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The Australian economy according to David Llewellyn-Smith; Rallying call to his perma-bear audience to get the hit count up?
Topic Started: 30 Sep 2013, 11:10 AM (7,301 Views)
Catweasel
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b_b
30 Sep 2013, 05:05 PM
The AUD loan creates the AUD deposit. Even Macrobusiness agrees with this.

So bank balance sheets balance - always.

Why do Banks borrow overseas? There are two answers depending on your definition of overseas borrowings

1. Foreign owned domestic liabilities (deposits)
This comes from our external accounts (CAD). When an Aussie decides to buy a honda, they will buy yen and sell AUD. The yen is used to buy the Honda. But the seller of the yen now owns AUD. If the AUD is not used for trade, then is simply finds its way into the banking system again (capital account). This has nothing to do with the bank. The bank has not funded the current account. In fact, it is probably correct to say the bank is an innocent bystander to the transactions undertaken by the customers.

2. Banks issuing Bonds to foreign investors / domestic bonds
Foreign investors do not have access to AUD. But Banks (say NAB) will issue in foreign juristictions to meet man made requirements from APRA and regulators (term requirements etc). But it is nonsensical to suggests this funds Banks. Because the Bank raises USD from the Bonds, and swaps it back into AUD. AUD which already exists. the same for domestic bonds. The issue of the bonds is bought by investors who already have funds in Australian bank accounts. It is about swapping term. Again, the AUD already exists.

So it is a closed system. No AUD leaves our shores - no AUD comes in from offshore. It is about the composition of a Banks portfolio of liabilities.

Now here is the real killer.

If the loan creates the deposit, then rapid growth in the loan book actually assits the banks funding mix, and the requirement for offshore loans is diminished.
Catweasel say strange.

Mrs the Catweasel say a Australia use wholesale fund because of cost the efficiencies.

Is it the broken think? Seem the strange if it get a funding at higher the cost




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b_b
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Catweasel
30 Sep 2013, 06:35 PM
Mrs the Catweasel say a Australia use wholesale fund because of cost the efficiencies.




When an aussie bank issues a bond in the US, they raise money at a margin over the reference rate. In the US, the reference rate is lower than Australia, so it may look like cheap funds.

But the Aussie Banks swaps it's foreign bond proceeds back into AUD, resulting in an an unhedged foreign liability.

The Bank will always hedge this position (usually with the custodian Bank which issues the bond). So the cost of funding has to be considered net of cross currecy swap costs.

Cross currency swaps are priced on an interest rate differential, so the USD reference rate actually translates back into an AUD reference rate. So the only funding advantage is whether the Aussie bank gets a better margin versus issuing in Australia. Usually they don't, but sometimes they do.

But the main reason the banks issue in overseas markets is for term. Australia does not have a deep term issuance market. Banks can go to 5-7 years here, but can get +10 in the US.

Mrs Weasel probably understands this.
Edited by b_b, 30 Sep 2013, 06:52 PM.
(S – I) + (T - G) + (M - X) = 0
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Catweasel
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b_b
30 Sep 2013, 06:50 PM
When an aussie bank issues a bond in the US, they raise money at a margin over the reference rate. In the US, the reference rate is lower than Australia, so it may look like cheap funds.

But the Aussie Banks swaps it's foreign bond proceeds back into AUD, resulting in an an unhedged foreign liability.

The Bank will always hedge this position (usually with the custodian Bank which issues the bond). So the cost of funding has to be considered net of cross currecy swap costs.

Cross currency swaps are priced on an interest rate differential, so the USD reference rate actually translates back into an AUD reference rate. So the only funding advantage is whether the Aussie bank gets a better margin versus issuing in Australia. Usually they don't, but sometimes they do.

But the main reason the banks issue in overseas markets is for term. Australia does not have a deep term issuance market. Banks can go to 5-7 years here, but can get +10 in the US.

Mrs Weasel probably understands this.
Catweasel say yes.

It can be the technocrat of banking the system.

But it clear as the cousin's moonshine,

wholesale the funding,

borrow the cheap,

lend the high as possible.

Money for a jam.
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Bond
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If we are serious about gradually easing ourselves away from a houses and holes economy and the ‘kindness of foreign savers’ we have to start reducing the volume of transactions that result in an exchange rate far higher than is warranted given our ability to produce value added goods and services.

1. Start reducing the government IOUs sold to foreign savers (central banks, banks etc)

2. Reduce the private IOU’s sold to foreign savers to fund domestic lending by our ‘govt guaranteed banks’ on residential real estate - i.e. reduce the wholesale funding from 30-40% to zero over say 5-10 years.

3. Consider the rate at which we sell our non-renewable capital assets (minerals, coal etc). Export volume permits sold by auction would be a simple way of both managing the volume and rate and also raising income from the sales.

This is not blowing up the economy but weaning it slowly by gradually reducing the amount of ‘silverware’ we are selling.

It is very frustrating. The problem is not complex and fixing the present state of affairs is not difficult.

Certainly there will be an adjustment but undertaken over a 10-15 year period it need not be painful.

All that is required is a minor degree of self control and a gradual reduction in our reliance in living off the silverware.

But then most countries that have an abundance of natural wealth demonstrate an inability to use it to their advantage and instead let it dissolve their muscle tissue and grey matter.

One thing I remain positive about is that the game can be changed if enough people understand why it is not working and what needs to be changed.

Too often nothing changes simply because everyone ASSUMES that it is too complicated or too hard or no-one gives a stuff.

I am quite sure that the vast majority of Australians would be appalled if they really understood what the problem is, how easy it would be to fix over a period of 5 – 20 years and MOST IMPORTANTLY the consequences if we do not start trying to fix the problem NOW.

Keep in mind that there are still millions of people who live in their own homes and will not be selling up just because new land and land + house packages are coming on to the market at a lower price.

So while some of the more twitchy negative gearers may decide to sell as the price of existing dwellings stagnate to reflect the lower cost of brand new houses and apartments, there will be plenty who do not sell and when they do sell they will find buyers motivated by the lower prices.

Sure the welfare effect in reverse will depress them but at least they will be depressed in an economy where the building and associated industries are thriving due to the higher rates of construction and development.

The spending energy of those who have not had to take on goat choking mortgages is likely to far exceed the fading remains of the ‘wealth effect’ of the asset bubble admirers.

So while sagging prices of existing houses may cause some unhappiness what have we got to lose? A wealth effect that is not working anyway?

An economy that is at least building low cost shelter is streets ahead of where we are now.

Combine that with the measures I have outlined to put downward pressure on the exchange rate and we might start to see the beginnings of some rebalancing towards an economy with lower cost structures and a lower exchange rate.

Sure that will make the imports more expensive and reduce demand for them – but isn’t that the point.
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b_b
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Catweasel
30 Sep 2013, 07:42 PM
Catweasel say yes.

It can be the technocrat of banking the system.

But it clear as the cousin's moonshine,

wholesale the funding,

borrow the cheap,

lend the high as possible.

Money for a jam.
Money for jam. I agree. Until you can't get the money back.

Therein lies the problem with valuing banks on forward pers.
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Catweasel
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b_b
30 Sep 2013, 09:14 PM
Money for jam. I agree. Until you can't get the money back.

Therein lies the problem with valuing banks on forward pers.
Catweasel say a rapscalls in a sandpit not a really the understand.

Because it think of a bank the cash as ephemeral.

Dream into a exist.

Of the course, foreign mouse can take the big bath on a AUD and a NZD,

when a fan the hit with proverbial feces.

But bank the master has its manhole covered,

most of a time.

And mouse ultimately a responsible for the balls up.

Mouse have the no idea what around a corner.

It simply live on its emotional fear of being left behind from the flock.
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skamy
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Slug
30 Sep 2013, 05:50 PM
We are a basket case in a fools paradise and I believe that from this day onwards with reference to the utter stupidity of house prices in Sydney this year we are going to see the magnitude of the over leveraged herd and we will all be amazed at the actual numbers involved swimming naked!

Jeez shitty little inner city houses with no parking were highly priced since 2003 and last year at over 700k they were not worth the money and the Sydney dickheads have bid them up more!

You want to see how fucked we are?

OK, let’s set up in Sydney a world trade exhibition to show the world what we produce here. It couldn’t happen now because we would have nothing to show the world unless we do bus tours around our property hot spots and point out our million dollar shitbox houses then drive them out to the Nepean River and show them the people living in their cars.

Wake up you dumb Australian cocky arrogant inner city smug in love with your own importance as you strip yourselves bare so willingly in front of your banking masters!

:mad:
Oh Dear somebody is angry - did ya miss out on a Sydney bargain during the downturn ?
Definition of a doom and gloomer from 1993
The last camp is made up of the doom-and-gloomers. Their slogan is "it's the end of the world as we know it". Right now they are convinced that debt is the evil responsible for all our economic woes and must be eliminated at all cost. Many doom-and-gloomers believe that unprecedented debt levels mean that we are on the precipice of a worse crisis than the Great Depression. The doom-and-gloomers hang on the latest series of negative economic data.
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b_b
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Catweasel
30 Sep 2013, 10:48 PM
Catweasel say a rapscalls in a sandpit not a really the understand.

Because it think of a bank the cash as ephemeral.

Dream into a exist.

Of the course, foreign mouse can take the big bath on a AUD and a NZD,

when a fan the hit with proverbial feces.

But bank the master has its manhole covered,

most of a time.

And mouse ultimately a responsible for the balls up.

Mouse have the no idea what around a corner.

It simply live on its emotional fear of being left behind from the flock.
Mouse will not be responsible for the balls-up
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Veritas
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b_b
30 Sep 2013, 11:16 PM
Mouse will not be responsible for the balls-up
Mouse will pay for the balls up.

Your trust in the banks is curious.

Based purely on the evidence, there is no reason to trust the banks or the regulators that are supposed to keep them in check.

And again, based purely on the evidence, it is always the tax payer who gets it in the neck when they kill the goose that laid the egg.
Property acquisition as a topic was almost a national obsession. You couldn't even call it speculation as the buyers all presumed the price of property could only go up. That’s why we use the word obsession. Ordinary people were buying properties for their young children who had not even left school assuming they would not be able to afford property of their own when they left college- Klaus Regling on Ireland. Sound familiar?

The evidence of nearly 40 cycles in house prices for 17 OECD economies since 1970 shows that real house prices typically give up about 70 per cent of their rise in the subsequent fall, and that these falls occur slowly.
Morgan Kelly:On the Likely Extent of Falls in Irish House Prices, 2007
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b_b
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Veritas
30 Sep 2013, 11:19 PM
Mouse will pay for the balls up.

Your trust in the banks is curious.

Based purely on the evidence, there is no reason to trust the banks or the regulators that are supposed to keep them in check.

And again, based purely on the evidence, it is always the tax payer who gets it in the neck when they kill the goose that laid the egg.
I do not trust the banks. If the banks fail the taxpayer will not bail them out.

If the banks fail, the deposits will be backed by the RBA (although the equity will be wiped out). This will be achieved by the RBA simply marking up the accounts of the banks with a computer. No taxpayers or grandchildren required.

Check out the sixty minutes transcript with bernanke in 2009. When asked whether taxpayers bailed out the us banks, bernanke responded no. Bank balances were marked up by computer.

Australia will be no different so long as the liabilities are in aud.

http://michaelreinstein.blogspot.com.au/2009/03/ben-bernanke-on-60-minutes-complete.html
Edited by b_b, 30 Sep 2013, 11:44 PM.
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