{"id":21007,"date":"2011-05-09T09:36:07","date_gmt":"2011-05-09T13:36:07","guid":{"rendered":"http:\/\/countingpips.com\/fx\/?p=21007"},"modified":"2011-05-09T09:36:07","modified_gmt":"2011-05-09T13:36:07","slug":"how-to-create-prosperity-and-opportunity","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/fx\/2011\/05\/09\/how-to-create-prosperity-and-opportunity\/","title":{"rendered":"How to Create Prosperity and Opportunity"},"content":{"rendered":"

By Money Morning<\/strong><\/p>\n

Today and for the next two weeks your editor will write to you from the US east coast city of Baltimore, Maryland.<\/p>\n

Or, as the cab driver insisted on calling it, Balymore.<\/p>\n

But even though we\u2019re 16,467 km from our usual writing hovel in St Kilda, we\u2019re still keeping track of what\u2019s happening back home\u2026 and what\u2019s happening elsewhere.<\/p>\n

Such as 8,192 km to our east where the outlook for Europe\u2019s debt problems is worse than it\u2019s ever been.<\/p>\n

As we\u2019ve pointed out before, one of the most effective indicators of risk and uncertainty is the level of interest rates.<\/p>\n

If you look at the chart below, you\u2019ll see Greek bond yields are higher than at any point since financial markets imploded in 2008:<\/p>\n

\"\"<\/a>
\n<\/strong>Source: Bloomberg<\/em><\/p>\n

Right now investors demand a 15% yield on 10-year Greek government bonds.<\/p>\n

That\u2019s much higher than the rate demanded 12 months ago when Europe\u2019s debt problems started to make front-page news.<\/p>\n

In other words, for all the talk about Europe working together and multi-billion-dollar bailouts, the problem has only gotten worse.<\/p>\n

Another Euro bailout looms<\/strong><\/p>\n

So now Bloomberg reports:<\/p>\n

\u201cEuropean Union officials may require Greece to provide collateral for aid as policy makers struggle to prevent the euro area\u2019s first sovereign debt restructuring\u2026\u201d<\/em><\/p>\n

\u201cDebt restructuring\u201d is the polite word for default.<\/p>\n

It means one of two things.\u00a0 Bond holders either take a hit on the principal repayment, or the coupon (interest payment) is adjusted.\u00a0 Either way it means bond holders will get back less than they thought.<\/p>\n

As an investor that\u2019s bad news.<\/p>\n

But as bad as it may be, it\u2019s better than forcing taxpayers to foot the bill again for the Greek government\u2019s spending extravagance\u2026 especially when the taxpayers footing the bill didn\u2019t get the benefit of the spending\u2026 because it\u2019s the German, Fins and other European taxpayers who are paying for it.<\/p>\n

Yet it\u2019s not just the Greeks or the Americans with debt problems.\u00a0 Xinhua.net reports:<\/p>\n

\u201c[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.\u201d<\/em><\/p>\n

While The Australian<\/em> reports:<\/p>\n

\u201cOne 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.\u201d<\/em><\/p>\n

According to Mr. Swan this will be part of his grand plan to \u201cconvert a mining boom into an opportunity boom.\u00a0 The whole theme of everything I do is that we create prosperity to spread opportunity.\u201d<\/em><\/p>\n

Australia\u2019s debt burden<\/strong><\/p>\n

When, we wonder, will the politicians figure out they\u2019re the cause of economic problems, not the solution?<\/p>\n

But that\u2019s not his only idea.\u00a0 Again according to Xinhua.net:<\/p>\n

\u201cHe [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.\u201d<\/em><\/p>\n

Hmm.\u00a0 Who does that help?\u00a0 Non-unionised small businesses or unionised car manufacturers?<\/p>\n

It\u2019s typical for a politician to think that pure spending is the answer to economic woes.<\/p>\n

And don\u2019t for a minute think Australia is fine, just because government debt is low compared to other nations\u2019 levels.\u00a0 Australia has a whopping great private sector debt \u2013 as you know.<\/p>\n

A debt that\u2019s getting more expensive to service.<\/p>\n

Money Morning<\/em> reader Brett sent us the following news link<\/a>:<\/p>\n

\u201cANZ Banking Group boss Mike Smith warns banks\u2019 borrowing costs may spike due to \u2018massive\u2019 credit market volatility as Europe\u2019s debt crisis progresses.\u201d<\/em><\/p>\n

After the Christchurch earthquake and Queensland floods, you might remember your editor pointed out these events wouldn\u2019t be good for either economy.<\/p>\n

Many disagreed with us.\u00a0 They said it would be good for the economy because insurance companies would foot the bill.<\/p>\n

As usual, those who argued the point couldn\u2019t see what isn\u2019t seen.\u00a0 They didn\u2019t take into account that insurance companies and reinsurers would seek to recover their costs by increasing premiums.<\/p>\n

Something insurance companies and reinsurers have already started doing.<\/p>\n

While it\u2019s not directly related to Europe\u2019s debt problems, the point is interest rates in Australia aren\u2019t just determined by what happens in Australia.\u00a0 Interest rates will rise here if investors can get better yields elsewhere.<\/p>\n

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.<\/p>\n

Not only that, but it\u2019s a poke in the eye to those mainstream economists who claim interest rates are at a new \u201cstructural low\u201d.\u00a0 In other words, interest rates are low and will stay low\u2026 not so.<\/p>\n

Anyway, back to our point.\u00a0 Look, your editor isn\u2019t about to speak for Australia\u2019s hundreds of thousands of small businesses.\u00a0 But we doubt if there\u2019s more than half a dozen small business owners who believe buying a new car will increase business revenue and profits.<\/p>\n

The only boost it\u2019ll provide is to the unionised car manufacturers.<\/p>\n

And the only small businesses that will benefit from it are those that will take the tax break on the car for \u201cbusiness use\u201d but will most likely use the car for personal use.\u00a0 And fair play to them.<\/p>\n

Redistribution of wealth<\/strong><\/p>\n

This shows the redistributive nature of taxes.\u00a0 Taxing individuals or businesses that don\u2019t use a car for work \u2013 even though they may use a car to get to work \u2013 while giving a tax break to someone who can claim they use the car for business purposes.<\/p>\n

In a nutshell, we\u2019re not talking about government creating new opportunities. We\u2019re talking about the government stirring the tax pot.\u00a0 We\u2019re talking about taking food from Peter to feed Paul.<\/p>\n

Peter starves. Paul becomes obese.<\/p>\n

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.\u00a0 That is the abandonment of regional Australia by younger generations.<\/p>\n

Why do younger Australians leave regional areas?\u00a0 A lack of job opportunities is one reason.\u00a0 But that\u2019s only because red tape and regulations makes it hard for regional businesses to compete.\u00a0 And those businesses that take the biggest hit are typically those in the non-services sector.<\/p>\n

Not only that, but it\u2019s partly to do with the obsession with getting kids to university when they may be better suited to entering the workforce.\u00a0 That hurts small and large businesses.<\/p>\n

Think about it. A kid who may be prepared to do blue-collar \u00a0or white-collar work straight from school in his or her regional home town is less likely to consider it once they\u2019ve got a degree to their name \u2013 that goes for city kids too.<\/p>\n

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.<\/p>\n

But again, it\u2019ll just result in further distortions to the economy.<\/p>\n

If Mr. Swan really wants to \u201ccreate prosperity\u201d<\/em> and \u201cspread opportunity\u201d<\/em> all he needs to do is get out of the way\u2026 left to the free market, prosperity and opportunity are automatic.<\/p>\n

It just happens.<\/p>\n

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.\u00a0 A record that has been tarnished since the early twentieth century when Progressive politics took hold.<\/p>\n

The fact is, prosperity and opportunity don\u2019t need a helping hand from politicians.\u00a0 Especially not from a former lecturer at a second-rate Queensland university.<\/p>\n

Back to the beginning<\/strong><\/p>\n

Which brings us back to where we started.\u00a0 Europe\u2019s and the US\u2019s debt problems.\u00a0 These debt problems were caused by programmes intended to \u201ccreate prosperity\u201d<\/em> and \u201cspread opportunity\u201d<\/em>.<\/p>\n

And they\u2019ve just ended up creating debt and spreading despair.<\/p>\n

Think about it.\u00a0 When the US and Greek governments went on their spending binges, what was their justification for doing it?\u00a0 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?<\/p>\n

Or did they say they were creating prosperity and opportunity?<\/p>\n

Some will claim politicians have good intentions.\u00a0 That they\u2019re just trying to do the best for the people they represent.\u00a0 We disagree.<\/p>\n

We believe they either knowingly implement unaffordable policies that result in future taxpayers footing the bill, or they\u2019re just incompetent fools\u2026 or both!<\/p>\n

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.<\/p>\n

Just as ridiculous as the idea that giving a tax break to property investors leads to prosperity and opportunity.<\/p>\n

Of course the property spruikers like to claim it leads to both, because without negative gearing investors wouldn\u2019t invest in property and therefore there would be fewer properties available for rent.<\/p>\n

In a word: nonsense.<\/p>\n

Negative gearing just takes from one bunch of taxpayers and gives to another.<\/p>\n

Just like any other form of government interference it distorts the economy and destroys prosperity and opportunity.\u00a0 However, unlike most, your editor doesn\u2019t believe negative gearing should be outlawed.<\/p>\n

That may surprise you.\u00a0 But it shouldn\u2019t.\u00a0 We\u2019re in favour of anyone reducing their tax bill.\u00a0 The last thing we\u2019d want is for more cash to end up in the hands of federal politicians.<\/p>\n

The only thing we object to is someone paying for someone else\u2019s tax cut.<\/p>\n

What we\u2019d prefer to see is tax breaks for everyone.\u00a0 A better \u2013 but still flawed \u2013 option would be to make owner-occupied mortgage repayments and rent payments tax deductible.<\/p>\n

But even that would create distortions in the economy, and would likely result in a further inflation of the property bubble.\u00a0 But it just goes towards making our point.\u00a0 That any interference designed to close loopholes only results in more loopholes.<\/p>\n

That\u2019s why free markets are best.\u00a0 The market decides what works rather than relying on political intervention.<\/p>\n

And so, the only answer is to eliminate the single cause of these problems \u2013 interventionist governments.\u00a0 Simple eh!<\/p>\n

Anyway, we\u2019ll be back tomorrow with more from the US.\u00a0 In the meantime, as we write it\u2019s Sunday afternoon and so we\u2019re going to take in what Baltimore has to offer.\u00a0 Including a visit to Camden Yards to see the Baltimore Orioles in action.<\/p>\n

Cheers.<\/p>\n

Kris Sayce
\nMoney Morning Australia<\/strong><\/p>\n

How to Create Prosperity and Opportunity<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

While it\u2019s not directly related to Europe\u2019s debt problems, the point is interest rates in Australia aren\u2019t just determined by what happens in Australia. Interest rates will rise here if investors can get better yields elsewhere.<\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-21007","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21007","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/comments?post=21007"}],"version-history":[{"count":0,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/posts\/21007\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/media?parent=21007"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/categories?post=21007"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.investmacro.com\/fx\/wp-json\/wp\/v2\/tags?post=21007"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}