Financial Armageddon!!

[speights boy]

Correct.

It is also a shame that a lot of retail savers just use term deposits, when spending a bit of time learning about what is on offer in the bond market could be of benefit.

SB

[muppet]

In budget crisis, states rein in pensions NYT: Some are cutting once-sacrosanct benefits to deal with deficits
By Mary Williams Walsh
The New York Times
updated 5:37 p.m. ET June 19, 2010

Many states are acknowledging this year that they have promised pensions they cannot afford and are cutting once-sacrosanct benefits, to appease taxpayers and attack budget deficits.
Illinois raised its retirement age to 67, the highest of any state, and capped public pensions at $106,800 a year. Arizona, New York, Missouri and Mississippi will make people work more years to earn pensions. Virginia is requiring employees to pay into the state pension fund for the first time. New Jersey will not give anyone pension credit unless they work at least 32 hours a week.
“We can’t afford to deny reality or delay action any longer,” said Gov. Pat Quinn of Illinois, adding that his state’s pension cuts, enacted in March, will save some $300 million in the first year alone.
But there is a catch: Nearly all of the cuts so far apply only to workers not yet hired. Though heralded as breakthrough reforms by state officials, the cuts phase in so slowly they are unlikely to save the weakest funds and keep them from running out of money. Some new rules may even hasten the demise of the funds they were meant to protect.
Lawmakers wanted to avoid legal battles or fights with unions, whose members can be influential voters. So they are allowing most public workers across the country to keep building up their pensions at the same rate as ever. The tens of thousands of workers now on Illinois’s payrolls, for instance, will still get to retire at 60 — and some will as young as 55.
One striking exception is Colorado, which has imposed cuts on its current workers, not just future hires, and even on people who have already retired. The retirees have sued to block the reduction.
Other states with shrinking funds and deep fiscal distress may be pushed in this direction and tempted to follow Colorado’s example in the coming years. Though most state officials believe they are legally bound to shield current workers from pension cuts, a Colorado victory could embolden them to be more aggressive.
Colorado pruned a 3.5 percent annual pension increase to 2 percent, concluding that was the fastest way to revive its pension fund, which was projected to run out of money by 2029. The cut may sound small, but it produces big results because it goes into effect immediately. State plans vary widely, but many have other costly features, like subsidized early-retirement benefits, which could likewise be trimmed for existing workers

http://www.msnbc.msn.com/id/37798908...new_york_times

[Realist]

China Sends Mixed Signals on Currency

"Early Tuesday, China’s central bank set a key daily reference rate for the renminbi at its highest level in five years, up 0.4 percent from Monday and in line with that day’s gain in over-the-counter trading. It was a closely watched move that suggested Beijing was open to a further rise in the exchange rate.

But by midday, financial news agencies were quoting unidentified currency traders saying that large state-owned banks were buying dollars for renminbi. The news spooked investors and suggested that the Chinese central bank was trying to limit any gains in the currency."

So China changes the daily reference rate, but there's still unofficial buying of USD. The USD has too many reasons to be persistently strong long term, possibly too strong for the good of the country. Perhaps we need a new global reserve, the SDR would do nicely if only it could become a direct fractional reserve, IMF needs more collateral first.

[muppet]

Is there life after debt?

The age of easy credit and its aftermath

Is there life after debt?
Rich countries borrowed from the future. Paying the bill will be difficult, and so will living in a thriftier world

Jun 24th 2010

DEBT is as powerful a drug as alcohol and nicotine. In boom times Western consumers used it to enhance their lifestyles, companies borrowed to expand their businesses and investors employed debt to enhance their returns. For as long as the boom lasted, Mr Micawber’s famous injunction appeared to be wrong: when annual expenditure exceeded income, the result was happiness, not misery.
For a long time debt in the rich world has grown faster than incomes. As our special report this week spells out, it is not just government deficits that have swelled. In America private-sector debt alone rose from around 50% of GDP in 1950 to nearly 300% at its recent peak. The origins of the boom go even further back, reflecting huge changes in social attitudes. In the 19th century defaulting borrowers were sent to prison. The generation that lived through the Great Depression learned to scrimp and save. But the wider take-up of credit cards in the 1960s created a “buy now, pay later” society. Default became just a lifestyle choice. The reckless lender, rather than the imprudent debtor, was likely to get the blame.
As consumers leveraged up, so did companies. The average bond rating fell from A in 1981 to BBB- today, just one notch above junk status. Firms that held cash on their balance-sheets were criticised for their timidity, while bankruptcy laws, such as America’s Chapter 11, prevented creditors from foreclosing on companies. That forgiving regime encouraged entrepreneurs (in Silicon Valley a bankruptcy is like a duelling scar in a Prussian officers’ mess) but also allowed too many zombie companies to survive (look at the airlines). And no industry was more addicted to leverage than finance. Banks ran balance-sheets with ever lower levels of equity capital; private equity and hedge funds, which use debt aggressively, churned out billionaires. The road to riches was simple: buy an asset with borrowed money, then sit back and watch its price rise.
Related items

• Britain's budget: Going for brokeJun 24th 2010
• The yuan and global imbalances: The long marchJun 24th 2010
• A special report on debt: Repent at leisureJun 24th 2010

All this was encouraged by the authorities. Any time a debt crisis threatened the economy, central banks slashed interest rates. The prospect of such rescues reduced the risk of taking on more debt. Bubbles were created, first in equities, then in housing. It was a monetary ratchet, in which each cycle ended with much higher debt and much lower interest rates. The end-game was reached in 2007-08 when investors realised a lot of this debt would not be repaid. As the credit crunch tightened, central banks had to cut short-term rates to 1% or below.

And now the reckoning
Rich-world countries now face two sets of problems. The most pressing is how to pay off their debts. Many people who have cut back their credit-card spending and firms which have seen their credit lines slashed would be horrified to see how little the rich world’s overall burden has fallen. Much of the debt has merely moved from the private to the public sector as governments have correctly stepped in to support banks and save the economy from falling into depression. And in the future, even more money will have to be raised, because of governments’ lavish promises of pensions and health care for the retiring baby-boom generation.
All this debt will have to be regularly refinanced and rolled over. Crises of confidence are likely, given that the rich world’s trend rate of growth (and thus the ability of debtors to service their loans) looks set to slow. Worse, much private debt is secured against assets; while the value of the debt is fixed, the value of the assets can fall. This can cause a vicious circle as debtors are forced to sell assets, driving prices down.
Piling up more debt does not seem an option. There is little appetite on behalf of borrowers or creditors. All governments face the tricky balance of appeasing the markets without damaging growth: Britain’s new government had a go this week (see article). But living with less debt will present a second set of longer-term challenges.

The road to purgatory
A rich world with less debt would look very different. Banks are already facing demands for higher capital ratios (and thus safer balance-sheets). Western consumers, facing higher taxes and lower benefits, will no longer have the freedom to spend; indeed, they will want to save more as they face long retirements. Sarah Jessica Parker and her Manolo Blahniks will be out; Grandma Walton and her sensible apron will be in. Houses will once again be somewhere to live, not vehicles for speculation. Some business models, notably private equity, will find it tougher to thrive. Life will be harder for entrepreneurs: more than half of all new firms rely on debt finance.
For policymakers, the priorities are clear. First, they need to focus on generating growth. America, with its relatively young, rising population, will find that comparatively easy. Continental Europe, by contrast, runs the risk of ending up like Japan, which has spent two decades struggling to grow in the face of its debt burden and ageing population. The best and the brightest young Europeans may emigrate to countries without such burdens; and if the economy stagnates, those that remain may eventually decide either to default on their debts, or to cut benefits to the elderly. Faced with those dangers, Europe needs to embrace the structural reforms necessary to make its economies as fast-growing and flexible as possible.
Second, policymakers need to begin the long task of rebalancing the world economy. It makes sense for Western countries, like workers in their 50s, to save for retirement rather than run up their credit-card bills. But if one lot of people saves, another must borrow. At the moment the developing world is unwilling to run current-account deficits; even getting China to save less is a huge task (see article). All the same, a shift is in everybody’s long-term interest—and the younger parts of the world should be the borrowers.
Weaning rich countries off their debt addiction will cause withdrawal symptoms. Austerity does not appeal to voters, who may work off their frustrations on politicians and (worse) foreigners. Mr Micawber’s phrase may be turned on its head again. When annual income is forced to exceed annual expenditure, the result may well be misery.
An interactive chart allows you to compare how the debt burden varies across 14 countries and to examine different types of borrowing
http://www.economist.com/node/164260...26084&fsrc=nwl

[eri]

from the end of the linked article

Hyman Minsky, an American economist who has become more fashionable since his death in 1996, argued that these debt crises were both inherent in the capitalist system and cyclical. Prosperous times encourage individuals and companies to take on more risk, meaning more debt. Initially such speculation is successful and encourages others to follow suit; eventually credit is extended to those who will be able to repay the debt only if asset prices keep rising (a succinct description of the subprime-lending boom). In the end the pyramid collapses.

In the aftermath of the latest collapse it is clear that the distinction between debt in the private and public sector has become blurred. If the private sector suffers, the public sector may be forced to step in and assume, or guarantee, the debt, as happened in 2008. Otherwise the economy may suffer a deep recession which will cut the tax revenues governments need to service their own debt.

If the Western world faces an era of austerity as debts are paid down, how will that affect day-to-day life? Clearly a society built on consumption will have to pay more attention to saving. The idea that using borrowed money to buy assets is the smart road to riches might lose currency, changing attitudes to home ownership as well as to parts of the finance sector such as private equity.

http://www.economist.com/node/163971...ry_id=16397110

[Perry]

You do have to wonder at the ever-increasing use
of the quaint expression, "re-balancing the economy."
When was the first attempt made at balancing it?
How? Why didn't it work? No one seems to know.
.

[Austrokiwi]

When was the first attempt made at balancing it?
How? Why didn't it work? No one seems to know.
.

1307 AD: Probably it wasn't the first time but one of the earliest: KIng Philip IV of France had racked up huge debts....... He rebalanced the economy..... It involved burning his creditors at the stake. It worked quite well not only didn't he have to pay his debts he was able to add the properties of the Bankers (knights Templar) to his own holdings.

[Jumpin]

I dont know about balancing, but apparently Solon of Athens cancelled out loans back in ca 600BC?

I kinda liked the burning creditors at the stake solution though. Bankers beware!!

[spaceman]

Increased cost of borrowing...

1307 AD: Probably it wasn't the first time but one of the earliest: KIng Philip IV of France had racked up huge debts....... He rebalanced the economy..... It involved burning his creditors at the stake. It worked quite well not only didn't he have to pay his debts he was able to add the properties of the Bankers (knights Templar) to his own holdings.

Some would argue that this approach over the years lead to the British Empire being larger than the French ..... due to the fact that lenders saw increased risk in lending to the Frogs and thus charged a premium and the Poms who were less liable (not saying they never did it) to eradicate their creditors were able to borrow money at a more favourable rate et viola French Empire << English Empire.

Cheers
Spaceman

[Perry]

House building consents slumped back in May,
almost wiping out the strong gain seen in April
according to official figures.

The level of planned home building remains
almost a third down on levels seen in the boom
three years ago, though the trend has been
improving since early last year

The number of new housing units authorised
(excluding apartments) fell 9.5 per cent in May
2010 when adjusted for seasonal effects,
Statistics New Zealand said

The drop follows a 13.4 per cent rise in April 2010.
.

[Realist]

In some ways this is a good thing because it keeps prices firm on existing dwellings.

[Winston Smith]

Great thread - any sign of the feared deflationary pressures in your neck of the woods Austrokiwi? All that austerity has to hurt property prices.

[Austrokiwi]

Great thread - any sign of the feared deflationary pressures in your neck of the woods Austrokiwi? All that austerity has to hurt property prices.

Actually the PI market picked up last year, that was phenomenally different to what is normal. I think I mentioned it before. In Austria purchasing costs the buyer around 11-15% over the contract price with all the added fees. Prices have never gone up much nor have they gone down. What we are seeing is more owner operated shops closing, and more big chain stores replacing them.

The PI market picked up because a number of banks started lending on them. Wierd ( to me) investment schemes in east Europe weren't selling well and mortgage applications were possible dropping from OO

I am hearing of people in Mortgage stress more than normal though.

One thing that is very different to NZ..... most in Vienna live in apartments ( yes I've said that before): but those who can purchase a country house, this is where NZ is very different. Where prices for a reasonable house are around €300,000 -400,000. A country house can cost as little as €45,000.

As an aside:
Heres an example of one that is tempting me sorely to sell my NZ property and Buy it @ €90,000. Its in Retz ( off the English speaking tourist Map) Half way between Vienna and Prague good public transport to both cities ( hourly running commuter train) Hours drive in each direction.

RETZ – Altstadt – Hauptplatznähe
Zeitzeuge!

Dieses Wohnhaus wurde 1896 erbaut und 1955 mit einem Zubau versehen. Um das Gebäude wieder in neuem Glanz erstrahlen zu lassen, sind umfangreiche Sanierungsarbeiten unumgänglich.
Die Immobilie ist teilunterkellert (Pressraum und 2 Gewölbekeller).
167,9 m² Wohnfläche teilen sich in: 4 Zimmer, 2 Abstellräume,
2 Küchen, 2 Kabinette, Bad, WC, Gang und Vorraum.
Die Wohnfläche kann durch einen Dachbodenausbau noch erweitert werden. Gesamtgrundgröße 839 m².
.
Weitere Pluspunkte: Innenhof, Stadel, Gaszentralheizung, Hausbrunnen.
Kaufpreis: € 90.000,-- Herr Mokesch 0664/1815090

Rough Translation: They want €90,000 for 198 sqm house with four rooms ( they don't count Bedrooms but rooms, 2 kitchens etc on 839 sqm. two storage rooms but only one WC and only 1 bathroom. There is room to develop the Attic as an extra living/sleeping space. built in 1896 and renovated in 1955.
Seems like just a cheap country village? To me it seems grossly under valued. Do an internet search on Retz ( it will be a surprise)

The property is near the town square (Hauptplatz) the inner part of Retz. The old part. Retz is a very old town in 1300 it was invaded. The invaders got under the Town walls ( exist still on 2.5 sides) walls by tunnelling under them and accessing the original Wine cellars under the town. What the add also point outs the house has a press room, what it doesn't mention is it may also have access to the Towns Wine tunnels ( three levels of them: but establishing ownership of any wine cellar under it can be a legal nightmare to sort out) In September they have a wine festival.... and not sure if they have done it for a long time but they have two fountains in the square.... At one time one was for red the other white! Would make a nice holiday home!!! Bad PI though sort of on par with an NZ bach. B**GR I have almost sold my self on it!!!! Driving into retz through the vine yards and the wine cellers on each side of the road is exactly as you could imagine it from NZ!!!!

[eri]

do it astro

i love my cabin

esp. as it's about 1/10 the price you'd pay in nz

[Realist]

The future price of crude

"Iraq, by contrast, aims to raise its crude production from 2.5 million barrels a day now to 9.5 million in 2020 under contracts signed with the world's biggest oil companies in the past 12 months.
...
He predicts that "the evolution of Iraq's oil capacity over the next 10 years promises to be the most important issue confronting Saudi Arabia in particular and Opec and the oil industry in general".
...
Given that Opec has more capacity than it needs to meet demand, increased Iraqi output will put heavy downward pressure on the price of oil."

Low oil prices will cause Russia to use up their stabilisation fund. When they're out of funds, it will hasten their admission into the EU simultaneously solving energy security issues for the bloc. Expect Russia to become an EU country 2025-2030.