Hello UBankers (don’t read that aloud too fast as it may sound like an insult). This week I will continue this blog’s firm political stance on not having a firm political stance and take a gander at the ads and disads of the political football that is immigration. Tony kicks to Kev, Kev kicks to Tony…

Advantages of immigration:

1. We get more skilled workers in sectors that need them: Skilled migrant workers are often employed in important occupations that plug gaps in our national employment profile. Plus we didn’t have to pay to educate them. These sorts of professions include nurses, doctors for regional hospitals and more recently experts to service the mining boom.

2. We get more unskilled workers to do jobs we don’t want to do: On the flip side many migrants occupy low-skilled, low-paying jobs that Aussies don’t want to do. But it’s a win-win because the standard of living they enjoy here is often better than what was available to them before.

3. It slows the ageing population time bomb: As you would know the workforce is ageing. This ticking demographic time bomb is set to impact social security, health costs and other issues dramatically. But migrants and their kiddies tend to be younger than the natives so getting them in slows this down.

4. Better “vibes” dude: Sure it’s an esoteric concept and not one that belongs in an economics blog but a nation with a rich melting pot of cultures is better off in terms of music, food, clothing and art.

Disadvantages of immigration:

1. Threat of domestic terrorism: This is the political elephant in the room. Listen to the far right and this is a real and present threat; listen to the far left and the threat is minimal and can be contained. Either way this issue could turn the election. Just ask Tony Abbott, who last week announced immigration/terrorism as one of the big issues he wants to fight the federal election on.

2. Wage levels get pulled down: Migrants will often work for less than the natives, which can have the effect of pulling down wages especially in low-skilled jobs.

3. We end up educating more kids: Migrant families usually have more kids, which means more taxpayers’ money is needed to educate them.

4. Greater poverty: Because migrants often occupy low-paying jobs as a group they are more exposed to downturns in the economy like the GFC. This weakens the economy.

And in other news… over the past few weeks the acronym PIGS (Portugal, Ireland, Greece and Spain), representing the list of countries at risk of bankruptcy, has grown to PIGSJUKUS. JUKUS adds Japan, UK and US. FYI on a proper accounting basis PIGSJUKUS is already bankrupt, but technically they have avoided it because they can either print money or borrow more. Pork chops anyone?

The first started when the subprime collapse put a bunch of private investment banks like Lehman Brothers up against the wall. The second I fear may have already started with the possible bankruptcy of Greece. So what the hell happened? Well basically the Greek government has wildly over-stretched its finances and may not be able to meets its debts and unless it gets a grip on its deficit and massive foreign debt, it risks what’s called sovereign debt default. Put simply, this is when a country can’t meet its debts. To quote the inimitable Guy Rundle for crikey.com.au “the Greek accounts are Swiss cheese”. And I reckon Greece is just the start - a headline to a much deeper problem that will see a whole bunch of European nations struggling to pay their debts with Spain, Portugal and Italy next.

So why does the drama of the drachma need to be an issue for us Aussies? Well this may be a Greek tragedy now but, because of the interconnectedness of Europe, it could take the Eurozone down with it with obvious impacts on world trade etc. But that’s just the start because when we finally work out how much the global financial system is exposed to the Greek meltdown it’ll start getting really funky. In fact if the tentacles of this drama reach far into the global banking system we’ll be back up Ouzo creek without a souvlaki before you can say fetta anyone? I.e act two in the GFC franchise.

Awww but don’t worry, it’s not all bad news for Australia. As economist Mohamed El-Erian told ABC’s Inside Business, “these sovereign debt problems are not going to go away any time soon but Australia is lucky because it’s exposed to the accelerated shift of growth and wealth towards Asia”.

Nice one … errrr … I guess.

And in other news… well actually not other news, just more bad stuff from the same grim tale. Greece has been using derivatives which allowed them to delay payments and hide its budget deficit problems. This dodgy accounting kept chunks of Greece’s debt off the books. The political question is did Greece do this to hide its problems, complying with the membership criteria of Eurozone? Oh and the postscript is that it was done with the assistance of Goldman Sachs.

Hello Valentine’s week lovers, it’s the cupid of economics here fearlessly firing weekly arrows of love (mixed in with the odd one of despair) into the digital ether. In this Valentine’s week I want to talk to you about your relationship. No not that one; it’s the one you’re rekindling with debt and spending that concerns me.

Retail sales are up, house prices continue skyward, personal debt is starting to grow and I hear margin lending is back on the card table. This sounds like a trial separation with frugality to me. Who gets the dog and how about the kids? In case you have been intoxicated by spurious data falsely indicating otherwise we just scraped through this meltdown mess by the hair of our chinny chin chin thanks to the low debt left by the Howard Government and bold, swift action by our Kev and Wayne. In other words, lovers, don’t stray back to your old ways of debt and spending. Put love over gold (Dire Straits’ best album?), temper rapacious spending impulses and learn to love to save because we’re not out of the woods yet. Chinese growth is slowing. Europe is teetering on the edge of a debt crisis. And the US employment picture still looks like a stick figure drawn by a five-year-old. Is that a light at the end of the tunnel or the entry light into another one? Simply start squirreling away a few acorns in case a cold snap turns into a winter of discontent.

To get this savings festival started right here’s a few tight-arse tips I prepared earlier:

1. Save on chewing gum by mixing blue tack with tooth paste.
2. Walk into your next party carrying a case of beer, struggling a bit like it’s full when in fact it’s only holding a six-pack.
3. Save on an expensive iPod by simply thinking of your favourite tune and humming it. To hear another song hum that one instead.
4. Save money on birthday cards this year by collecting up all the ones you get and returning them with the simple inscription “back at ya”.
5. And finally remember you can make clothing last twice as long if you only wear it every other day.

So that’s it, lover boys and girls, stay kind to each other and remember love is a good economy.

In other news… the monetary policy pendulum has just swung decisively toward further rate rises. January’s labour force figures reveal the strongest growth for three years with over 52,000 jobs created. The unemployment rate was 5.3% down from 5.5% in December. Meanwhile the US rate fell to 9.7% in January after the December high of 10%, giving hope that the hardest employment market over there in over 25 years is finally turning.

Despite the “smart” money plunging, hurtling, even careering behind a rate hike all week the RBA board has gone against the script and in doing so has proved every economist surveyed wrong. Perhaps John Kenneth Galbraith was right when he said “the purpose of economic forecasting is to make astrology look respectable”.

Yes folks, as the shock of the no reverberated around the nation we all breathed a sigh of relief. Nearly all the pundits, however, except me (see my predictions for the year from a few blogs ago), who swore blind we were going to get at least a .25% hike, ran for the door. In fact a hike had been so well anticipated that bookmaker Centrebet refused to take any more bets on a rise declaring that “there was not a snow ball’s hope in hades of interest rates staying put”. It’s currently snowing in hell.

Basically our market economists got carried away by alluring data that showed strong growth in China, house prices going through the roof, inflation getting sticky, and unemployment declining sharply.

But the herd was feeding in the wrong paddock. It was chewing the wrong data cud because over the hill the clouds were still gathering in threats. For starters, information on the impact of the three rate rises remains limited. Plus banks putting up their home loan rates a full percentage point above the RBA cash rate put rates in the “normal range” allowing the RBA to build this into its strategy. On the global front the Chinese plans to wind back stimulus will impact negatively on our export earning. This has obvious implications for us. Plus, as I have written here before, there are grave concerns about what’s called sovereign debt, which basically means what each country owes after the global stimulus splurge. And there’s also the uncertainty of what will happen here as the stimulus starts to be wound back. Finally, inflation, the main driver of interest rates, is still not a big drama here.

But here’s a tip for the indebted - don’t get complacent because as long as the economy keeps on its current trajectory then these record low rates will have to move up. I will put myself out on a limb here and predict there will be two or three more rate rises this year totalling .50 to .75%. As for those economists, well don’t believe everything you read, err… except maybe the stuff that I write?

And in other news… according to credible independent number crunching out of the US, unless we see a Miracle on 54th Street the US will have virtually no room for new domestic initiatives. This raises the spectre of that very important country suffering the same problem Japan has had over the past decade or so. As debt grew more rapidly than income, Japanese influence around the world declined. The rise of China anyone?

Please excuse me while I put on my horns, crank up the fires of Hades and assume the role of devil’s advocate for a double dip in 2010 - folks, the recovery is an illusion David Copperfield would be proud of and 2010 will be a shocker.

Right now things are going along well. Stats are looking up, the jobs market is turning, banks are starting to lend. But a closer look reveals what I call the Great Impression. All is not well and it’s hard to know where to start.

This year will be a very tough one for Australia and things that will be keeping Kev and Wayne awake include how to exit the fiscal stimulus, the creeping shadow of inflation, the bursting of the housing bubble, infrastructure bottlenecks and the small matter of moving to a low-carbon economy. Oh yeah, and this is all in an election year.

Then there’s history - you know that thing you are doomed to repeat if you don’t pay attention to it. After the Great Depression the economy was OK for the first two years then things got worse, a lot worse. And many see parallels between then and now. For starters this growth is illusionary - it’s stimulus driven but we’ve mistaken it for genuine economic activity. Yes folks, we’re about to learn that a bunch temporary shovel-ready Keynesian band-aids didn’t give us the fairytale ending we wanted. I would like to suggest we go back to the drawing board but unfortunately we sold it to the Chinese to pay for a Memorial Hall at Nowhere Primary!

Then there’s the recent spike in production and sales which is less about green shoots and more about the yellow weeds that have sprouted thanks to tax breaks and businesses tentatively stocking up after not doing anything for most of the year. The reality is that the demand needed to kickstart things just isn’t there and by year’s end we will have acres of warehouses full of dead stock.

Then there’s the international economy which is looking shakier than the trembling heart of a captured bird. (Thank you Roberta Flack circa 1971.) Everywhere you look there’s another country having trouble paying its debts - a phenomenon called a sovereign debt crisis. The massive debts taken on by countries to blow on stimulus packages will unravel this year turning the global financial crisis into the mother of all sovereign debt crises. Dubai nearly went under at the end of last year, Greece is teetering on the edge of oblivion and the UK is facing a possible credit-rating downgrade. And don’t ask Barnaby Joyce about the possibility of a US default - you’ll be there all day.

And finally, on a negative note, let me leave you with something out of The Economist this week: “This year the world may have to choose how to answer the question laid out in 2007 by the French president, Nicolas Sarkozy: an Iranian nuclear bomb, or the bombing of Iran?”

Until next week, keep fearing, stay anxious and be sure in the knowledge that the sky will fall in in 2010.

As we launch into another trip around the sun I thought it appropriate to explore both the doom or zoom scenario for 2010. This blog will present the reasons why we won’t have another recession in 2010 and next week I argue why we will. Meanwhile I’m off to see a movie with my split personality.

Towards the end of a recession conversation always turns to concerns of what’s called a ‘double dip’ i.e. a recession followed by a brief period of growth followed by another recession. But while it’s possible, it doesn’t usually happen, kinda like sleep for new parents. And there are a number of reasons specific to Australia for this. Firstly, unless we suddenly drift off into the Atlantic Ocean, we’re part of Asia. We have a Mandarin-speaking PM and, aside from the odd blue, China is a new mate. The UN predicts this new mate will have a GDP of 8.8% in 2010 and will need shiploads of raw materials to continue its nation building and coal to fire its generators. That’s our job and it’s good work if you can get it. In addition the UN is predicting an Asia-wide-led recovery for 2010 so that means even more demand for our goods and services from other neighbourhood besties like Japan, Indonesia, Malaysia and Singapore.

The few times that a double dip has occurred (early 80s and after the Great Depression) it was due to premature tightening. And no, that’s not a Jenny Craig weight-loss strategy. It refers to monetary policy. Specifically this means raising interest rates too early to curb inflation and/or prematurely withdrawing stimulus to cool things off a tad. However, this time around world leaders and the now-influential Group of 20 are adamant there will be no tightening until the recovery is definitely go. Phew!

As for fears of a share market crash - fuggedaboutit. With inflation and interest rates low and a planet of cash looking around for places to park itself the share market still has a ways to go. That said I do think it will slow down to grow only around 5.5%.

The other big thing to watch is the US economy because a double dip there would be a shocker for the rest of us. Despite the fact I have written about the unwinding of our interdependence with the US (remember the old adage if the US sneezes we got a cold?), it still represents a huge chunk of the international economy so it matters big time. The good news out of there is that inflation is low, house prices are bouncing back and banks are starting to lend gain. And while employment is stubbornly high remember employment always lags behind the rest of the economy in a recovery. As AMP’s Shane Oliver pointed out in his recent newsletter, unemployment peaked there two months after the end of the ‘82 recession, 15 months after the ‘90-91 recessions and 21 months after 2001 recession.

Well that’s it for my rosy take on the year ahead. Next week I will invite the clouds of doom to shut out those pesky shards of hope. Until then keep trickin’.

To paraphrase Elton John in Son of Your Father circa 1970 bricks and mortar take blood and water. Indeed Elty is right. Buying a house takes a lot of work and while those galloping prices will slow a tad the trajectory for 2010 will, like Superman, continue to be up, up and away.

Our collective obsession with house ownership has sent prices through the roof and turned the great Australian dream of owning a home for many into just that. Over 2009 Melbourne house prices soared 17%, Darwin 15% and Hobart 14%, while Sydney’s median price ended the year on $655,000. This is despite successive interest rate rises in October and November and the winding back of first home buyer grants. Jeeze Louise!

The primary driver of all this madness is the lethal combination of an under-supply of housing and the fastest population growth in Australia in 40 years. In 2009 Australia grew by 440,000 people, but we only built 131,000 new houses. Basically, there aren’t enough houses to go around. In addition, the relaxation of foreign investment rules has seen more overseas bidders at auctions, thus stoking prices.

Following an entirely unexpected and exceptional 2009 for house prices, 2010 holds two scenarios, neither of which is good news for first home buyers. The first is that house prices will slow down to a more modest 5-10% as interest rates continue to move back to normal, inflation starts to creep back in and the emergency stimulus component of the first home buyers grant goes the way of the Dodo. In other words prices will rise but not by as much as last year.

The other scenario is bad news for everyone. A bursting of the housing bubble, the old boom-bust scenario. For most of us, buying a house is life’s biggest financial decision. It ought to be based on what you can afford taking into account rising interest rates, the possibility of you losing your job, and, of course, ongoing valuations. But Aussies have been gambling on houses for over 10 years now and if an event comes along that drove unemployment up or existing wages down then it could be cameras, lights, meltdown.

In other news… some commentators are tipping commercial property in the US is in such a bad way that it may send us all back into the abyss this year. With $1.4 trillion of commercial real estate debt set to mature over the next few years and over half of it worth less than the mortgage, it’s not hard to see why it’s being called a ticking time bomb.

As always I welcome your feedback and any ideas for subjects I can tackle. So go on, let us know what’s on your mind - log in and post your comments below.

Andrew Pegler - 15 January 2010

Now that you have recovered from your annual Christmas dose of family enmity I want to chat to you about moral hazard. And, no, this is not a sermon on your behaviour over the break; it’s a finance term and it will be a big issue this year.

At the height of the GFC, after the Lehman Brothers collapse froze international credit and we were all going to hell in a handbasket, Australia, like many other countries, issued a federal government bank guarantee. What this meant was that Kev and Wayne promised that if your bank went belly up they would guarantee your deposit. In addition to that, any institution that lent money to an Aussie bank would be paid back by the Australian Government if all else failed. Both these guarantees ensured banks stayed in business and that the economy didn’t grind to a halt. Nice day’s work boys.

But there is a flipside and it’s called moral hazard.

Moral hazard refers to the idea that people who are insured take greater risks. (Kinda like that hire car you thrashed in Byron Bay last year.) In this case the people who now have insurance are the banks and by default all the super funds, financial institutions, hedge funds and just about every other corner of the financial system i.e. pretty much anywhere you have parked your hard-earned. The fear is that once things recover these guys may start to take more risks than they ought in the knowledge that if it goes pear shaped again the good ole federal government will bail ‘em out.

Now I am not against the idea of a bank guarantee. We were all stuffed without it but it sends a bad message to the financial services and investing community. A message of moral hazard.

So this year as the whole GFC mess starts to recede keep your eyes on what people start to do with your hard-earned and be prepared to move it if you think they are getting a little careless. But right now it’s still very early January so kick back and continue hallucinating to the freestyle beats of your evaporative cooler.

And in other news… while on the subject of moral hazard Greece is currently a great example of how it can apply to a whole country. As I have written before, the Greek economy is currently up Ouzo creek without a souvlaki and it’s hoping the EU will bail it out. However, if the EU does come to the toga party, as it’s being pressured to do, what’s to stop Greek policy makers continuing to pursue bad policies in the knowledge they have fall-back if the wheels fall off again?

As always I welcome your feedback and any ideas for subjects I can tackle. So go on, let us know what’s on your mind - log in and post your comments below.

As they say get two economists in a room and you’ll get ten different answers to the same question. But what the heck, it’s the time of the year to gaze into the crystal ball, read the tea leaves and pore over the goat entrails to boldly predict what lies ahead for 2010.

The recession was less disastrous than many feared but I reckon its aftermath could be more dangerous than many expect. For starters ending the fiscal and monetary stimulus will be much harder than starting it. Plus, with so much stimulus slashing about the globe inflation may blow out. But let’s steer away from Armageddon talk and take philosopher Frederick Nietzsche’s advice and don’t stare into the abyss for too long or it may start staring back.
With so much of global demand still dependant on government support, the global stability we have ended the year with will remain fragile plus we haven’t really addressed the problems in the financial serves sector that started this whole mess.

Moral hazard will become a big issue over the year as banks bounce back and start to take on risk again. And don’t worry if you don’t know what moral hazard is as I plan to give it the plain English treatment early in the New Year.

Large household debt and busted banking systems across the world will keep demand in the industrial west pretty weak. This of course affects the demand for widgets from the emerging economies, like China which also faces a housing bubble fuelled by loose monetary policy.

The share market will continue to grow as the world dusts itself off and gets back on the horse but not at the same pace. I predict ours will grow by 15%. If not I predict I will blame my failure on a typing error.

Gold will lose its lustre as the US economy picks up and dips below US$1000 an ounce.

The Reserve Bank won’t lift rates in February but will in March by 25 basis points. And official interest rates will sit between 4-5% by year’s end.
Unemployment will be gripped by the gravity of recovery and only go down from February to be 5.3 % by year’s end. On the subject of the RBA, I also predict Governor Stevens will not join the Spice Girls as “Banker Spice”.

Australia will emerge as one of the best economies around and seeing this Russia will buy Australian treasury bonds to augment its foreign reserve. Nostrovia!
Companies reporting in February for the second half of the year will surprise us with good results and strong forecasts sending the $AUD back up past 90c for a bit.

And yes folks it’s a federal election year so get ready for baby kissing, bold statements and a lot of blah, blah, blah. Climate change will be the key issue and Kev will take an ETS to the electorate seeking our thumbs up which he’ll probably get. Sorry Tony.

What a difference a year makes. We started firmly astride the seven horses of the apocalypse galloping right into the belly of the beast where we sat frozen by what looked like the headlights of doom but turned out to be shards of sunlight blazing though the woods from which we are now emerging. In other words, the sky didn’t fall in; it just passed quite close.

Things kicked off ceremoniously with Obama inaugurated into the biggest mess since the Great Depression. With little more than a blink he threw US$787 billion at it, Gordon Brown US$330 billion and Kev and Wayne about $70 billion. For now things seem to be under control. It’s the longer-term implications for inflation and inter-generational debt that will be the elephants in the room.

Star Wars: the stock market strikes back! The share market defied expectation, logic and intuition in 2009 to roar back from its 2008 lows and recover 50% of its losses. Bank shares have fully recovered, resources stocks have boomed and super has pretty much made up its falls. The most amazing thing is this happened in one year. Nice.

China’s economy began to roar again in 2009 following a sharp decline. Its returning appetite for raw materials has been a big part of the spectacular rise of the Aussie dollar, which some bearish types are tipping for parity. The jury is still out on that one.

With uncertainty the only certainty a lot of money fled into the safety and stability of gold, which rocketed past US$1000 an ounce. Its rise was also fuelled by the US dollar losing its lustre. The counter argument is summed up wonderfully by legendary US investor Warren Buffet. “Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.”

The Australian economy continues to be a shining light in an otherwise bleak global landscape. Thanks to the low debt left by Peter Costello and the swift stimulation of the Rudd Government we’ve ended the year with unemployment actually going down, banks still standing and (touch wood) no real property collapse … yet.

On the crime front, epic shonk Bernie Madoff got 150 years for his $65 billion Ponzi scheme and Texan billionaire and cricket promoter Sir Allen Stanford got arrested for an alleged $8 billion fraud.

And finally, when the global swarming in Copenhagen wound up we were left with agreements to disagree about agreements or something. In other words we’re as resolved to tackle the problems and shape an ETS as we were in January.

In Sopranos parlance “fugeddaboutit”, it’s over, move on and have a spanking NY’s knees-up. I’ll cop you on the other side.