"When you combine ignorance and leverage, you get some pretty interesting results." - Warren Buffett
Australian home prices world's most over-priced: Economist surveyAs Helicopter Ben keeps flooding the world with USD's, other countries must "compete" by inflating their currencies to keep the value of their currencies from appreciating making their exports (priced in USD) from becoming too expensive. And let's not forget all that "stimulus" money pumped into every global economy 2 years ago.
Australia has enjoyed a stunning economy -- sellining to china and India. China has been inflating, but the government is worried, but the Chinese government has painted itself into a corner.
A cheap Yuan means more export competitiveness but that has led to inflation on many levels domestically. The property market is over-heated and looks like there is no getting out with a "soft" landing. It is going to be hard.
Food and energy prices have sky rocketed domestically. There are about 90,000 cases of civil unrest/ protests in China every year -- most go unreported. People are angry over the rises in food and energy costs. More money chasing fewer (or the same number) of goods causes prices to rise -- that is economic reality. Imports are of course priced in USD, and the Yuan-USD peg is on shaky ground.
The value of real estate stock to GDP is around 350% in China. When the Tokyo real estate bubble burst catastrophically in the 1980's the figure was 370% of GDP. China is on the brink. One small trigger is all it would take to burst this bubble.
The Chinese government has been taking steps to try to avert a credit crunch -- it has raised bank reserve requirements and raised interest rates. It has also allowed Chinese exporters to use the money they earn to directly purchase overseas assets without first repatriating their earnings to Chinese banks. Not much seems to be working.
If the Chinese government acts more aggressively to reain in the money supply, it would make Chinese exports more expensive. Higher interest rates means businesses will feel the added cost. Bear in mind that profit margins are very thin as Chinese manufacturers and exporters depend on volume to drive their heady export-driven revenue machine.
A decrease in business activity due to money tightening will cause unemployment -- and now you have the threat of civil unrest in an environment of doom, gloom and uncertainty, lack of financial security, people losing their homes and jobs and high cost of living.
It'll be interesting to see how the political economy progresses...or doesn't. Inflation of the global money supply has already had adverse social effects: the civil unrest in the Middle East was sparked off by high food prices.
The trouble in many of the oil-producing countries has spiked the oil price to USD100-120 per barrel. Even if the civil unrest comes to an end, it would take time for new regimes to get their economies back on track.
Higher oil prices tend to lead to a slow-down in economic activity. Everything needs energy in our fossil-fueled modern existence -- if we don't get our "oil fix" the "cold turkey" which follows is economically and financially disastrous. Sure, the markets will adjust but there will be massive pain along the way, and that pain could destabilize governments and make a bad situation even worse.
The Labor Government has been steadily issuing bonds (borrowing money) at an alarming clip. But forget about the government for a sec. Afterall, isn't avoiding the government as much as they can the goal of free-minded individuals? Let's look as how "We They People" are doing:
2. Australian National Debt (about AUD45.5k per individual -- everyone in Australia, that is)
How does large debt affect a market?
Let's take it way back to 1st Principles: Praxeology -- the logic of human action. The "market: is nothing more than the collective expression of individual actions -- actions directed at achieving individually chosen objectives (chasing ends) by using, organising and directing resources to achieve those objectives. (the means).
So consider leveraged individuals in an environment: How will they act? Erratically.
If they get "gun shy" and start de-leveraging, prices could fall as well as business revenues. Result: a pull back in economic activity, Asset prices fall as money is directed to paying down debt.
If they however think "the good times are still here" and continue to borrow and buy assets, they increase their debt exposure and push up market prices. It'll come to a point where things will start to turn, as these acting individuals change their minds, so to speak.
In a nutshell, high amounts of debt make markets unstable and unpredictable. Central banks and governments can "kick the can down the road" (a popular expression in the financial press these days) and keep inflating or applying QE (Quantitative Easing) but at some point in the future (yes, there is a lag time) there will be a correction.
Lenders (bond holders, creditors) will get fed up of seeing their loan-assets decrease in value and are not being compensated enough through interest revenues and therefore demand "more" for their loaned-out capital.
Borrowers now highly leveraged will struggle to meet their debt commitments as real interest rates rise. Financial institutions start getting the jitters. They enact measures to protect themselves and the capital-stock of their owners: foreclosures, cut back on credit, raise interest rates on unsecured loans, decrease margin lending, issue margin calls. along wiht the increasing price of living (CPI increases due to inflation), borrowers are now feeling pressure from all sides...and their hitherto "secure jobs" are precarious as employers seek refuge from the coming financial and economic storms.
...anyway back to the Chinese credit bubble: I am hoping for a crash. That would mean that economic activity will shrink in China. Which means that Australia's exports to China will fall off a cliff. That means that there will not be enough revenue/ capital to finance the hungry monster of "The Great Australian Dream" -- aka buying (on mortgage) the biggest most opulent house you can imagine and fill it will "stuff" -- all done by borrowing as much as you can.
Bring it on, mate!
Related: Australian Sovereign debt -- very popular "investment". Imagining the possibilities of a "fun" crisis, which could happen because a high amount of debt is owned by foreigners.
Let's take it way back to 1st Principles: Praxeology -- the logic of human action. The "market: is nothing more than the collective expression of individual actions -- actions directed at achieving individually chosen objectives (chasing ends) by using, organising and directing resources to achieve those objectives. (the means).
So consider leveraged individuals in an environment: How will they act? Erratically.
If they get "gun shy" and start de-leveraging, prices could fall as well as business revenues. Result: a pull back in economic activity, Asset prices fall as money is directed to paying down debt.
If they however think "the good times are still here" and continue to borrow and buy assets, they increase their debt exposure and push up market prices. It'll come to a point where things will start to turn, as these acting individuals change their minds, so to speak.
In a nutshell, high amounts of debt make markets unstable and unpredictable. Central banks and governments can "kick the can down the road" (a popular expression in the financial press these days) and keep inflating or applying QE (Quantitative Easing) but at some point in the future (yes, there is a lag time) there will be a correction.
Lenders (bond holders, creditors) will get fed up of seeing their loan-assets decrease in value and are not being compensated enough through interest revenues and therefore demand "more" for their loaned-out capital.
Borrowers now highly leveraged will struggle to meet their debt commitments as real interest rates rise. Financial institutions start getting the jitters. They enact measures to protect themselves and the capital-stock of their owners: foreclosures, cut back on credit, raise interest rates on unsecured loans, decrease margin lending, issue margin calls. along wiht the increasing price of living (CPI increases due to inflation), borrowers are now feeling pressure from all sides...and their hitherto "secure jobs" are precarious as employers seek refuge from the coming financial and economic storms.
...anyway back to the Chinese credit bubble: I am hoping for a crash. That would mean that economic activity will shrink in China. Which means that Australia's exports to China will fall off a cliff. That means that there will not be enough revenue/ capital to finance the hungry monster of "The Great Australian Dream" -- aka buying (on mortgage) the biggest most opulent house you can imagine and fill it will "stuff" -- all done by borrowing as much as you can.
Bring it on, mate!
Related: Australian Sovereign debt -- very popular "investment". Imagining the possibilities of a "fun" crisis, which could happen because a high amount of debt is owned by foreigners.
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