Interest rates: will they or won't they?
Economists are lining up to make their call on whether the Reserve Bank will hike official cash rates at its board meeting next week, even amid signs that businesses and households are cutting back on borrowing.
Any 25 basis point hike at its Tuesday meeting could see mortgage rates offered by some big banks push above the 8 per cent mark. This would be the highest level since November 2008.
This would be even worse news for banks, after data released this morning shows total lending across the economy fell in June for the first time in nearly two years as business credit contracted. The figures also showed housing lending has hit a hump, growing at its slowest pace in at least 27 years.
Private credit dropped 0.1 per cent from May, the Reserve Bank figures showed, after a 0.3 per cent gain the previous month.
But until Wednesday's bigger-than-expected inflation figures, there was a growing view that official interest rates were firmly on hold, while some including the view of the futures market were predicting a cut. But these views are now changing.
Figures released on Wednesday showed Australia's consumer price index rose 0.9 per cent in the three months to June from the previous quarter.
ANZ's economists are among the most hawkish, with a view that official cash rates could rise 25 basis points to 5 per cent on Tuesday.
Ten things you need to know about why the US debt ceiling matters
Here is a list of the 10 things you need to know about the debt ceiling statements - most of them crazy, many of them downright scary:
1. First, a word about debt ceilings
The very idea of the debt ceiling is ridiculous. Like the human appendix, the debt ceiling is a vestigial remnant of history that does no one any good. You only notice it when it is causing pain.
The debt ceiling is a cap set by US Congress on the amount of debt the Government can legally borrow. Politicians agree to raise the debt ceiling every time they vote for a spending hike or tax cut so in reality arguing over the debt ceiling is essentially arguing over whether to pay the bills.
Without an increase to the debt limit by August 2, the Government will run out of cash to pay its bills, which include social security benefits, military pensions, contractor payments and interest on its debt.
The debt ceiling does not provide a meaningful check on US spending. The Government does what it wants and then adjusts the debt ceiling to accommodate the deficits it votes for.
2. Defaulting would be "no big deal"
The people who say this have not thought through the implications of the US Government not paying its bills.
For starters, it would make the debt problem much worse. Interest rates would permanently rise, the financial system would seize up temporarily, and a recession would certainly result from slashing government spending by 10 per cent of gross domestic product for more than a few weeks.
Remember, one definition of a depression is a 10 per cent drop in GDP.
3. Defaulting mean Armageddon for US
Default would be pretty awful, but the sun would come up the next day.
Countries have defaulted before and lost their triple-A rating and they have managed to recover and even return to the markets for loans.
There are things worse than temporarily defaulting on our debts, such as permanently reneging on our promises that we will take care of each other.
4. World prosperity is under threat
Maybe. The markets panicked when Greece, a country with GDP of $US330 billion, was close to defaulting - imagine then the fallout when a country with a $US14 trillion economy nudges much closer.
No agreement sends a message to creditors that the US could pay but decided not to. That will dent the credibility of the world's largest economy.
While that doesn't necessarily dictate that bond and credit markets will react negatively, it does mean that upward pressure will be placed on interest rates in the US.
For international markets, it would reduce the liquidity in the US, which in spite of its current predicament, remains one of the largest debt markets to which global economies look for loans.
However, the US can currently borrow at very low interest rates. If government borrowing were really crowding out private investment, you would see it in the bond yields.
The US can afford to repay its debts - easily.
5. Australia will escape this time
According to the OECD, we should be fine. Its deputy director, Adrian Blundell-Wignall, says Australia’s links to China would act as a buffer.
"As long as growth is there in the emerging markets then what is happening (in the US and Europe) won't affect Australia,'' Dr Blundell-Wignall said.
But if the Australian economy does tank, we know who we can blame.
6. The US must cut government spending
Balancing the budget immediately would be a catastrophe. Even large budget cuts would make the very weak recovery stall.
It is simple arithmetic: What the government spends becomes someone's income, which they in turn can spend. Cutting government spending (or raising taxes) means cutting disposable incomes, and that means cutting economic growth.
That is why we do not want any of this budget balancing to take effect for at least a couple of years.
Once growth is stronger, the government can reduce spending and raise taxes without hurting the economy.
7. Listen to Standard & Poor's and Moody's?
These are the folks who missed the greatest bubble in history and are now trying to make up for it by causing another recession by urging deficit reduction. Even if the debt ceiling crisis passes, they have threatened to lower the US's credit rating, even though it can easily afford to pay back its debts for the foreseeable future.
8. Can't the President just sort this out?
This is the plan proposed by Senate Republican Leader Mitch McConnell, who suggests a legislative sleight-of-hand to make Barack Obama responsible for the debt ceiling.
Sorry, Mitch, but if you read your Constitution, you will find that Congress is responsible for the debts, the spending and the taxes. Man up.
9. No tax increases, no welfare cuts
These ultimatums are pure politics. Americans are not overtaxed, either in historical terms or in comparison with other advanced nations. It does, however have a revenue problem.
By the same token, welfare programs are part of the long-term budget problem, so they should be part of the solution.
Remember, deficits are the result of spending exceeding revenue. Both sides of the equation count
10. The US should mint a $1 trillion coin
This is an idea that is bouncing around some of the blogs. The basic idea is right: The US Treasury does not actually need to borrow any money at all to pay its bills.
Why not? Because Treasury can unilaterally create money out of thin air.
So, the idea to get around the debt ceiling is for the Treasury to mint a one-ounce, $US1 trillion palladium coin and deposit it in the Treasury's bank, the Fed.
(Under the law, the monetary value of any coin has no relation to its metallic value.)
The Fed would credit $US1 trillion to the Treasury, which could use it to pay the USA's creditors.
It is a brilliant and creative idea in theory, but in practice it would be almost as devastating to the full faith and credit of the United States as a default would be.
If this gimmick were used only once in an emergency, that would be one thing. But once the Government got the idea that this sort of alchemy is an option, it would use it all the time.
Inflation - perhaps hyperinflation - would result from overuse of the alchemy/seigniorage option. Do not go there.
Where to now?
So what should the US do? It is pretty simple. Pass the increase in the debt ceiling so we can pay our obligations in full and on time.
Then have politicians do their jobs: Talk, negotiate, bargain, plead, threaten, bluster, pontificate, legislate and cast votes until they have figured out in a transparent and democratic fashion how to stabilise public debt at a sustainable ratio, setting spending, taxing and borrowing at levels that the US can live with.
courtesy of The Telegraph UK
House prices ease in June
Home values eased in June, following three consecutive months of falls, but low consumer confidence, the Eurozone and US debt crises, and fears of an interest rate rise are still affecting the market, the latest RP Data-Rismark home value index has found.
Capital city house price declined 0.2 per cent in the month, seasonally adjusted, while year-on year prices were down two per cent.
The result followed on from losses in the preceding five months, but had improved since falling heavily in January.
"While the June result was technically the sixth straight monthly correction in capital city home values, the rate of decline has been moderating since January when capital city values fell by 1.2 per cent, seasonally adjusted, over that month alone due to the natural disasters along the east coast of Australia," RP Data-Rismark said.
RP Data’s research director Tim Lawless said the effects of the January natural disasters were "washing out" of the numbers, but the dented confidence continued to impact property values.
“Market conditions are clearly being dampened by low levels of consumer confidence fuelled by interest rate speculation and global economic jitters," Mr Lawless said.
"The higher than expected CPI figures earlier these weeks are likely to reignite the interest rate debate which is not going to assist with an improvement in consumer
sentiment.”
courtesy of The Business Spectator
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