July 2011

Andrew Pegler – 24 June 2011

A tiny computer chip inside your next Smartphone may replace cash.

Picture this: Five years from now you’re at Harvey Norman when an employee announces a new special on the loudspeaker. “Buy a television in-store and get 10% off – if you pay with your smartphone.”

You whip out your phone and it automatically details all your previous purchases at said store: Your sound system, those pricey HDMI cables, surge protectors, a case for your smartphone, etc. But no telly, and 10% is pretty decent…

“Just place your phone here sir/ma’am and enter your PIN.” You plonk your smartphone next to the cash register, enter your PIN on your phone and the telly is yours.

Okay, maybe they won’t call you sir or ma’am. But you get the idea. Smartphones are poised to replace every debit card, every credit card, every loyalty rewards card. Every. Financial. Card.

So how’s it going to work? With technology called Near Field Communication (NFC). Wire that acronym into your neurons, folks, because you�re going to hear a lot more about it.

Basically, NFC is a tiny radio with a tiny antenna on a tiny computer chip. Tech watchers expect the upcoming iPhone 5 to include NFC, followed soon after by Android, Blackberry, etc.

NFC chips are social little critters. They spend their days wirelessly “looking” for other NFC chips. They only have a range of about 10cm, so they need to be close to connect. (That’s why you plonked your phone next to Harvey Norman’s cash register.)

But when they do connect, the chips get their mojo on. They automatically establish a secure connection, bridging their parent devices. An App on your smartphone will cross that bridge to pay the App on the cash register. And you walk out the door with your telly.

Right now the race is on to win the “mobile payment format war” (I just made up that phrase). Google Wallet is teaming with Mastercard, Visa has its own system, and other players include Isis and Square. Google Wallet will be trialling this summer in San Francisco and New York, but once they iron out the bugs expect it to head our way.

Meanwhile, Kenyans could be excused for sniggering. They have a system called M-PESA, which transfers money from one mobile to the next. About 70% of Kenyans use it to buy groceries and pay bills, to the tune of about $350 million a month. It’s pretty handy in a country where most people don’t have bank accounts.

Next week we’ll explore the spooky benefits of mobile payments, and the equally spooky drawbacks. So stay tuned for Part II of the mobile payment format wars (did I mention I made that up?).

Andrew Pegler – 17 June 2011

You’ve heard about Australia’s rising “terms of trade”, but what does it mean?

Well, if you have a vague idea that the terms of trade (let’s call it TOT) is related to exports and the mining boom, you’re right. But that’s not all; it’s also about imports. And finally, most importantly for us, it’s about our real incomes in the global economy.

First the maths (and I’ll keep it short): the TOT is the total price of our exports divided by the total price of our imports. Therefore, the TOT is a ratio.

Here’s a simplified example: if Australia exports $100 worth of products and imports $150 in products, our TOT would be 100/150 = 0.66. Because the ratio is less than 1, it’s considered negative, which means we’re spending more than we’re earning. Long term, money would drain out of the country.

Let’s try again: say we export $100 in products and import $80. Our TOT would be 100/80 = 1.25. That’s a positive ratio, which means we’re earning more from our exports than we’re spending on our imports. The net effect is money coming into the country – which is what we want.

Okay, no more maths. I promise!

So how does Australia’s TOT change over time? Well, we export tonnes of manly stuff like coal, iron ore and liquid gas. And we import quite a bit of nerdy I.T. stuff, you know, computer and communications technology. And here’s the kicker: in recent years, on global markets, coal, iron ore and gas has got more expensive, and I.T. has got cheaper. So our exports are rising in value while our imports are getting cheaper, and, hey presto, up goes our TOT.

Another way of thinking about the TOT is that it describes what quantity of imports we can buy for the sale of a fixed quantity of exports. So, ten years ago a tonne of Aussie coal didn’t buy many Asian-made computers. Nowadays, a tonne of our coal buys a tonne of computers. The TOT has improved in our favour. We can buy more stuff. As a nation, we’re wealthier. Our real incomes are rising.

Finally, what’s all this got to do with the rising Aussie dollar? Nothing. Nada. Zip.

Sure, when the AUD rises, we can buy more imported stuff. But at the same time, our exports are more expensive so we earn less. The exchange rate cancels itself out. Rather, the terms of trade is about the change in value of our exports and imports, not the change in price. It’s all about value, and right now our value is on the up.

Andrew Pegler – 10 June 2011

 

Is that the pitta patter of a big drop I can hear coming down the stairs?

It’s part of Aussie folklore now, that we dodged a bullet during the GFC. But if you ever get a nagging feeling that we didn’t dodge it permanently, that our desperate cleverness just temporarily propped up our house of cards, it might please you – or not – to know some pretty smart people feel the same way.

One of those is economist Steve Keen, who has predicted house prices will plunge by 30% to 40% over the next ten to fifteen years. He has even staked his reputation on a high, single-digit drop (close to 10%) over the next twelve months.

Bunkum or wisdom?

If you ask me, it comes down to how you measure demand – for housing. Regular readers will be all over this like a rash: all things being equal, if demand rises, so does the price. If demand drops, so does the value of your property.

So how strong is housing demand right now? Business Spectator recently set Steve Keen onto another economist, Harley Dale, from the Housing Industry Association. It was a duel at ten paces, mano-o-mano (although very civil). The discussion got interesting when they tackled my pet topic: housing demand.

Harley Dale, who gets paid by the housing industry, argued prices would be flat to moderately lower for the next year. He said rising demand, caused by a strong labour market and income growth, would be neutralised by upward pressure on interest rates and ‘post-GFC nervousness’. (New medical condition, anyone?)

But Steve Keen wouldn’t have a bar of it. He argues housing demand has got nothing to do with income or population pressures. He says people don’t buy houses. Say what? You heard right. He clarifies: people with mortgages buy houses. Therefore, the key driver of housing demand and prices is not rising income – it’s rising debt.

Which gets you thinking. The GFC was all about banks taking on too much debt. And right now it’s a fact, ladies and gents, that Australians have higher levels of household debt than Americans. And as we move to reduce that debt, or are forced to by rising interest rates, demand for housing – and therefore house prices – will fall along with the debt levels.

So are we looking at big price drops or not? Anyone who tells you ‘for sure’ has either invented a working prototype of a crystal ball, or is just making an educated guess. But one thing does seem highly likely: there’ll be no good news for home owners. Housing prices will be flat, slightly weaker or downright terrible. For those with mortgages, let us hope it’s not the latter.