Aeo8’s Word

The Liberal Party of Australia have a way with words when it comes to the development of the newly elected Federal Labor Party. The much hyped “Fuel Watch” and now from the newly released recommendations from the ACCC, “Grocery Watch” are more than the Liberals state. Watching the news headlines without much knowledge of the depth of theory behind these policies a reasonable person would assume that cataloging prices of groceries or fuel would do nothing much to the price we pay at the till. That would occur if you didn’t believe in the fundamentals of capitalism.

I’ve touched upon this subject before with the U.S. providing funds for troubled mortgage firms to ‘apparantly’ protect their economy. I concluded then that protecting businesses that are inherently ‘weak’ is not a fundamental to capitalism and its idea of competition. I also admitted that it was a complex situation that occurred because of a number of a factors i.e. poor disclosure laws and lending practices.

Keeping that in mind the issue here is not much different; to bring more information to the consumer and competitive businesses in whatever field. In this case, fuel station (and their oil companies) and grocery stores (the biggest and only two you see around is Coles and Woolworths). That said we must keep in mind what started all these policies, that is ‘inflation’. Labor during the election have stated that the previous Liberal Federal government wasn’t doing enough to keep petrol and grocery prices low.

This is a true statement because on the face of the issue disregarding the ‘unusual’ price of oil in the market (today down to $120 - still abnormal levels) prices have been difficult to adjust to by the ‘reasonable person’ because of the percentage income of debt they carry. A method of tackling this issue is to increase information in the market.

That last line sounds vague but is a very important line for sustainable and strong competition. Let me identify that listed companies on the ASX release important market sensitive information all the time so that shareholders know what is going on in that particular company (from which they would either to hold their shares or sell). It’s no different in the grocery store or fuel station situation. The key word here is ‘CHOICE’, its a very liberal concept; for an individual to have choice in their own unique ‘individual’ lives.

What is being proposed is to give better choice, to compare, contrast and ultimately reach a decision. I understand that ‘individual choice’ is more applicable in certain situations than others. However, in clear economic situations such as company disclosure laws (company laws in general), securities (share market), tourism industry, shopping, petrol prices, etc their essence is at the heart founded on competition. A situation where firms (companies) compete with one another to provide a service or product that a consumer wants. Firms that are ‘weak’ will perish (either dissolve or merged with larger more stronger firms) and exit the market and the strong firms will survive and new firms will emerge to fill the gap of perished firms. If you reflect upon this concept its more like a life cycle than anything.

Increased competition, choice with additional measures such as recommended by the ACCC for better leasing arrnagements and more zoning. Its a difficult issue, its not simple and its important because ultimately its the consumers dollar that is going into someone else’s pocket. There is no one answer but this is a good start and it should be supported because knowledge is power.

Market truth provides certainty in the market and supporters of stronger disclosure laws will often state this reality. Opponents will argue that non-government interference is best to promote certainty in the market. However, from the country that brings us exciting global news because usually they are usually the news are now passing the new housing rescue plan to help the American housing market from complete destruction (or insert whatever catchy news headline) by providing $3.9 Billion to Fannie Mae and Freddie Mac, both prominent mortgage lenders in the U.S.

I quite agree with opponents to the new legislation because it does protect irresponsible lenders and consumers. America is a prominent support of capitalism and have activelyspread it around the world, but when it comes to weaknesses in their own economy they ignore fundamental economic principles. It’s a fundamental of economics that competition ’weeds’ out the weak from the strong for the distribution of the finite resources to meet our infinite wants.

However, saying that I believe there is a time and place for government intervention and social policy. Is this the time? It is a hard decision but it’s my opinion that the money being spent in this rescue package is not going to be effective. Why? A number of reasons, firstly the America’s Central Bank and their insistence of keeping interest rates low to provide cheap money for businesses in the U.S. economy to first stay afloat (from their great debts because of over expansion) and hopefully grow again.

When money is cheap than inflation is going to be a problem; a big problem as it is now in the U.S. and now affects the greater world economies because of imported inflation through America’s exports.

As you can imagine its a huge equation. At the moment this is my 2nd week of university semester 2 and the work is piling up and I think this a huge problem for myself. That problem for me is a speak in comparison to the problems of the U.S. economy. I don’t agree the best way for the U.S. to turn its economy is to reduce interest rates or implement housing rescue packages. I do feel for those suffering in America from rising debts, and being forced to foreclose their homes/businesses. In the news I read about a woman who was experiencing significant financial stress and who’s husband had tried to file for bankruptcy number of times but failed; so she committed suicide without telling her husband. The act was to have the husband use the life insurance to pay off the debts. Stronger company disclosure laws and accountability would have lenders be more stringent and accountable for their lending practices.

The U.S. need to wring out the weak from the strong and start from scratch because I don’t really see how these tragic events; and this is tragic with millions of lives affected in the U.S. and around the world. The fundamentals of capitalism, particularly market truth, need to be returned in the U.S. for the greater good because if it isn’t solved properly then these events can occur again. That’s Aeo8’s word for real.

The morning of day 4 of university and I can’t help be distracted in the law library by the up, down, up economic news. All occurring at the same time, oil prices whilst still in unprecedented territory fell around $124 for West Texas intermediate crude, the Australian stock market on the ‘All Ordinaries’ up around 85 points at yesterday’s close, Australian inflation in last quarter higher than expected at 1.5% bringing an annual rate of 4.5%, renting price data in capital cities running at double digits among the data 25% for units and 17% for houses in Perth,  and 13% in my home city of Brisbane, Mr Turnbull making a statement that ‘inflation’ is being caused by the so called ‘alcopops tax’ because in the CPI (Consumer Price Index) the relevant data for these drinks rose by around 6%, again back to the U.S. the American financial reguatory (think American version of ASIC {Australian Securities and Investments Commission} introduced laws to address short-selling (selling shares you down own at that time and repurchase them at a lower price as the stock falls) to provide more certainty in the market.

Over the last few days and weeks everything in the financial world has been up, down, up with no end in sight. The underlying issues in the Australian economy is inflation because it’s still feeding into other areas of the economy (such as higher rents because landowners are facing higher mortgages), the retail sector has been ranging around average to above average and I suspect should be around above average expectations in the next release of data to include the affect of ‘end of financial year’ sales and general sales because of earlier in the year subdued sales.

The RBA (Reserve Bank of Australia) will have to have a good look at the numbers and analyse what sectors are getting fed inflation but my opinion is that they will have the conclusion that the price of world oil prices is what is feeding ‘cost-push inflation’ (not the alcopops tax as Mr Turnbull would like it to be the case) into all sectors generally and the ‘credit-crunch’ (love these catchy phrases) increasing the costs of banks, business and governments to borrow funds.

Between the RBA raising official interest rates and the banks independently raising rates, the RBA will have to either conclude that it will eventually be enough to inhibit inflation or not. In my opinion the RBA will have to raise rates at least once before the end of year as the new tax cuts feed into the economy form tax returns and people get ready for the Christmas, New Year season and end of school for Australian’s youngest. These are two distinct areas where demand will traditionally be at its strongest.

In either case the bank’s are sure to readjust their rates to cover their costs, so the probability of rates moving is either up or on hold. I don’t conclude with an oil price ‘anywhere’ above US$100 and the credit crunch still existing that positive news for inflation falling and with it falling interest rates is anywhere in sight.

It’s sad that the world is so dependant on oil but that’s the nature of capitalism to put a price on the finite resources, to price debt (or risk), to price demand and costs (inflation) and without regard to emotion and the social effects on Australian citizens and people generally round the world.  The very nature of capitalism demands from companises ‘profits now rather than later’. This has alot to do with the fast pace and limited life that humans experience and the fast pace of lifestyle we all find normal (on that note I better be heading to university :P).

Watch this space, that is the Australian financial situation and what is going on in the U.S. because what happens today or tomorrow will affect your financial situation in the future either directly through investments, or broadly as in your job security and that’s Aeo8’s word for real.