Surpluses mean unemployment and deficits bring employment

It’s a strange paradox. There is a professor of economics John T Harvey who writes a lot on the fallacy of “getting rid of the deficit.” It seems it is his mission in life to educate politicians that the government’s budget can’t be likened to a household budget and that it shouldn’t be a government’s aim to get a surplus. He writes in Forbes magazine on why you should learn to love the deficit.

But how little progress he is making! I don’t know if he has an equivalent academic in New Zealand, but Australian Professor Steve Keen who now works in UK is also doing his bit. Hs latest article last week was entitled Beware of Politicians Bearing Household Analogies. Then there is a Professor Randall Wray of the University of Missouri and Kansas City doing the same thing.

Despite the shortfall this year, Treasury still backs Mr English to pull the country into the black over the next few years – predicting a $565 million surplus in 2015/16 and $4.1 billion in 2018/19.

Read more: http://www.3news.co.nz/nznews/dont-blame-deficit-on-tax-cuts—english-2014121709#ixzz3M73GczGY

Russel Norman blamed it on 2010 tax cuts and the fact that the Govt borrowed $5b in 4 years.

Treasury’s predictions Budget time: $372 m
Election: $297m
Dec: $572 million

(To year to June 30, 2015)

L Randall Wray:
Whenever a demagogue wants to whip up hysteria about federal budget deficits, he or she invariably begins with an analogy to a household’s budget: “No household can continually spend more than its income, and neither can the federal government”. On the surface that, might appear sensible; dig deeper and it makes no sense at all. A sovereign government bears no obvious resemblance to a household.

Surpluses cause a fall in your net assets. Deficits create private sector wealth while surpluses deplete it. If Government takes in $1000 taxes from private sector but doesn’t spend any of it and they had $100 of their own earnings, their total intake is $1100. The private sector has gone into debt of $1000. Government deficits create private sector wealth while govt surpluses drain it. Learn to love your deficit.

But in New Zealand, as in Australia and no doubt Canada and UK, politicians all believe in surpluses. Here’s the current petty interchange from our country.

On Dec 16 on Yahoo the headline was “Don’t blame deficit on tax cuts says English”

“The Government believes a surplus is achievable this financial year despite the Treasury’s latest forecast,” Mr English said.
“Previous forecasting rounds show the outlook can change significantly between the half-year update and the final accounts.”

Opposition parties were quick to describe the forecast as proof of a broken promise.
“Bill English’s face is redder than the crown accounts,” said Labour’s finance spokesman Grant Robertson.
“This is the political test he set himself, and he has failed… the government owes New Zealanders an apology.”

The Greens say National’s economic credibility is on the line and NZ First’s Winston Peters believes the government has been cooking the books for years.”

In Australia we see the headline “Australia budget deficit to hit $40.4 billion” with all the accompanying handwringing and blaming of the opposition. And it is the same in the UK.

New Zealand is in dire need of a professor of economics who makes it his (or her?)mission to educate our own politicians on the topic of deficits and surpluses.


Bubble finance, junk energy bonds, oil derivatives being neglected by mainstream media

Those who still think the plummeting price of oil is a good thing for the economy are taken in by PR spin or the simple lack of coverage in the mainstream media. It is not about consumers having lower petrol prices and more in their pocket. It’s not even about the energy. It’s about the money, the financial structure of the oil industry, particularly for the wildly speculative ventures like shale oil extraction. Environmentalists will see low oil prices as bad news for climate change but they need also to look at the way these energy shale firms are financed and learn about things they don’t want to know about, like junk bonds, leveraged loans and derivatives. It causes more immediate pain and must be survived first.

WTI to 12 Dec 2014The relentless slide continues. As of Monday 15 December in New Zealand the price of WTI oil was $56.73, down over 47% since June this year.

Unfortunately in New Zealand we are being shielded from all this bad news. Bubble finance is not a sexy topic for a front page. During the last week the Dominion Post, national radio, Sunday Star Times had nothing, and a business programme on Radio Live on Sunday touched on everything but the junk energy bond issue or the derivative issue. The programme gave the impression the only place to invest was in shares, bonds or fixed interest. When the derivatives market is so enormous, this is a major omission. It’s not as though the media believe the public won’t be able to understand junk energy bonds or derivatives. The corporate owned media only gives us bad news when it is about crime.

OK let’s try and explain it.

There are four major risks of plummeting oil prices
. The first is the risk to junk energy bonds held by pension funds, mutual funds and governments. Second is the secondary oil market, including the risk associated with a variety of oil derivatives contracts held by big banks. The third is the social unrest in oil exporting countries like Venezuela, Russia. And a fourth is the ongoing and contagious decline in prices of a range of other commodities – iron ore, copper, milk powder. Let’s just deal with the first two, though the fourth one is dealt with in passing.

1. Junk energy bonds. What on earth are these, you might ask. They are the risky bonds that energy companies sell to help finance their operations. The bonds give you high returns but they are also high risk as they are unsecured loans. That risk-taking now comes home to roost. For a new venture now the bank will lend you less because the oil in the ground as their security is now worth less. In December 2014 the oil is worth only about half what it was six months ago. So you have to get more of your funding from junk bonds. You end up shelling out more in interest and what’s more you get less in revenue from the sale of your oil.

Michael Snyder says “The impact of lower oil prices has been felt directly by high yield energy bonds and since September they have posted a return of -11.2%. J P Morgan has warned that if oil prices stay at $60 a barrel for three years 40% of the junk bonds could be facing a default.”

Of course other companies finance themselves using junk bonds (as well as bank loans at a low interest rate and their own revenue stream). The energy sector accounts for over 17% of the high yield bond market (junk bonds) and when these are hammered apparently a stock market decline always follows. It’s not a small sector either. Analyst Wolf Richter says there are $210 billion of them.

So they have to sell more bonds. Unfortunately now fewer investors want to buy the risky bonds so that means the yields go up to make it more tempting for investors. As the debt markets dry up and profits fall due to cheaper oil, the funding gap widens.

It was all beautifully explained in October 2014 when oil prices were $85/barrel here

Who loses from this? The investors. And those employed in the oil industry as smaller or more indebted firms are less viable than others. And that is just the start.

But it isn’t only junk energy bonds being affected now. As the Financial Times told us on December 12,
“Investors are fleeing the US junk debt market as a selloff that started in low-rated energy bonds last month has now spread to the broad corporate debt market amid fears of a spike in default rates.” Woops, that wasn’t meant to happen.

2 Oil derivatives. Like other industries over the last few decades of financial wizardry, the oil industry has been financialised.

Remember when housing debt was bundled up by the banks, securitised, divided into tranches according to risk, and sold off? It was to increase the profits of the banks. You just pass the risk on. The bonds are sold to unwary buyers who don’t realise the risk for massive losses. The whole process was enabled by rating agencies who rated junk bonds (the risky ones have high returns) as A++. A great movie explaining all this was The Inside Job.

Now we have version 2 of the same script. Instead of CDOs (Consolidated Debt Obligations) we have got CLOs (Consolidated Loan Obligations) – just a different name this time. It’s what is called ‘leveraged loans.’

The 6 largest ‘too big to fail’ banks control $3.9 trillion in commodity derivatives contracts. A large portion of this is in energy. And the big banks of the world are on the other end of derivative contracts.

One of the headlines of a tweet going round is “Plummeting Oil Prices Could Destroy The Banks That Are Holding Trillions In Commodity Derivatives”

There is nowhere to hide. As the entire global economy is dependent on the six biggest banks, we will all be affected, even in New Zealand.

The Oil Industry is not just any old industry
Writing on Zero Hedge in October when oil was $75/barrel, Michael Snyder explains the huge investment of the energy industry in both capital expenditure and R&D.

He quotes the Perryman group on the economic effects of the oil industry in US alone:
If you think about the role of oil in your life, it is not only the primary source of many of our fuels, but is also critical to our lubricants, chemicals, synthetic fibers, pharmaceuticals, plastics, and many other items we come into contact with every day. The industry supports almost 1.3 million jobs in manufacturing alone and is responsible for almost $1.2 trillion in annual gross domestic product. If you think about the law, accounting, and engineering firms that serve the industry, the pipe, drilling equipment, and other manufactured goods that it requires, and the large payrolls and their effects on consumer spending, you will begin to get a picture of the enormity of the industry.

The combination of junk bonds and financialisation
Putting these two first effects together, former Reagan budget chief David Stockman, in an analysis on his “ContraCorner” website Dec. 9, wrote: “The now-shaking high-yield debt bubble in energy is $500 billion — $300 billion in leveraged loans and $200 billion in junk bonds. This is the same estimate EIR has made in recent briefings, of one-quarter of the $2 trillion high-yield market being junk energy debt. In that junk energy debt market, interest rates have suddenly leaped, in the past 45 days, from about 4% higher than “investment grade” bonds, to 10% higher; that is, credit in that sector has disappeared, triggering the start of defaults of the highly leveraged shale companies and their big-oil sponsors.”

“In the larger, $2 trillion high-yield debt market as a whole, interest rates have also risen sharply, so far by 2-2.5%: i.e., contagion. Whether the debt collapse will be “mini”, or maximum, may be determined in the markets for $20 trillion in commodity derivatives exposure.

“So now we come to the current screaming evidence of bubble finance—–the fact that upwards of $500 billion of junk bonds ($200B) and leveraged loans ($300 B) have surged into the US energy sector over the past decades—–and much of it into the shale oil and gas patch.

“An honest free market would have never delivered up even $50 billion wildly speculative ventures like shale oil extraction million of leveraged capital—let alone $500 billion— at less than 400bps over risk-free treasuries to.”

The simple fact is low oil prices kill millions of jobs. Falling oil prices are dangerous. While readers of mainstream media, listeners to radio and watchers of television remain in blissful ignorance of the nightmares that fund managers are living through, they will celebrate Christmas as though nothing had happened – and then ask later why nobody warned them.

The first Global Financial Crisis came on us with little apparent warning. The Queen was famously known to ask “ Why did nobody see this coming?”

For the last five years since QE, energy companies have received super cheap financing. Quantitative easing, where the Fed created trillions of dollars for banks, was a gift to the capital-intensive energy industry. Moreover job creation has been huge. Bloomberg reports Employment in support services for oil and gas operations has surged 70 percent since the U.S. expansion began in June 2009, while oil and gas extraction payrolls have climbed 34 percent.

It doesn’t matter whether the trigger for this fall was OPEC punishing the shale industry, falling demand in China, the end of QE or what it was. It was going to happen anyway and the trigger might have been anything. The whole pack of cards simply has to tumble. It’s a cauldron of death brought to the boil.

But many have seen it coming – Nicole Foss and Raul Ilargi Meijer of The Automatic Earth, Michael Snyder, Gail Tverberg, Jesse Colombo, Wolf Richter, Yves Smith are a few names that spring to mind. It’s just that haven’t been listened to yet. Whether is it the Tulip Bubble, the South Sea Bubble or the housing bubble of 2007, bubbles have a nasty habit of bursting.


Reserve Bank of NZ may explain money creation to the public in a new video

Reserve-Bank-of-New-Zealand-generic-GettyHere is our 8 Nov 2014 letter to the Governor of the Reserve Bank of New Zealand on money creation and their reply. It is encouraging to think that they are contemplating producing a video explaining how money is created in New Zealand and we await it with interest. Hopefully it will start to make an effect on the media and will start to change their erroneous and misleading reports that the banks are only intermediaries. The public owns the Reserve Bank of NZ and we deserve to have the truth. Moreover they have an obligation to train the media on the topic of money creation and to correct any wrong impressions that are given by any media. The public is not stupid. More and more people are starting to understand that the bulk of the money in the country is created by private banks as credit and are starting to ask whey private banks should have this unique privilege.

We also note in their reply they didn’t challenge our statement about over 98% of the money supply being created by private banks.

The Governor
Reserve Bank of New Zealand
PO Box 2498
Wellington 6140

Dear Sir,

Re What is Money video
You posted your animated video What is Money? at http://www.rbnz.govt.nz/research_and_publications/videos/whatismoney.aspx
We have some questions to ask you:

1. Why don’t you tell the truth about money creation to the public of New Zealand? You give the impression that the Reserve Bank issues all of it – not just coins, notes. It makes no mention of the fact that over 98% of our money is created by banks as credit. It tells us that notes and coins are backed by the government, but fails to mention that bank credit is backed by government too. It omits any mention of bank credit, a major flaw in the whole video.

2. Are you aware that economists from the IMF have recently published papers on money creation, (see Michael Kumhof and Jaromir Benes https://www.imf.org/external/pubs/ft/wp/2012/wp12202.pdf)? The Bank of England’s Michael McLeay, Amar Radia and Ryland Thomas have also published papers and released videos (see http://www.bankofengland.co.uk/publications/Pages/quarterlybulletin/2014/qb14q1.aspx) Both of them tell the truth to the public that the bulk of money comes from interest bearing debt created by banks.

3. Will you now do a video as a real contribution to Money Week, telling the public the truth?

4. Are you aware that the UK Parliament will have a three hour debate on money creation on November 20th? See http://www.positivemoney.org/2014/11/uk-parliament-debate-money-creation-first-time-170-years/

Yours sincerely
Deirdre Kent and Phil Stevens
New Economics Party

And here is the reply on email 9 December 2014:

Dear Ms Kent and Mr Stevens

Re What is Money video

Thank you for your interest in the animated video What is Money? that we published recently on our website, and thank you again for following up on the lack of response to your letter.

In response to your specific questions:

1. As implied by the title, the video explains what money is and as you’ve clearly identified it does not attempt to explain money creation. I note that the video is not titled “Where does money come from?”

2. Yes, the Reserve Bank is aware of papers from the IMF and the Bank of England and the associated video. Indeed, we’ve published similar material ourselves here:www.rbnz.govt.nz/research_and_publications/reserve_bank_bulletin/2008/2008mar71_1lawrence.pdf

3. We are currently planning our multimedia and web content for the next year and we may indeed create a video that covers money creation. As you’re not doubt aware, it is a popular topic and the paper referred to above is unlikely to be as accessible as a video presentation.

4. Yes, the Reserve Bank is aware of the UK Parliamentary debate. The Hansard record is here: http://www.publications.parliament.uk/pa/cm201415/cmhansrd/cm141120/debtext/141120-0001.htm#14112048000001

Regards

Deirdre Hanlon
Knowledge Advisor
RBNZ


We urge you to write to the Reserve Bank to ask them to create and publicise this video on money creation and to take responsibility for educating the media on the topic of money creation. Either a hard copy letter to the Governor, RBNZ, PO Box 2498, Wellington 6140 or send an email rbnz-info@rbnz.govt.nz to them.