Recession/Interest rates. This is going to end badly!

[topcropper]

I believe Australia is going into a severe recession, and this has been obvious since China hit the wall. In hindsite it was crazy to think China could decouple from the rest of the world.

I also believe the economic crisis has been mainly caused by the entire western world living beyond it's means in a debt funded orgy. A lot of growth wasn't real, it was all an illusion funded by debt. The sub prime and the subsequent debt crisis were just the trigger that set everything off. This bust was always going to happen, it just needed an event to get things started. So, it's started, and now the developing world has been bought down too. This was always going to happen with globalisation.



So, was Keating right all along..??
Is this world wide fiscal stimulation going to work..??
Are low interest rates leading us to a disaster..??
It could be argued that it's low interest rates that caused the bubble in the first place.

As you get older you start to see things differently. I went through the Keating recession. My family owed 500k at one stage, and we paid at the top, 22% interest rates. It was only good luck that we survived. I've always hated the man ever since.

However, what if Keating was right? What if slashing interest rates and government induced stimulous is the exact wrong thing to do? I suspect a lot of the people on here who I respect the most, and who have reduced debt, lived and suffered through the Keating recession. I think with whats coming up, I'm glad I went through it.

I think, especially in Australia, that we inevitably have to drop our standard of living. The commodity boom is well and truely over, and historically, commodity booms have never ended when supply catchs up to demand, they have ended with global recession.



Oh dear..!!

We have a massive problem coming up with the current account deficite. We either lower our spending and standard of living, or the current account deficite will explode. There is no getting around this potential disaster waiting to happen. Even with the commodity boom, our imports were growing faster than our exports. The commodity boom ment that we didn't need a manufacturing industry. Our export income has now been slashed. We now have a problem. We didn't have any problem at all while the commodity boom was happening.

If/when the current account deficite explodes upwards, our economy we be seen as a disaster waiting to happen and the dollar will crash even further. The market will do it's thing here.

If I'm right here, then slashing interest rates to pump start the economy is the wrong thing to do. It will just keep the bubble in everything propped up. The bubble needs to deflate, and the quicker it does, the sooner everything can get back to normal again.

I think global governments need to see reality.



I see things differently to most here. Being a commodity exporting farmer, you get a completely different perspective to a city person with a services based job. I said even at the top of the bubble that Australia would be in big trouble if the commodity boom ever finished. I thought it would continue for a decade or more. How silly of me?



I found this on the unmentionable forum,....

http://petermartin.blogspot.com/2009/01/saturday-insight-our-problems-are-worse.html

However, this blokes views make a lot of sense to me. The best bit of the whole article is a bit about from Gerry Harvey,...

......."Gerry Harvey of the retailer Harvey Norman says he's not that fussed about getting people back into his stores in the short-term. He'd rather the government concentrated on making Australia productive".......

I feel the same way. I would rather some short term pain, rather than trying to keep the bubble pumped up.

I wouldn't be pumping up the residential property market by the FHOG. I wouldn't be dropping interest rates further, and I think higher interest rates would be more sensible. I'd be slashing immigration now before unemplyment gets too high. I wouldn't be giving tax cuts. I wouldn't giving crazy cash handouts to increase retail spending. I'd instead be spending money on Australia's infrastructure. This would employ people and better prepare Australia for the future.

Good luck everyone. Cheers.

 

[boomtown]

TC

You are focusing on long term solutions. Reality is we need both short and long term solutions.

 

[Unit]

The commodity boom is well and truely over

Is it over for 2 years, 5 years, forever??

Will Australia just return to pre commodity boom levels of prosperity or has too much debt been accumulated since.

With a growing world population to feed can our agricultural sector pick up any slack if drought conditions recede?

 

[Nathan]

TC well detailed post..

few points, i dont like labor one bit. however keating said the dumbest thing, at the dumbest time with his recession we had too have, however in a lot of cases this was true. in short the recession, decreased the expansion of the money supply and harnessed the debt/inflation from going out of control.

i belive we are setting ourselves up for disaster atm, dont get me wrong im all for low interest rates, and high inflation... however in the grand scheme of things, the government is just paying for its next election win with the peoples money, he is buying free ride home. lowering interest rates, and giving stimulus (that sounds naughty ) only adds fuel too the fire. 1/2 the wall street companys should have went under, the bailut should not have occoured.

in the us they should have gone into recession back in 2000 from memory with the tech wreck but they didnt, then in 2001, but they were saved from that, then in 2004, but they were saved with low interest rates and a housing boom occouring, and then now, they get em all rolled in to one big recession.

it will take a strong chrismatic leader to change this situation we are in @ present.

it is interesting times ahead, very gloomy on the horizon, however belive that some will have big growth periods from this, its just a matter of knowing whats safe and being prepared. at present it appears nothing is safe to park your money in...

goodluck

nath.

 

[topcropper]

Is it over for 2 years, 5 years, forever??

Will Australia just return to pre commodity boom levels of prosperity or has too much debt been accumulated since.

With a growing world population to feed can our agricultural sector pick up any slack if drought conditions recede?

1. Dunno. There will be another commodity boom, dunno when.

2.Yes. Back to before the commodity boom. Problem is though, that we now have less manufacturing, much more % services and our standard of living is so much higher and we are geared to boom times, not bust.

3. Our agriculture sector is too small really to make much defference when compared to the energy and minerals boom. I'm thinking the $A could drop much much further when the real extent of our trade deficite become realised, so agriculture will do really well with say a 40c dollar.

See ya's.

 

[devo76]

If the government was doing a few years ago what it is doing now then i would agree. Yes it would be inflating the bubble. But truth is the bubble is deflating right now. The economy is slowing. There actions are an attempt to reverse or at least stop the backward movement of the economy.There actions will not cause another boom at this stage. If it did you watch those interest rates scream back up again.

It was not that long ago that the doomers were pushing for neg gearing to be abolished in every post because it was the only way to stop house values climbing. And truth is some investors would have become concerned that it actually could happen. Look at were we are now. The government would not think of it as they are now trying to encourage investment. Its not about a boom now. Its about trying to make as soft landing as they can.Nothing they are doing will re inflate at this stage.

 

[boomtown]

You guys are talking like the mining companies are all going to close up shop. Thats not happening.

 

[Piston Broke]

Keating was the guy who seen it coming, and had the balls to say it.

But some people are so simple minded that they believe if your put your head in the sand, you will not see the recession.
This view than pervaded the media which generated some mass hysteria type movement blaming him for recession that had to have, because just like the one we are having, there are no alternatives.
What suprises me is that many people just parroted without giving it any thought.

devo76, neg gearing was not the cause of house prices rising.
Don't forget that goverment started giving away tens of K's to people buying houses, that banks were lending to anybody, that loans could be obtained based on a promise and no income proof.
This was to encourage investment, but the end result was inevitable.
Which is why I agree, it wont be "re-inflating" for a while.

 

[NedKelly]

I think the Keating Recession was a walk in the park compared to what is coming over the next few years. I think that the Keating government did the right thing during the recession.

I know people refer to it as the Keating recession but it was also a worldwide recession as well. The problem we have now is that instead of the government tightening it's belt it thinks it can spend it's way out of a recession which is typical left wing dogma. Duing this recession there were conservative governments in power in the US (Bush Senior), UK (John Major) & Canada (Brian Mulroney). Now we have socialist governments in these countries and they don't believe in belt tightening. Recession are part of the normal business cycle and cannot be avoided, what can be avoided is the depth and in this recession we have a world wide concensus that the way out is to spend, spend, spend.

If you want an interesting simple read on the current situation follow the link to the article "Where did all the money go?" and it will put the 'pump priming stimulation' into true perspective:-

http://www.guardian.co.uk/business/...log/interactive/2009/jan/29/financial-pyramid

We are in for a wild ride! The question in my mind is how do I make money out of it?

 

[Pushka]

I think we should start saying and behaving as though we are going into recession, rather than the current denial and attempts to keep propping us up financially and artificially to avoid going into recession.

 

[ziggy2214]

You guys are talking like the mining companies are all going to close up shop. Thats not happening.

Its not going to happen full stop

 

[topcropper]

You guys are talking like the mining companies are all going to close up shop. Thats not happening.

All I've said is that the commodities boom is over. Nothing about commodities being dead at all. Commodities are the basic building blocks of society, food energy metals etc. The world will always need commodities. Not so financial service companies or other crap I can think of. Besides, I still hold BHP, RIO, WPL, AWE, BPT and most of my assets are in farmland so I'm not exactly the biggest commodity bear there is. Where has anyone on this thread said mining is finished?

The big profits in mining are over for the time being, and this has implications for a commodity exporting country who was geared into the boom times and produces very little else that the world needs.

Boomer, it was just only back in Oct that you weren't even aware of a slowdown, when the stockmarket forecast the slowdown 6 months earlier.

Are you more involved with the bulks, coal and iron ore..?? These haven't even corrected in price yet, but that's because they aren't traded on a market. They are done on yearly contracts, but you knew that eh?

See ya's.

 

[markpatric]

Ok well the US is in what 660 billion deficit?, and now they are printing how much more to bail out banks?, I guess they just print money to pay Obama.
The only answer to my mind is too print more money but it must be spread out equally and fairly to all people, but with a measured subsidy for those small businesses proving to be efficient with regard to the pollution and solutions for future.
Or start a cashless society right now and supply a massive credit on each card to kick it off.
They could easily regulate how and when the credits are used only on essential items such as food/rent etc.
How can anyone go broke if they have money?, they can`t, in effect this would devalue everything at an equal rate and make debt more managable.
But obviously this needs to be accompanied by big reform with regards to governments/big business and the stockmarket.
Instead of paying banks money for nothing would it not be better to pay mortgage holders who in turn make lump sum payments on thier mortgages?.

 

[boomtown]

Are you more involved with the bulks, coal and iron ore..?? These haven't even corrected in price yet, but that's because they aren't traded on a market. They are done on yearly contracts, but you knew that eh?

Yes, yes and yes. The buyers are trying to push contract negotiations forward. The sellers are trying to push contract negotiations back.

Evidently both sides suspect that prices will go back up.

 

[topcropper]

Yes, yes and yes. The buyers are trying to push contract negotiations forward. The sellers are trying to push contract negotiations back.

Evidently both sides suspect that prices will go back up.

I hope your right then.


However my thoughts would be the buyers [Asian steel makers] want the negotiations to happen as soon as possible because they know the new prices will more than halve and this will put them back into profitability.
The sellers [BHP, RIO,] want to delay the contract negotiations for as long as possible, as they don't want the gravy train to end.

Gee's your an optomist Boomer! As are plenty on here. Blind optomists.

See ya's.

 

[topcropper]

in the us they should have gone into recession back in 2000 from memory with the tech wreck but they didnt, then in 2001, but they were saved from that, then in 2004, but they were saved with low interest rates and a housing boom occouring, and then now, they get em all rolled in to one big recession.

nath.

I agree there. The US should have had a massive recession in 2000. The stockmarket was at never before seen multiples. Then along comes Sept 11, and interest rates crash, and off we go again.

See ya's.

 

[boomtown]

I hope your right then.


However my thoughts would be the buyers [Asian steel makers] want the negotiations to happen as soon as possible because they know the new prices will more than halve and this will put them back into profitability.
The sellers [BHP, RIO,] want to delay the contract negotiations for as long as possible, as they don't want the gravy train to end.

Gee's your an optomist Boomer! As are plenty on here. Blind optomists.

See ya's.

I didnt actually give you the full set of information. No matter when the prices are decided, they take effect from the start of the new contract year (typically 1 April or 1 May).

So whether you decide prices on 1 Feb or 1 August, the price change always takes effect on 1 April or 1 May. So the only reason to move the timing of price negotiations around is to maximise negative / positive sentiment.

Maybe its more accurate to say that both sides must think that sentiment is near its worst and will recover over 2009.

 

[chilliaa]

I believe Australia is going into a severe recession, and this has been obvious since China hit the wall. In hindsite it was crazy to think China could decouple from the rest of the world.

I also believe the economic crisis has been mainly caused by the entire western world living beyond it's means in a debt funded orgy. A lot of growth wasn't real, it was all an illusion funded by debt. The sub prime and the subsequent debt crisis were just the trigger that set everything off. This bust was always going to happen, it just needed an event to get things started. So, it's started, and now the developing world has been bought down too. This was always going to happen with globalisation.



So, was Keating right all along..??
Is this world wide fiscal stimulation going to work..??
Are low interest rates leading us to a disaster..??
It could be argued that it's low interest rates that caused the bubble in the first place.

As you get older you start to see things differently. I went through the Keating recession. My family owed 500k at one stage, and we paid at the top, 22% interest rates. It was only good luck that we survived. I've always hated the man ever since.

However, what if Keating was right? What if slashing interest rates and government induced stimulous is the exact wrong thing to do?Increasing lending rates, cutting back on the circulation of cash and the enactment of trade bariers turned the 1930's from a severe recession into the great depression. THe world central banks are determined this time to not follow the same course. I suspect a lot of the people on here who I respect the most, and who have reduced debt, lived and suffered through the Keating recession. I think with whats coming up, I'm glad I went through it.

I think, especially in Australia, that we inevitably have to drop our standard of living.Yes of course it was unsutainable The commodity boom is well and truely over, and historically, commodity booms have never ended when supply catchs up to demand, they have ended with global recession.



Oh dear..!!

We have a massive problem coming up with the current account deficite. We either lower our spending and standard of living, or the current account deficite will explode.This is already happening through reduced consumption and increases in the savings rate. There is no getting around this potential disaster waiting to happen. Even with the commodity boom, our imports were growing faster than our exports. The commodity boom ment that we didn't need a manufacturing industry. Our export income has now been slashed. We now have a problem. We didn't have any problem at all while the commodity boom was happening.Its definately not going to be like before, but i dont see it being as bad as you pointed out. The lower AU$ will cushion the impact, it will depress imports and encourage exports.

If/when the current account deficite explodes upwards, our economy we be seen as a disaster waiting to happen and the dollar will crash even further.by falling further the currency will act as a further buffer, it wont be nice for those wanting to buy TV's but its good for exports, this is why the asian economies for the last 20yrs have been trying to keep their currencies low. The market will do it's thing here.

If I'm right here, then slashing interest rates to pump start the economy is the wrong thing to doStrongly disagree with you here as per above comments. Cutting interest rates will increase bank profitability fastening the spead at which they will encourage lending again (and remember there is good lending and bad lending but both are influenced by the cost of money), it will also enable consumers to pay down debt faster thereby restoring their own balance sheets. It will just keep the bubble in everything propped up. The bubble needs to deflate, and the quicker it does, the sooner everything can get back to normal again.Once again read the history of the catalysts for the great depression

I think global governments need to see reality.



I see things differently to most here. Being a commodity exporting farmer, you get a completely different perspective to a city person with a services based job.Yes but because you are at the front end, could you also have a view that is based on your own circumstances. I said even at the top of the bubble that Australia would be in big trouble if the commodity boom ever finished. I thought it would continue for a decade or more. How silly of me?



I found this on the unmentionable forum,....

http://petermartin.blogspot.com/2009/01/saturday-insight-our-problems-are-worse.html

However, this blokes views make a lot of sense to me. The best bit of the whole article is a bit about from Gerry Harvey,...

......."Gerry Harvey of the retailer Harvey Norman says he's not that fussed about getting people back into his stores in the short-term. He'd rather the government concentrated on making Australia productive".......

I feel the same way. I would rather some short term pain, rather than trying to keep the bubble pumped up.its not about trying to keep the bubble pumped up but let it depressurise slowly.

I wouldn't be pumping up the residential property market by the FHOG. I wouldn't be dropping interest rates further, and I think higher interest rates would be more sensible. I'd be slashing immigration now before unemplyment gets too high. I wouldn't be giving tax cuts. I wouldn't giving crazy cash handouts to increase retail spending. I'd instead be spending money on Australia's infrastructure. This would employ people and better prepare Australia for the future.

Good luck everyone. Cheers.

Dont get me wrong, im not forecasting that things will be restored soon, history shows that debt inspired recessions take a long time to fix. This is not going to be over soon. However i keep emphasising the degree of recession that i think Australia is going to have: what ever happens in the US and UK we will see it to a much lesser extent.

 

[ziggy2214]

Gee's your an optimist Boomer! As are plenty on here. Blind optimists.
See ya's.

Topcropper
Could the same be said for the opposite side?
blind pessimists?
because there is a alot of speculation going around atm

 

[sue78]

It is going to end badly. What's happening now in UK is what's going to happen in Oz soon and UK are officially in a recession.

Some UK companies now have a point system for each employee and the lower points you have, well you will lose your job. It's stupid as I'm sure it's already decided who will go.

Maybe the property market won't be as badly affected coz we have the safety net of negative gearing so there will always be high income earners looking to buy IPs.

I would hold off for bargains for properties and shares. We don't know how long the recesison will last for and how bad it will get yet and I'd rather buy again when the market recovers and is definately on the way up.

The key is don't be too greedy. Lower your LVR, cash is king, don't be encouraged to spend with low interest rates, try to save instead or pay off ppor. If it needs to be, sell an IP, cash yourself up to get over this bleak period which may last for 2 years.....you may lose your job so need to be prepared.