Every country is borrowing money....who from???

[FenceFurniture]

When you borrow money, it comes from someone else or a bank or whatever.

At the moment, it seems that every country in the world is borrowing money to deal with the economic catastrophe brought on by the coronavirus.

Where does it come from?

[Lappa]

I read that some countries are simply printing.

[woodPixel]

How come Australia suddenly has billions of dollars to pay for welfare? - Hack - triple j (https://www.abc.net.au/triplej/programs/hack/coronavirus-covid19-how-australia-is-paying-for-welfare/12133292)

[DomAU]

When you borrow money, it comes from someone else or a bank or whatever.

At the moment, it seems that every country in the world is borrowing money to deal with the economic catastrophe brought on by the coronavirus.

Where does it come from?

Australia, Japan, the USA and Europe are undertaking quantitative easing which basically means that the Government issues Bonds which are sold on the market and purchased by private investors, banks, hedge funds, super-funds etc and then are purchased from them by the central/reserve banks. The central banks are generally not allowed to buy government bonds directly but can on the secondary market. They are also buying up corporate bonds and i the USA even junk bonds (BBB or lower rated) By buying up the bonds the central banks are effectively lending money (that didn't exist up to that point - the central banks create it) to the Government and corporates and also bid up the price of the bonds which effectively pushes down the yield or interest rate paid - thus 'flattening the yield curve'or reducing interest rates.

The reserve banks build their balance sheet by buying these securities and effectively 'print' that amount of money into the financial system(it's not physically printed just electronic spreadsheet numbers). The idea is that they will later sell these bonds into the market and drain this excess liquidity. But so far it seems the process can never be reversed without crashing the markets so it's effectively just inflating the money supply or monetising the debt.

Cheers, Dom

[PJM16]

It's been like that for a long time. Everybody is in debt, but who are they in debt to? The Labor Party are especially good at getting Australia in to debt.

[AlexS]

The Labor Party are especially good at getting Australia in to debt....and getting Australia out of trouble.

[FenceFurniture]

It's been like that for a long time. Everybody is in debt, but who are they in debt to? The Labor Party are especially good at getting Australia in to debt.PJM, I'm not looking to have this thread politicised. It was a question about economics, not politics.

[Beardy]

How come Australia suddenly has billions of dollars to pay for welfare? - Hack - triple j (https://www.abc.net.au/triplej/programs/hack/coronavirus-covid19-how-australia-is-paying-for-welfare/12133292)

I think if you believe this you also believe in the easter bunny. I get what they are saying when interest rates are so low but it is not always like that
If it was that simple any third world country with a printer could print enough wealth to sort their problems

One of the financial gurus said that funding this emergency is easier than the last GFC because interest rates are so low

[Fekit]

Where does it come from?

It comes from the future.

[elanjacobs]

If it was that simple any third world country with a printer could print enough wealth to sort their problems

Zimbabwe went overboard with that idea and their currency became so worthless that they ended up with 1 trillion dollar bank notes before abandoning it entirely

[FenceFurniture]

If it was that simple any third world country with a printer could print enough wealth to sort their problems Beardy, I think what changes that is this bit:
"A country also takes a debt out against its asset, which is the Australian people and their productive capacity as a nation. But Australia will always be here producing goods and services, unlike a car or a house which can be taken away. As long as we keep producing goods and services and money keeps flowing through the economy, the national debt never has to be repaid."

Not so sure about that very last bit (others in the know can comment on that) but a third world country doesn't have that production power for goods and services, and they also often have enormous inflation which shoots down Modern Monetary Theory.

So the way I understand that, as an analogy, is that a company doesn't have enough money to hire "Superman" who would be able to increase the production of the company significantly. They borrow the money to be able to hire him and purchase the requisite equipment for the production increase, betting against the increased income allowing them to service the debt. As long as the company stays productive, and there is sufficient demand for their produce, all is well.

BUT
isn't that a little bit like a pyramid scheme, or is there a part that I'm missing? Certainly we can always expect that there will be demand for Australia to produce the goods and services, but demand can be quite variable as we are seeing writ large at the moment. Demand for Oil and South Sea Island cruises is non-existent but demand for computer monitors is enormous, and further screwed up by a huge lack of supply because they all come from South Korea and China.

How am I going there?

[FenceFurniture]

Zimbabwe went overboard with that idea and their currency became so worthless that they ended up with 1 trillion dollar bank notes before abandoning it entirelyI think there was also an underlying problem for Zimbabwe: their ultra corrupt dictator president just would NOT die!

[Mobyturns]

I think the most appropriate answer is "we are borrowing from the future" our children and grand children will be saddled with the burden of this corona virus stimulus / recovery debt. As Dom states its a balancing act, how far is to far?

[FenceFurniture]

I think the most appropriate answer is "we are borrowing from the future" our children and grand children will be saddled with the burden of this corona virus stimulus / recovery debt. As Dom states its a balancing act, how far is to far?Yes but any borrowing by any person or entity is from/against the future. It's the very definition of borrowing. The opposite is to pay for stuff out of existing money, that is, spending the past.

Around 6-12 months ago I read that Norway is now so rich from oil revenue that it is becoming a problem. They have nowhere to put the money (or something like that). I don't understand how that creates a problem though. Maybe they need to urinate it up the wall on Rollers, Miebachs and private jets like the Middle East did. :doh:

[FenceFurniture]

Around 6-12 months ago I read that Norway is now so rich from oil revenue that it is becoming a problem. They have nowhere to put the money (or something like that). I don't understand how that creates a problem though.Further to that, I don't understand why they can't use this excess money build stuff for the future that will help them create revenue then, or create stuff that will reduce future expenditure. I dunno, something along the lines of a stockpile of super-efficient wall building materials for future constructions that will reduce their heating bills to negligible. There must be SOMETHING they can do with the money.

As we have discussed in another thread, there is only about 50 years worth of oil left in the world (not sure where Norway's reserves lie in that figure), so just like the Middle East, Norway will run out of this revenue. It may be sooner than 50 years too - that's the supply forecast at current demand, but when electric vehicles get going bigly (:D) the demand will drop away at a pretty steady clip. Not completely, but enough to cause revenue pain.

[woodPixel]

I think if you believe this you also believe in the easter bunny. I get what they are saying when interest rates are so low but it is not always like that
If it was that simple any third world country with a printer could print enough wealth to sort their problems

One of the financial gurus said that funding this emergency is easier than the last GFC because interest rates are so low


It was a contemporaneous news article that stated the facts without too much spin. It was a decent explanation of what is happening without getting too deep into it.

What is happening right now, in the USA, Europe and here ****IS**** "money printing".

It is a game - inflation, interest rates, central bank trust, bonds - its all a game.

I wouldn't say I'm a guru, but I know how "money" really works and why the system is fundamentally broken. My eyes are wide open. It only works because people want it to work.

Nobody has sound money. Nobody has money backed by assets. It will all eventually come to grief.

I find it interesting how easy it is to distract people with what the real woes of the financial world are. If you want to see the future, do a quick google around for "outstanding derivatives". That will may you spray your tea! (ok, I'll let a cat out of the bag, its $1200 trillion).

The worlds debt levels are about to hit high gear, so will inflation, deflation AND an unholy unstoppable unwinding of every bank.

I'm not sure how it will be stopped.

[Simplicity]

Yes but any borrowing by any person or entity is from/against the future. It's the very definition of borrowing. The opposite is to pay for stuff out of existing money, that is, spending the past.

Around 6-12 months ago I read that Norway is now so rich from oil revenue that it is becoming a problem. They have nowhere to put the money (or something like that). I don't understand how that creates a problem though. Maybe they need to urinate it up the wall on Rollers, Miebachs and private jets like the Middle East did. :doh:



I would be happy to help Norway spend money if they need a hand , I’m just a helpful kind of guy.

Cheers Matt

[GraemeCook]

......
The worlds debt levels are about to hit high gear, so will inflation, deflation AND an .........


So, we are going to have inflation and deflation at the same time?

[clear out]

‘Trillion Dollar Baby’ by Aus author Paul Cleary.
How Norway out smarted the oil industry and secured its future.
Read it and weep.
Ditch the witch and all that plus we gave away our natural gas for how many years.
Thank got de livalls are beck in power!
H.

[woodPixel]

So, we are going to have inflation and deflation at the same time?


Correct. Violent. Both. At the same time.

edit: Sorry, I should have added this - Biflation Definition (https://www.investopedia.com/terms/b/biflation.asp)

We studied this at Uni in Economics in 1996. It was something that interested me. :)

edit 2: this EXCELLENT and reasonably old article describes it perfectly: Are Simultaneous Inflation and Deflation Possible? (https://survivalblog.com/are-simultaneous-inflation-and/) Ignore the rest of the site. They are nuts.

[GraemeCook]

https://www.woodworkforums.com/images/misc/quote_icon.png Originally Posted by GraemeCook https://www.woodworkforums.com/images/buttons/viewpost-right.png (https://www.woodworkforums.com/f43/country-borrowing-money-234180-post2184708#post2184708)

So, we are going to have inflation and deflation at the same time?




Correct. Violent. Both. At the same time.

edit: Sorry, I should have added this - Biflation Definition (https://www.investopedia.com/terms/b/biflation.asp)

We studied this at Uni in Economics in 1996. It was something that interested me. :)

edit 2: this EXCELLENT and reasonably old article describes it perfectly: Are Simultaneous Inflation and Deflation Possible? (https://survivalblog.com/are-simultaneous-inflation-and/) Ignore the rest of the site. They are nuts.


Amusing articles. But like most grand conspiracy theories essentially lack credibility.

[Kuffy]

Let's see if I have things correct...

Australia is selling bonds to itself purchased with borrowed money at super low interest rates. Those interest rates are lower than current inflation levels, and therefore the difference between the interest rate and the inflation will be what pays the loans back? And if that is correct, surely it would be a great time to hold no cash and only hold "hopefully" appreciating assets because interest rates will need to remain low for decades while inflation stays high enough without going way too high to cripple us?

In summary, buying just about any asset now is a no brainer?

[Pat]

The analogy comes to mind, if you owe the bank $100, it's your problem. If you owe the bank a Mil, it's the banks problem.

[DomAU]

Let's see if I have things correct...

Australia is selling bonds to itself purchased with borrowed money at super low interest rates. Those interest rates are lower than current inflation levels, and therefore the difference between the interest rate and the inflation will be what pays the loans back? And if that is correct, surely it would be a great time to hold no cash and only hold "hopefully" appreciating assets because interest rates will need to remain low for decades while inflation stays high enough without going way too high to cripple us?

In summary, buying just about any asset now is a no brainer?

You have some of it correct, but unfortunately it's not that simple. Yes, the Australian government is effectively borrowing money at super low rates that are created by the reserve bank through the purchase of bonds (debts) - and those purchases are predominantly Government bonds in Australia (in the USA they have moved to nearly every type of bond - corporate etc). Yes the interest rate is likely below the level of inflation, however there are also significant down-ward pressures on inflation (in consumer prices) such as lack of demand, and ever increasing technology (at an exponential rate) - and the government can use this to their advantage, allowing them to borrow more (create more money) without, hopefully, pushing CPI up too much and creating an inflation problem. Creating a heap of money (debt) does push up prices, although it seems that in most countries (including our own) this is mainly limited to the price of assets like stocks and housing not consumer goods. At the moment, given that we already had a record level of debt (private) in Australia and a lot of corporate debt, and the fact that the economy has been virtually stopped, this is putting a lot of deflationary pressure on assets like stocks and housing. Depending on how much money is injected by the government (through debt issuance) it may push asset prices higher or they may collapse anyway, or we may get high consumer price inflation if supply is depressed due to collapsing industry/business and too much demand.

The Government and Reserve bank are just desperately trying to prevent a complete collapse in the debt market, destruction of asset prices, and a complete liquidity freeze / crisis, as well as prevent a complete stop to the real economy. They would be hoping that this will lead to a better outcome post-COVID and that maybe, we will be able to pay back the debt at some stage in the future via a combination of inflating away the debt and real growth in productivity/the real economy. If they print too much money / create too much debt then we may reach a point where nobody believes that it will ever be able to be repaid, international investors will refuse to buy Australian bonds / securities, and we will have hyper-inflation as the Reserve bank ends up having to buy all of the bonds to stop the market collapsing and the Government will spend ever more money to try and help people / stimulate the economy.

However, in effect, the Government / Reserve bank is effectively trying to dig out of a hole. The best they can succeed is to delay an even bigger collapse in the debt market and asset values (either nominally or in real-terms if we have high levels of inflation). In the process they create all sorts of distortions in the market, unfair outcomes, and a re-distribution of wealth not based on any kind of merit.

At the moment, it's hard to know where to put cash as many assets are already hugely over-valued, and it's still possible that we see deflation even in many consumer items. My personal opinion, however, is that houses will lose a large amount of value, the share market likewise, and any non-technology based consumer goods will increase in price significantly over time - especially basics - and of course woodworking tools ;). Precious metals may serve as a store of value as they have in the past, and crypto-currencies maybe - although I personally don't think Bitcoin etc have a future. Cash may still be a good option vs stocks and property at the moment - provided that the banks don't collapse given their reliance on property debt (and don't think that the "government guarantee" is a sure thing).

Sorry a bit too much of a rant off-the-cuff.

Cheers,

Dom

[Kuffy]

Awesome! Thanks Dom. It sounds like a game of battle chess, but instead of capturing and killing the king, the aim of the game is to keep the game running as long as possible.

[Chris Parks]

I know nothing about this stuff but I read an article many years ago of how Japan's economy was stalled and they began building huge infrastructure projects to kick start the economy and it failed to do that. Many Japanese were hoarding gold at home because holding money in cash in a bank meant a loss. All this while they had a booming automotive and electronics export business bring in huge amounts of cash.

[doug3030]

Most people on this forum re old enough to remember the craze in the 1990's of investing in ostriches.
Chris Griffith - Alarm bells are ringing in Australia's ostrich industry (https://www.chrisgriffith.com/1990s/1996/ostrich1.html)

Basically a pair of imported breeding ostriches could be bought for $90,000. This was considered a good deal because a female ostrich was able to lay 70 eggs per year for 40 years or 2,800 eggs and eggs were selling for over $1,000 each which meant a return on your $90,000 of $2,800,000 (less expenses) over 40 years.

Trouble is - nobody actually wanted ostriches. They wanted money. The actual worth of an ostrich was negligible as an end-product in its own right. Birds were worth so much because they produced eggs that were worth so much because they produced birds that were worth so much etc etc.

Once people realized that, the whole thing collapsed in on itself.

It's like today with houses. A house is worth say $650,000 because you can rent it out for $2,000 per month and expect it to appreciate by say 10% per year. The only reason you can reliably rent out a house for $2,000 per month is because the government subsidies the rent for low income earners so that they can afford it so that investors can pay $650,000 for houses.

Look at the Share Market. Shares are worth what they are worth because of the net worth of the company and their capacity to increase in value and pay dividends. People investing in shares used to get a prospectus and study the company to determine if they are a god investment or not. Many still do that.

But somewhere around 2000, as I recall, there were businesses selling lessons in share trading. They taught people how to look for trends in trading figures on graphs and manipulate data in spreadsheets. They had no clue of the worth of the company they were investing in or even what they did in many cases. They made decisions based on a share price moving by a Fibonacci ratio or the eight-day moving average crossing over the 15-day moving average.

These buy and sell triggers actually worked because so many people were using them that when one of them occurred, heaps of people responded to them because they had all done the same course and were following the same triggers. With everyone trying to buy, of course the prices went up. But it was not based on any actual improvement in the actual value of the stock, and therefore not sustainable. Yes, people could actually make money out of riding these artificial waves if they bought and sold according to the otherwise meaningless triggers. Every now and then the market has a "correction" when common sense prevails and all the over-inflated prices come tumbling down. Smart people see these coming and are able to exploit them to their advantage but a lot of people get burnt.

Woodpixel has already discussed the value of money, so I won't expand on that, but the upshot of it all is that the value of EVERYTHING exists just because we all agree that it does. We are seeing negative interest rates in some countries and that is just crazy. Imagine your mate asking to borrow $100 today and give you back $95 at the end of the month and you call it square?

Well the Covid-19 situation has a lot of the movers and shakers of the world re-evaluating the worth of EVERYTHING. Lots of things in the world will be getting restructured. Some people will adapt and prosper, others will not do so well. Lots of things will change in the aftermath of this. Nobody can predict the outcome entirely but there are some in this world who will be able to influence it in their favor at the detriment of others as usual. We can probably expect to be paying a lot more for some things than we have in the past as the world will probably decentralize manufacturing and other restructuring takes place.

The fact that closing down parts of he economy for only a few months are now believed to be going to need to be paid for by future generations for decades means that the whole thing is being run too tight with no reserves for too long. The whole world is living from paycheque to paycheque and paying interest on loans like a poorly run household. Decades to repay what is lost in a couple of months is ludicrous.

EDIT: Please note that this post is all oversimplified for the sake of brevity and ease of understanding. The actual forces at play are of course much more complex. Please don't try to score cheap points about the bits I left out or simplified.

[Chris Parks]

People say that our habits will change, they said the same thing after the GFC but after a few years we reverted to exactly the same behaviour of using debt to buy happiness or what we think is happiness. It took a lot of marketing to sell that idea to us but it worked and those who sold it made a lot of money. Whether this event has a permanent change on human behaviour is doubtful and the jury is still out.

[Beardy]

Doug3030 I don’t completely agree with you on the values, I think it works the other way around.

A products value goes on supply V demand be that it is paid for by money ,barter, pigs or whatever, that has been the case long before our current monetary system.
Housing prices are dictated by demand largely by the owner occupiers who are the majority of buyers. Investors just fit into that pricing structure looking at price they need to pay V rent dollars the market will tolerate and will purchase only if it is deemed a good investment. Demand is largely controlled by the banks willingness to lend money.

[woodPixel]

Amusing articles. But like most grand conspiracy theories essentially lack credibility.

When I was at school, it was often observed that I thought a lot. Thinking things through.... I was often roused by the teachers due to my deliberate brevity. When asked a question, for example in maths, I simply wrote the answer.... No workings.

English was the same. I simply wrote the answer, often in five words.

It was explained that my brevity was because I didn't know the answer. Perhaps this is true (I'll never know... Dunning Kruger and all that). Shame though that the answers were always right.

A for answer, E for explanation.....

What I found distressing and still do, is that a simple explanation is often not taken seriously due to its source, or simplicity, rather than its inherent correctness.

It has often crossed my mind that being an economist or weather forecaster is a great job. One can be wrong every single day and still have a job.


Alas, one can only ever lead the horse to water.

[doug3030]

When I was at school, it was often observed that I thought a lot. Thinking things through.... I was often roused by the teachers due to my deliberate brevity. When asked a question, for example in maths, I simply wrote the answer.... No workings.

English was the same. I simply wrote the answer, often in five words.

It was explained that my brevity was because I didn't know the answer. Perhaps this is true (I'll never know... Dunning Kruger and all that). Shame though that the answers were always right.

A for answer, E for explanation.....

I can relate to that Evan. Nobody was ever able to give me a sensible answer as to why I should have to show the working as long as the answer was right. They used to argue that if I didn't show the working they would not be able to find out where I went wrong. I told them that didn't matter because if I got it wrong I would make sure I found out what I did wrong.

Interestingly, they only ever seemed to take the matter up when the answers were all right, never on the rare occasion when one was wrong.

[GraemeCook]

..... We are seeing negative interest rates in some countries and that is just crazy. Imagine your mate asking to borrow $100 today and give you back $95 at the end of the month and you call it square? ......


Interesting statement, Doug. But negative interest rates are not unprecedented.

I first struck it some thirty years ago when my employers office in Geneva, Switzerland had leases for office space and employee's housing. Like many leases, these had CPI adjustments and the inflation was negative, so after each rental review the rents were decreased. Switzerland has also had periods of negative interest where the customer basically pays a storage fee for the bank looking after their money.

In fact, if you add up the miriad of small charges and fees that the banks charge their Australian customers I would guess that many customers have effectively been earning negative interest for years!

[doug3030]

Interesting statement, Doug. But negative interest rates are not unprecedented.

I first struck it some thirty years ago when my employers office in Geneva, Switzerland had leases for office space and employee's housing. Like many leases, these had CPI adjustments and the inflation was negative, so after each rental review the rents were decreased. Switzerland has also had periods of negative interest where the customer basically pays a storage fee for the bank looking after their money.

Interesting that there was negative interest in Geneva around 1990 when interest rates in Australia were over 17%


Interest Rate in Australia averaged 4.25 percent from 1990 until 2020, reaching an all time high of 17.50 percent in January of 1990 and a record low of 0.25 percent in March of 2020.


Australia Interest Rate | 1990-2020 Data | 2021-2022 Forecast ...<cite class="iUh30 bc tjvcx" style="color: rgb(32, 33, 36); font-style: normal; font-size: 14px; padding- line- 1.3;">tradingeconomics.com </cite>
(https://tradingeconomics.com/australia/interest-rate)

[Chesand]

in maths, I simply wrote the answer.... No workings.

English was the same. I simply wrote the answer, often in five words.


It has often crossed my mind that being an economist or weather forecaster is a great job. One can be wrong every single day and still have a job.



I was taught at school (a long while ago) that if you showed the workings and got the wrong answer, you would get some marks if the workings were correct but made a slip in the maths.

If you put 12 economists in a room, you will get 13 different opinions. :D

[Simplicity]

I was taught at school (a long while ago) that if you showed the workings and got the wrong answer, you would get some marks if the workings were correct but made a slip in the maths.

If you put 12 economists in a room, you will get 13 different opinions. :D



My dad taught English(I know don’t laugh lol)
At an all boys school in the 70s/80s in Melbourne.


He would regularly send his students home on a Friday with “Learn Chapter 6”

Some students from one particular ethnic group would learn “Chapter 6 word for word”

Dad would then ask them on Monday what chapter 6 was all about in “context”
They would recite there little hearts out word for word,dad would again ask them what chapter 6 was about,I’m sure most of you will get were this is going,
Yep Dad would fail them,
Then explain why, and them teach how to enjoy reading just not Learning a chapter word for word.

It’s sometimes the journey we are learning not the end destination.

Ps Dad wasn’t fond of teaching at home lol(Maybe he was I love reading)

Cheers Matt

[woodPixel]

You know, as I get on, I realise just how much of a little schite I must have been. A dreadful student... absolutely dreadful.

It would be grand indeed if I could go back in time and sit that young man down and tell him what I know now.

How often must we all have thought "Gee, school wasn't actually that hard. Shame I cant re-do this life".



The Madatory HHGTTG quote:


“You know,” said Arthur, “it’s at times like this, when I’m trapped in a Vogon airlock with a man from Betelgeuse, and about to die of asphyxiation in deep space that I really wish I’d listened to what my mother told me when I was young.”
“Why, what did she tell you?”
“I don’t know, I didn’t listen.”

[KBs PensNmore]

An interesting aside to all this is that China is trying to dominate the world by lending monies to small countries, knowing that there's no way that they can make any repayments.China ‘colonising smaller countries by lending them massive amounts of money they can never repay in bid for world domination’ (https://www.thesun.co.uk/news/7037663/china-colonising-smaller-countries-by-lending-them-massive-amounts-of-money-they-can-never-)

Kryn

[FenceFurniture]

An interesting aside to all this is that China is trying to dominate the world by lending monies to small countries, knowing that there's no way that they can make any repayments.China ‘colonising smaller countries by lending them massive amounts of money they can never repay in bid for world domination’ (https://www.thesun.co.uk/news/7037663/china-colonising-smaller-countries-by-lending-them-massive-amounts-of-money-they-can-never-)

KrynI'd classify that as bloody scary, rather than interesting Kryn. We all know what China will want in return.....strategic land.

[Simplicity]

I'd classify that as bloody scary, rather than interesting Kryn. We all know what China will want in return.....strategic land.

I think we need to clarify hear,
The Chinese communist party,are the S............

The Chinese people on the street are under the paranoid dictatorship off a top down controlling government.

They are suffering more than we will probably know.

Cheers Matt

[Chris Parks]

An interesting aside to all this is that China is trying to dominate the world by lending monies to small countries, knowing that there's no way that they can make any repayments.China ‘colonising smaller countries by lending them massive amounts of money they can never repay in bid for world domination’ (https://www.thesun.co.uk/news/7037663/china-colonising-smaller-countries-by-lending-them-massive-amounts-of-money-they-can-never-)

Kryn

Nothing new there, the Soviet Union did a similar thing, witness the missile crisis in 1962. The kicker in China's case is that the western nations gave them aid in years past. China has a timeline and it is not limited to years, more like centuries and we westerners can't tolerate that sort of approach. Every major European country has colonised other countries in the past, think of the atrocities that occurred in Africa because the Europeans thought they owned the world. Australia was founded on the idea of we found it so we own it and damn those who were here before us.

[doug3030]

Nothing new there, the Soviet Union did a similar thing, witness the missile crisis in 1962. The kicker in China's case is that the western nations gave them aid in years past.

Russia and Germany were at war in both WW-I and WW-II. Not sure I would go so far as to say we were on the same side as Russia but we were both at war against Germany.

Similarly China and Germany had declared war on each other in WW-I, although China never committed troops to the war. China and Japan were at war in WW-II.

So China, Russia and us were on the same side in both World Wars.

[GraemeCook]

Interesting that there was negative interest in Geneva around 1990 when interest rates in Australia were over 17%
...


OOps, mid-eighties - doesn't time fly. From memory, when Australia's inflation was 17% Switzerland's was round 6-7% - I don't actually remember it reaching 7%. We used to monitor it closely, as in HTF do they do that!

Switzerland's 10 year bond rate - the standard measure of the cost of debt for a country - has been negative since November 2018 - 17 months ago - and is currently -0.368%.
Switzerland Long Term Interest Rate [1988 - 2020] [Data & Charts] (https://www.ceicdata.com/en/indicator/switzerland/long-term-interest-rate)

[GraemeCook]

....
If you put 12 economists in a room, you will get 13 different opinions. :D

You have obviously never been in a room with 12 economists. ... only 13?

[GraemeCook]

An interesting aside to all this is that China is trying to dominate the world by lending monies to small countries, knowing that there's no way that they can make any repayments.
...
Kryn

I started to write a reply saying that that was probably cheaper and less scary than doing it the way the British, French, Spanish et al colonised the world ..... by sending in the military. But then I realised that this assumption was not quite true.

The colonisers sent in the traders, bankers and missionaries first, then much later the military followed to consolidate their position. Just history repeating itself?

[FenceFurniture]

The colonisers sent in the traders, bankers and missionaries first, then much later the military followed to consolidate their position. Just history repeating itself?The Spanish sent Smallpox to South America which was a much more passive way to knock them over. Wasn't deliberate of course....

[woodPixel]

I started to write a reply saying that that was probably cheaper and less scary than doing it the way the British, French, Spanish et al colonised the world ..... by sending in the military. But then I realised that this assumption was not quite true.

The colonisers sent in the traders, bankers and missionaries first, then much later the military followed to consolidate their position. Just history repeating itself?


Correct. I was reading about the history of the East India Company.

What a bunch of looting pirates they were. Their history is utterly despicable.

An extraordinary history of corruption, pillage, looting, murder, manipulation, plundering, enslavement and governmental deposement.

No wonder the Chinese have a chip on their shoulder, they were subject to their bastardry at every level. They have a "right" to be Pretty Upset.


Personally, I think China in the form of the CCP, is almost game-over. They'll make a decent fist of it, but they are about to experience ...ahhh... blowback... over recent events.

Their government are not the Good Guys.


read 1 - English East India Company, in China | Encyclopedia.com (https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/english-east-india-company-china)
read 2 - China, First Opium War to 1945 | Encyclopedia.com (https://www.encyclopedia.com/history/encyclopedias-almanacs-transcripts-and-maps/china-first-opium-war-1945)

[LanceC]

With respect to China, I read a fascinating book over January called "The future is Asian : global order in the twenty-first century". It's a looong dry read, but well researched and presented.

It changed a lot of my perceptions of not only Asian (of which China is obviously a major part), but global economics and emerging structures too.

The single most profound change it offered me was a chapter or two that took the reader (presumed to be western) through understanding the world through an asian lens. It shows how when we try and interpret the actions of Asian leaders and countries with our western understanding of culture, relationships and history, we are as equally unsuccessful as expecting an Afgan villager to comprehend the machinations or our democratic system of government.

As an example, it painted a picture of why to many Asians the USA's system of democracy would be seen as morally bankrupt, with little social cohesion, care for your fellow man or a shared common goal etc. etc, and why the thought that they would want to emulate "democracy" would be laughable. To be clear, it wasn't bashing the USA, but rather trying to show how a different lens produces vastly different interpretations of the same facts.

https://uploads.tapatalk-cdn.com/20200425/2f07dea727e1bdd014949291fb4be9f6.jpg

I only raise this to point out that our "analysis" of China is based on an Australian view with little understanding of a broader Asian picture. And I'm the first to point out that I'm not an Asian expert at all, just that any countries foreign affair platform is far more complex than a simple good or bad.

The global balance is certainly shifting. It is worth noting that the transition of one global dominating power to another has always been a tumultuous affair, with the exception of the last one of Great Brittian to the USA. We can but only hope that as we move away from a single dominant power, cooler heads prevail and realise that like the last change, cooperation is a far better outcome than conflict.

I've just re-read this post and it diverged quite far from the thread topic, so sorry. It was was not my intention when i hit the reply button. :)

[rrich]

Growing up in Brooklyn, post war, there was a guy down the street that had a printing press. He seemed to use a lot of green ink.

Just sayin.

[doug3030]

Housing prices are dictated by demand largely by the owner occupiers who are the majority of buyers. Investors just fit into that pricing structure looking at price they need to pay V rent dollars the market will tolerate and will purchase only if it is deemed a good investment. Demand is largely controlled by the banks willingness to lend money.

Think about who actually benefits from housing prices being over-inflated.

Not the owner-occupiers. When they buy a house they do so at market rate. When they sell a house they do so at market rate again, regardless of how much the perceived value has risen. But then they buy another house in the same market conditions, so in effect the appreciation in price on buying and selling really makes little difference to them. Th eprice may have risen at 1% per annum or 30% per annum and the difference is minimal to them because they are buying again in the same market they sold in.

State Government make money when someone buys and sells a house through stamp duties, and the higher the price the more stamp duty is paid. Local governments charge rates based on the land price, which is in reality the total cost less the price of building the house on it. As prices go up the price of land goes up so councils benefit by charging higher rates to everyone - not just thee ones who bought at an overinflated price. Every time someone buys a house at a higher price in an area local government benefit.

Investors benefit because they move their money in and out of different types of investments depending on where the greatest gains are perceived to be made, so they will ride a housing boom, capitalize their investment and then move on to shares or whatever next. Owner occupiers do not do that.

When the prices are going up it is investors that are driving them up and owner occupiers coming for the ride.

Federal government wants the states and councils to benefit from high property values so that they have a sustainable revenue base and require less federal support. Banks benefit from higher prices because people take out bigger loans and the banks make more.

[GraemeCook]

https://www.woodworkforums.com/images/misc/quote_icon.png Originally Posted by Beardy https://www.woodworkforums.com/images/buttons/viewpost-right.png (https://www.woodworkforums.com/f43/country-borrowing-money-234180-post2184861#post2184861)
Housing prices are dictated by demand largely by the owner occupiers who are the majority of buyers. Investors just fit into that pricing structure looking at price they need to pay V rent dollars the market will tolerate and will purchase only if it is deemed a good investment. Demand is largely controlled by the banks willingness to lend money.

I would rephrase that last sentence as:
Demand and price are almost totally controlled by the banks willingness to lend money and the interest rate they charge.

[GraemeCook]

Correct. I was reading about the history of the East India Company.

What a bunch of looting pirates they were. Their history is utterly despicable.

An extraordinary history of corruption, pillage, looting, murder, manipulation, plundering, enslavement and governmental deposement.
......


Absolutely true. And the demise of the company was so quick and absolute.

At the height of the British East India Company's power (c.1800-1850) the company's army was considerably stronger than the British military.

The Dutch VOC were their model - just as ruthless.

[Beardy]

Think about who actually benefits from housing prices being over-inflated.

Not the owner-occupiers. When they buy a house they do so at market rate. When they sell a house they do so at market rate again, regardless of how much the perceived value has risen. But then they buy another house in the same market conditions, so in effect the appreciation in price on buying and selling really makes little difference to them. Th eprice may have risen at 1% per annum or 30% per annum and the difference is minimal to them because they are buying again in the same market they sold in.

State Government make money when someone buys and sells a house through stamp duties, and the higher the price the more stamp duty is paid. Local governments charge rates based on the land price, which is in reality the total cost less the price of building the house on it. As prices go up the price of land goes up so councils benefit by charging higher rates to everyone - not just thee ones who bought at an overinflated price. Every time someone buys a house at a higher price in an area local government benefit.

Investors benefit because they move their money in and out of different types of investments depending on where the greatest gains are perceived to be made, so they will ride a housing boom, capitalize their investment and then move on to shares or whatever next. Owner occupiers do not do that.

When the prices are going up it is investors that are driving them up and owner occupiers coming for the ride.

Federal government wants the states and councils to benefit from high property values so that they have a sustainable revenue base and require less federal support. Banks benefit from higher prices because people take out bigger loans and the banks make more.

Yes no doubt the big winners are the government and the stamp duty collected
My father in law was a real estate agent and I remember when they bought in the first homebuyers grant of 20k I think it was and he said that prices at auction basically went up by the same amount overnight. It is human nature to stretch to get the most you can with what you have available. ( back then you could buy a one bedroom unit in Sydney for 100k)
I personally don’t agree with the way they do grants as all it does is push up prices ( which I know that is what they want it to do to increase their revenue)
If they really wanted to help first hone buyers I think they would be better off subsidising their outgoings like council rates and interest rates over the first five years rather than giving them a lump sum upfront.

[GraemeCook]

With respect, WoodPixel, I cannot work out if you are being totally provocative or incredibly naiive with this post. My comments irespective:


On housing, I've a few thoughts.

-- Houses are for people
-- They are NOT investments

True, houses are for people, and my dog, but people also invest in houses. Currently I invest in our home and in the past have invested in rental property and I have also chosen to be a tenant.

At present the Aus housing ownerships stats are:

30% - owner occupied without a mortgage,
37% - owner occupied with a mortgage,
32% - rental property, and
only 3% of property is owned by a Housing Commision (however titled).

https://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/4130.0~2017-18~Main%20Features~Housing%20Tenure~3

Where do the renters go? Do you really want to de-house 32% of the population?

When I was a student, I chose to rent knowing that I would be in that city for only a limited time.

At various times in my career, I chose to rent because I knew I would be moving on.

When I was working overseas, in some countries it was illegal for me, as a foreigner, to own real estate.

An aunty, now retired but once a prominent and very well remunerated lawyer, sold her only property over 50 years ago and has chosen to rent because she does not want the hassles of owning a property. My guestimate of the current market value of the place she has leased for the last 20+ years would be above $3 million. Its not about affordability.



-- Negative gearing, tax deductions and depreciation should be cancelled, now

I owned several rental properties when Paul Keating abolished negative gearing; initially I was unhappy, and many investors sold their properties reducing the supply. Rents went up by an unprecedented 20% in our area within two years. I was happy, the banks increased my interest rate so they were happy, I was no longer negatively geared so the tax man was happy; the tenants were not happy but all chose not to find alternative accomodation.



-- Loans can not be provided to investors on residential real estate

About 80% of landlords are small investors, but they only own about 20% of rental properties - the old 80/20 rule. Rental properties are commonly the first investment of "learner investors". This is far easier for most people to understand and much less risky than the stock exchange or direct investment.


-- One house per person/family (as defined by family law and/or tax law)

Are family law, tax law, contract law and common sense in agreement?



-- Houses unoccupied for a period of time (say 3 months) are considered abandoned

So, when I worked as a management consultant and went on long term assignment and left the family home vacant for, say, six months, you would take the family home away from us?

And you would prohibit us from renting in the assignment locale?



-- All "portfolios" of people-housing must be broken up
.......

No comment necessary.

[GraemeCook]

Yes no doubt the big winners are the government and the stamp duty collected.

My father in law was a real estate agent and ........

Coincidentally, in some states stamp duties and real estate agents fees on a property sale are roughly the same amount.

As is the average removalists costs!


Edit: some

[Beardy]

With respect, WoodPixel, I cannot work out if you are being totally provocative or incredibly naiive with this post. My comments irespective:



True, houses are for people, and my dog, but people also invest in houses. Currently I invest in our home and in the past have invested in rental property and I have also chosen to be a tenant.

At present the Aus housing ownerships stats are:

30% - owner occupied without a mortgage,
37% - owner occupied with a mortgage,
32% - rental property, and
only 3% of property is owned by a Housing Commision (however titled).

https://www.abs.gov.au/ausstats/[email protected]/Lookup/by%20Subject/4130.0~2017-18~Main%20Features~Housing%20Tenure~3

Where do the renters go? Do you really want to de-house 32% of the population?

When I was a student, I chose to rent knowing that I would be in that city for only a limited time.

At various times in my career, I chose to rent because I knew I would be moving on.

When I was working overseas, in some countries it was illegal for me, as a foreigner, to own real estate.

An aunty, now retired but once a prominent and very well remunerated lawyer, sold her only property over 50 years ago and has chosen to rent because she does not want the hassles of owning a property. My guestimate of the current market value of the place she has leased for the last 20+ years would be above $3 million. Its not about affordability.



I owned several rental properties when Paul Keating abolished negative gearing; initially I was unhappy, and many investors sold their properties reducing the supply. Rents went up by an unprecedented 20% in our area within two years. I was happy, the banks increased my interest rate so they were happy, I was no longer negatively geared so the tax man was happy; the tenants were not happy but all chose not to find alternative accomodation.



About 80% of landlords are small investors, but they only own about 20% of rental properties - the old 80/20 rule. Rental properties are commonly the first investment of "learner investors". This is far easier for most people to understand and much less risky than the stock exchange or direct investment.



Are family law, tax law, contract law and common sense in agreement?



So, when I worked as a management consultant and went on long term assignment and left the family home vacant for, say, six months, you would take the family home away from us?

And you would prohibit us from renting in the assignment locale?



No comment necessary.

Well said, we need private investors in the market to provide rental accommodation for those who either choose not to or don’t have the ability to buy.

When Keating abolished the negative gearing my father in law said a number of landlords sold their investment units and bought taxi plates as they gave a better return, rents went up substantially due to the shortfall

[Dareen]

Maybe this is how it works!!

Stimulus package


It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.




A tourist visiting the area drives through town, stops at the hotel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the hotel owner grabs the bill and runs next door to pay his debt to the butcher.



The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.



The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.



The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.



The hooker rushes to the hotel and pays off her room bill with the hotel owner.



The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.



At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything...



However, the whole town is now out of debt and now looks to the future with a lot more optimism.



And that, ladies and gentlemen, is how a Stimulus package works.

[doug3030]

Coincidentally, in most states stamp duties and real estate agents fees on a property sale are roughly the same amount.

A quick check on a couple of online calculators shows stamp duty on a $650000 house in Victoria is $34000, whereas R/E commission on the same house would be $18000.

Queensland stamp duty $15000. Re commission $17000

WA stamp duty $24890. R/E commission $15600

I guess it depends on where you live and what you call roughly the same.

Either way the Real Estate do some work for quite a sum and the government do nothing and generally get even more.

[GraemeCook]

Think about who actually benefits from housing prices being over-inflated.

...

When the prices are going up it is investors that are driving them up and owner occupiers coming for the ride.

.....


This is a really interesting question, and another way of analysing it is to look at the way in which the banks' policies and interest rates impact on the prices of realty.

First, most of us, myself included want to live in the "best" house in the "best" locality that we can afford.

Second, banks manipulate the minimum deposit required as a means of regulating their own risk exposure. Often it has been 20%, sometimes 10% and occasionally in high inflation periods as low as 5%. What deposit rate they insist upon will depend on their current risk situation plus their assessment of your risk profile. If you are a "most favoured customer" then a lower deposit requirement.

Third, over the years, mortgage interest rates were often around 8%, presently they are unusually low at around 4%, but not so long ago they topped out at 17%.

Fourth, banks have often assessed you ability to service a loan as being 25% of the males after tax income. Quite recently they have started treating women similarly, and often use 25% of the higher income. Some will also increase the repayment figure to 30% of the higher income for dual income families. Rarely will they lend against the sum of the incomes.

These four factors set the limits for realty lending and, I would suggest, are the prime determinants of house prices.

A rule of thumb: Fore housing, banks make credit foncier loans, meaning that over the period of the loan there are equal payments of capital and interest, even though the capital is steadily reducing. In the first monthly payment the interest is calculated on the full amount loaned, in the last monthly payment then interest is calculated on the very low residual debt and is miniscule. The average interest is thus approximately half the interest amount calculated for the first month.

Let us consider a simple example of a family where the wife has an after tax income of $100,000 and the husband $75,000. The bank policy and risk assessment dictates a maximum repayment obligation of $30,000 and a minimum deposit of 20%.

If the interest rate is 4% then they can borrow as follows:

$425,000 - Total loan amount,
$1,417 - first month's interest cost (= $425,000 * 0.04 / 12)
$708 - average monthly interest cost (= $1,417 / 2)
$1,771 - average monthly capital repayment (= $425,000 / 20 / 12)
$2,479 - monthly credit foncier loan repayment (=$707 + 1,771)
$29,750 - annual debt servicing costs (= $2,479 * 12)
$531,250 - Affordable house price ($425,000 / 0.80)
$106,250 - minimum deposit required ($531,250 * 0.20) - 20% deposit.

Under that interest regime our couple will look for a house priced around $531,250 and will need a deposit of $106,250.

If the interest rate changed to 8% then the maximum debt that they could service would be $330,000, for monthly repayments of $2,475 and a minimum deposit $82,500. They would be able to buy a house around $412,500.

Similarly, by substituting different numbers into the above calculations, when the interest rate was 16$ they would be looking in the $287,500 range.

I would suggest that the impact of the interest rate regime on the house buyers ability to service a loan is the prime determinant of housing prices.

[doug3030]

This is a really interesting question, and another way of analysing it is to look at the way in which the banks' policies and interest rates impact on the prices of realty. ... (rest of comment) ...
I would suggest that the impact of the interest rate regime on the house buyers ability to service a loan is the prime determinant of housing prices.

Well that's a nice history lesson on how it has been done, but this discussion is more about how things are going to change going forward from Covid-19. As we have been saying it could now be a totally new ball game.

[Lappa]

Maybe this is how it works!!

Stimulus package


It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.




A tourist visiting the area drives through town, stops at the hotel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the hotel owner grabs the bill and runs next door to pay his debt to the butcher.



The butcher takes the $100 and runs down the street to retire his debt to the pig farmer.



The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op.



The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit.



The hooker rushes to the hotel and pays off her room bill with the hotel owner.



The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.



At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves. No one produced anything. No one earned anything...



However, the whole town is now out of debt and now looks to the future with a lot more optimism.



And that, ladies and gentlemen, is how a Stimulus package works.


That was a great read. Thanks:2tsup:

There was also a very interesting article today by Peta Credlin on the stimulus package and other fiscal handouts during this pandemic.

[GraemeCook]

Maybe this is how it works!!

Stimulus package

It is a slow day in the small Saskatchewan town of Pumphandle, and streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit.

A tourist visiting the area drives through town, stops at the hotel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night......

The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything.
......

And that, ladies and gentlemen, is how a Stimulus package works.


No, Dareen.

You omitted to include what the economists call the multiplier effect in your analysis. Alternatively, the hotelier was the bane of all economists, an inept businessman who failed to act avariciously in his own best interests.

Consider the following stage 2 to your scenario:

After the hotelier receives the $100 note from the young business-lady he immediately goes down to the butchers and pays for $100 credit.
The butcher takes the $100 and arranges $100 credit with the pig farmer.
The pig farmer takes the $100 and arranges $100 credit with the co-op manager.
The Co-op manager takes the $100 note and arranges $100 credit with the young business lady.
She then takes the $100 and arranges $100 credit with the hotel.

The $100 note is then sitting on the counter waiting for the traveller ...

Stage 2 has created wealth - every person has a $100 asset in the credit owed to him. This is additional to Stage 1 which paid off a $100 owed by every person.

That is how a stimulus is supposed to work !

[Lappa]

your Stage 2 sounds very similar to a Ponzi scheme. In theory, if the business man stayed up inspecting for long enough, all the participants could have $1000000 credit!

[GraemeCook]

your Stage 2 sounds very similar to a Ponzi scheme.

Absolutely wrong. It has nothing to do with a Ponzi scheme.


In theory, if the business man stayed up inspecting for long enough, all the participants could have $1,000,000 credit!

True. And it would be very inflationary in the little Saskatchewan town of Pumphandle.

The business lady is probably closest to her clients, fully understands the concepts of supply and demand and market forces, and could respond quickest. Her next liaison with the co-op manager might be:

Either: I am a millionaire now; do you really think I will do it for you for $100?

Or: Honey, I have gone up market offering to more exclusive service only accepting millionaire clients. Would you like to see my new fees schedule?

[Dareen]

Hi GraemeC and Lappa,
I thought my original post was a simple solution. Now you financial geniuses have me totally bamboozled.
Cheers, Fred

[Lappa]

Semantics really as both involve using funds that aren’t theirs to pay someone else, besides that the business man came done after round one. So it had to stop there.


Dareen, no financial genius here. :D I loved the simplicity of your post then Graeme had to try and complicate it :cool:

[q9]

No one produced anything. No one earned anything...




Except everyone had already earned the money by providing goods and services on credit. Even the traveler got something for his money, the room inspection, so at the end everyone has settled their debts and walks away happy.

If we wanted more realism, the Govt would have swiped 10% at each step...

[DomAU]

No, Dareen.

You omitted to include what the economists call the multiplier effect in your analysis. Alternatively, the hotelier was the bane of all economists, an inept businessman who failed to act avariciously in his own best interests.

Consider the following stage 2 to your scenario:

After the hotelier receives the $100 note from the young business-lady he immediately goes down to the butchers and pays for $100 credit.
The butcher takes the $100 and arranges $100 credit with the pig farmer.
The pig farmer takes the $100 and arranges $100 credit with the co-op manager.
The Co-op manager takes the $100 note and arranges $100 credit with the young business lady.
She then takes the $100 and arranges $100 credit with the hotel.

The $100 note is then sitting on the counter waiting for the traveller ...

Stage 2 has created wealth - every person has a $100 asset in the credit owed to him. This is additional to Stage 1 which paid off a $100 owed by every person.

That is how a stimulus is supposed to work !

Except that in this example all of the people in the chain are no wealthier because they are all owed $100- and owe $100- to someone else. If that $100 was $1m dollars they would all have become debt slaves for many many years. And maybe some of those people decide they don't want to, or can't, pay so choose to default instead and the dominos would all fall over.

Cheers, Dom

[FenceFurniture]

Anyone got anything to contribute to the thread theme?

Apparently not.

[doug3030]

If we wanted more realism, the Govt would have swiped 10% at each step...


Actually 6%. This took place in Saskatchewan

[Lappa]

I believe the discussion on the stimulus keys nicely into the thread “Everybody country is borrowing money - who from?”

No need to borrow if there is no stimulus/handouts whatever.

[rwbuild]

At the end of the day you are borrowing from yourself