Kris Sayce
Money Morning Australia
