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Women Mean Business - September 2009

Posted by Jill Kerby on September 01 2009 @ 21:53

“All credit expansions eventually end in credit contractions. All bubbles pop. All asset prices go down as well as up. And all paper money, sooner or later, ends up as decoration.”

                         - Bill Bonner, The Daily Reckoning

 

It’s nearly a generation since price and wage inflation was the scourge of our country. But with the cost of living falling at a rate of nearly -5%, surely it can’t happen again, asks Jill Kerby.

 

Are the indebted economies of the world, led by America and Britain, with us tagging along at their heels, facing a decade of asset price and wage deflation – like Japan has been battling since 1990 – or the reverse – a period of brutal price inflation?  

 

The commentators that I subscribe to, who write mainly for UK and American specialist newsletters, magazines and newspapers and are followers of the Austrian School of Economics (see www.mises.org) believe foremost in the notion of ‘sound money’, and due to the massive inflating of the global money supply in the past year, they mostly fall into the inflation camp.

 

But just not yet. 

 

Some predict hyper-inflation Argentina-style, others dare to suggest it could even be a la Zimbabwe.   They all believe that ultimately, fiat currencies that can be printed on demand, unlike pre-1971 currencies that were nominally restricted in their production by a nation’s gold or silver reserves, have an increasingly limited shelf life. 

 

What I really like about the late, great ‘Austrians’ - Joseph Schumpeter, Ludwig von Mises, Friedrich Hayek, and the American Murray Rothbard -  who accurately predicted the last Great Depression, is that they don’t make nonsensical predictions – like how recovery from this Great Recession, “will begin in the second half of 2011”.  

 

If economists and politicians really believe this, they’d personally be loading up on construction, bank, retail and airline shares knowing they’d be fabulously wealthy by 2012.  Yes, the markets have had a great six month bull run, but look closer and you see the hand of government in the form of trillion dollar bail-outs and subsidies, and the massive cost cutting programmes that companies have embarked on.  This is what the traders are taking advantage of, for there is no sign of genuine, growth based recovery. 

 

What the Austrians are sure of, is that the inevitable consequence of yet more debt and credit being spent to try and prevent a depression caused by too much debt and credit, is the catastrophic devaluation of the currencies involved, specifically the US dollar as the reserve currency of the world. 

 

Argentina is an interesting example, they say, of how bad things can get.  Argentina’s most recent state debt default in 2002 involved the hyper-inflation of the peso, then prices and wages inflation, and eventually, a run on the banks. Once they re-opened, the currency was devalued and for the second time in two decades (the first default was 1982), the middle classes were wiped out. 

 

Back here in Ireland, the price of many goods and services (and wages) is falling and probably will for some time, but we’re not alone; it’s happening in other heavily indebted countries that succumbed to the lure of cheap credit during the noughties. 

 

Less consumer spending equals less demand. Less demand results in the production of fewer goods and the need for fewer workers.  Spending falls, savings increase. It’s a vicious downward spiral and the bigger the debt problem (like ours, and the USA’s), the bigger it gets. It’s what puts the ‘Great’ in the ‘Great Recession’. 

The only way to break the spiral, say the Austrians, is to let the correction happen and start again.  Insolvent banks and other companies receiving taxpayer’s support and loans are taken off life support. They go bust. Ordinary people, who also made poor borrowing and investing decisions (to buy the glut of houses that were built only because of the availability of artificially cheap credit) also have to face the reality that their debts need to be paid off or written off.  Too many will lose their homes, maybe even their jobs, but eventually capital – created through savings - and labour is redirected into sustainable enterprise where there is genuine demand.   

Since all of this unwinding of bad, leveraged debt involves considerable, immediate pain, lower living standards and loss of global power (where the world’s greatest indebted nation is concerned), it isn’t too surprised that the Americans have decided to turn up their dollar printing presses instead. (Even we’ve decided to “solve” our indebted banking and national insolvency crisis with yet more debt and credit.) 

This time, however the credit catastrophe is hundreds of times greater than the one in the 1930s and it isn’t just a few countries in dire straits – it’s a global phenomena.   So far, however, the trillions that have been manufactured or borrowed to recapitalise the insolvent banks, industries, municipalities and individuals, hasn’t found its way as purchasing power in the wider marketplace.  

Try as they might to inflate away their nations’ debts with more credit and cash, it hasn’t been enough to stop asset prices falling. 

When will it happen?  No one knows the exact date.  Sooner?  Later? 

When it happens, savers and anyone living on fixed incomes will suffer.  The value of your pension fund might soar, if it’s exposed to equities, but term life insurance contracts won’t be worth much if they get paid out. 

The only winners from a surge in inflation are debtors: some cynics suggest that a huge mortgage, fixed at a low rate for 20 years could be one of the best long term investments ever.  That’s assuming you’re able to keep up the repayments.

But can a small business, unable to pass on rapidly rising prices to its customers survive such a bout of inflation?  About as well as they, themselves, will be able to pay for the rising cost of groceries, heat and fuel, doctors bills and other essential requirements.  

The US Federal Reserve Chairman Ben Bernanke, who once said that if worse came to worse (like now) and deflation in the United States looked to go the way of Japan, he would resort to throwing out bundles of cash from an open helicopter.  “Helicopter Ben” – as he is known – is now at the controls and the doors have been open for months. 

Zero percent interest rates and trillion dollar bail-outs haven’t worked to restore the US economy to pre-2008 GDP and employment levels. There are hints that they may have to resort to stimulus package Mark II or Mark III.  They may have to start charging negative interest rates on savings in an effort to stop the hoarding of cash and force consumers to spend. (That’s when the price of gold will really soar.)

I’ve no idea when this Japan-like, deflation phase will end  - it’s 18 years and counting for the Japanese who also tried to spend their way out of a property induced recession - but I’ve decided to hedge my bets.  With all my debts paid, I’m aiming over the next year or so to have my pension fund stuffed full of index-linked bonds and cash and defensive, value shares that pay decent dividends.  These companies produce goods that people need regardless of which way the hands on the ‘flation clock turn.  And in anticipation - over the longer term – that the worst offending fiat currencies like the US dollar could end up as a form of wallpaper, I’m also going to add some precious metals, oil, arable land or agriculture commodities to the mix. 

You know, precious, scarce stuff, that politicians and their creatures in their central banks can’t just print out of thin air. 

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You & Your Money - September 2009

Posted by Jill Kerby on September 01 2009 @ 07:32

An unwelcome piece of information that the new intake of students in the country’s colleges andCollegegraduate universities are stuffing into their backpacks this month along with book lists, lecture notes and the flyers bidding them to join this society or that club, is a notice from their college about the level of fees they can expect to be charged next September/October, 2010. The Department of Education believes it has a legal obligation to warn this year’s college intake that the semi-free ride of the past 14 years has come an end, and that they’ll be paying a market price for their education starting next year.

As I write, the cost of the different degree and diploma courses hasn’t been announced, but it’s been suggested that the average arts graduate will be leaving after three or four years with a diploma and a bill for about €21,000, which they will be expected to start paying back once they find work. Welcome to the real world, kids. Actually, compared to the scale of car, credit card and mortgage debt that so many new graduates voluntarily collected soon after securing high paying jobs in banking and finance, IT, engineering and architecture, medicine, law and even the civil service during the heady days of the Celtic Tiger, €21,000 is a pretty tiddling amount. But it will certainly focus minds – especially parents’ minds if they feel under obligation to help their children meet these costs – on the difficulty of funding this investment, post-Tiger.

It might raise the question of value for money, and even teach their offspring a brutal post-graduate lesson that is never taught in college: how to live within your means. Or better still, beneath your means. The great leveller The Great Recession is already turning out to be a great leveller: like swine flu, it doesn’t discriminate between the educated and the ignorant, though at the moment it’s certainly packing a much bigger punch.

The graduate who falls victim to the new fees regime from 2010, and is lucky enough to get a job, will have two automatic repayments to make each month before he can spend another cent – one to the Revenue and the other to their bank. She should expect the former to keep rising and the latter to probably remain the same, though s(he) shouldn’t necessarily count on annual fees forever staying at that level. The €21,000 that an older brother or sister ended up owing in, say, 2013, might be closer to €25,000, or higher, for the younger sibling by graduation day, 2017. The re-introduction of fees also poses all sorts of familial dilemmas for students and parents. Is that minimum c€21,000 and all the other associated costs going to be worth the sacrifice involved in paying it off?

If you’re a parent, faced with higher taxation, reduced pension provision and fewer, more expensive public services, do you commit yourself to paying all or part or none of the third level bill? Do you support all your children in the same way or just the academically gifted ones? And If you have no specific job goal at you Leaving Cert, would it make more sense to get into the workforce sooner, earn some money, and literally buy yourself more time to gain some life experience and maturity before you return for a third level education? Decisions, decisions. One father or four or my acquaintance says these questions – and plenty more - are already causing conflict between himself and his wife.

The first born is two years into his BComm and not doing very well. “He still hasn’t got a clue what he wants to do – aside from playing poker and rugby and spending most of his spare time with his girlfriend. Just as well there are no fees.” Of the other three, two are in private secondary and only one “is particularly academic”. The youngest, nine, “shows some promise, but that’s what we thought of the eldest at his age.” As a higher earner and therefore disqualifying his children for education grants, he worries about where the money is going to come from; his wife insists they must all have a university education.

And maybe that’s the nub of it: for many, the children’s education has become, often unintentionally, a sort of designer label – like the remodelled designer kitchen and the shiny SUV. If the economic reality of the Great Recession focuses more minds on true value of education – both to deliver a fine academic degree AND a well-rounded individual - it might not be such a bad thing. Much as the government would like to see a plethora of IT specialists and chemists and bio-engineers emerging to create the new ‘Smart Economy’, while middle class mammy’s would like their offspring to join the ranks of the professions, maybe what would benefit our children most in an uncertain future, is an investment in an education that prepares them to be the proverbial Jack-of-all-Trades…as well as a Master of One.

AND HOW MUCH FOR THE SCHOOL OF LIFE?

It really is too bad that our children can spend up to 17 or 18 years in formal education (to third level), at an estimated cost of at least €70,000 according to the Bank of Ireland, and still be unable to type, cook, drive, swim, sew, build a fire, grow a vegetable, service a car, sail a boat, catch (scale and filet) a fish, use basic hand tools, perform first aid, speak at least one useful foreign language, balance a chequebook and fill out of a tax form. The modern economic model evolved to the point that specialisation provided the greatest rewards, but that model looks a little cracked these days and there’s a growing body of thought that believes that the target of high monetary reward and job security for as many young people in western economies as possible, might be a lot harder to achieve over the next few decades than it was over the previous ones.

Forking out even a portion of that €21,000 fee/debt on ensuring your less than academically brilliant child how to become self-sufficient might be the best hedged bet for parents and young people. A lot of this stuff can be learned for free – from other members of the family, friends, work colleagues and business associates (whose children you can mentor); from the public library, Google and YouTube. Of you can check out your local VEC, community centre and colleges, county training schemes, and of course, Aontas, the national adult learning organisation

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