About Geoff Wise

Business owner, family man, photographer, walker and traveller

Geoff Wise’s photostream

Avenue of FlagsBeside the lakeMorning walkLake Burley Griffin PanoMy Mate AxelParliament House
The Australian War MemorialRed Hill SunriseKayakers on Lake Burley GriffinThe Reason..Morning StrollHello.. Hello
6 dozen.Yes, I know I am cuteAnd what do you want.You never guess what the bird next door did!Nearly booked outIf you scramble up the rocks
Rocky Mountain National ParkThe wilderness.. US styleMill CreekSquirrelBear LakeDam burst.. amazing who you meet.

A few more.. of our nations capital

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not.. so.. very.. geocaches

not.. so.. very.. geocaches

I like were I live and want to share it.  One feature is to the east, running north south is the Georges River.  On the other side is bush.  So I have used Geocaching to share this bush experience, beside the river.

Geocaching is a game.  How it is done is you get a GPS device and go online an find GPS coordinates of hidden caches, find them, leave a little present in the box and take one for yourself, then go online and log the results.

I have created several geocaches in the area, they are listed at Geocaching Australia’s website.

Have fun!

The tidal flow of money

I’ve been somewhat unwise in my understanding of the ebb and flow of money and how that impacts us, here in Aus.

On a recent long distance drive I think it all came together. I would like to share it with you. I think it is important… It is a bit long winded, but I believe it is worth the read.

So here goes…

First, we need to understand – people who have will try to sell for as much as they can and people who buy will want to buy for as little as they can.

I am going to simplify the process and I want you to imagine there are two countries… “The Pen” Country, (USA) and the “Pencil” Country, (China). Also, that each country contains 100 Items that make up the country’s worth…. eg 100 Pen Items, 100 Pencils, etc. Also, it is not easy to trade in Pens etc. so they use tokens to represent the value of an item, (Money), eg Pen Tokens etc. Also, that 1 Pen Token is worth 1 Pen Item. Got it?

EG, 1 Pen Item = 1 Pen Token…. totaling 100 Pens worth 100 Tokens.

Let’s look at the demand for Pens. We accept that people who have will increase the price if the demand goes up and supply doesn’t. If people want something they will pay more for it, they don’t want it and the price drops.

Imagine that three supply and demand events can occur.

1. What is mine is worth more… The demand for Pens increases. The number of pens remains static. The price increases. EG, 100 Pens for 100 Tokens, Double the demand , Number of pens unchanged = 1 Pen costs two tokens. (The people who own the Pens charge double. Those with more tokens pay double those with one miss out).

2. What is mine keeps it’s value… The demand for Pens increases. The number of pens increases. The number of tokens increases. The token price remains static – 1 Pen for 1 token. EG, 100 Pens for 100 Tokens, Double the Demand, Double the number of pens, Double the number of tokens = The price remains the same. (More pens are made to meet demand, more money is made to equal the number of pens. This is what happens in a naturally expanding economy. The government or “money umpire – the Central Bank” sees what is happening and makes more tokens to enable more Pens to be made. This action keeps the value of an item stable).

3. What is mine is worth less… One scenario – The demand for Pens remains static. The number of Pens remains static. The number of tokens increases. EG, 100 Pens for 100 Tokens, Number of items is unchanged, 100 more tokens are made = 1 Pen is worth 1/2 a token. (The value of an item is halved.) This can happen when a Government needs more money and can’t pay its bills. I will deal with this further on.
… Another scenario – The demand for Pens declines. The number of pens and tokens remains static. Those with with the Pens drop their sell price. There can be all sorts of reasons for this, eg people want to buy Crayons, a holder of Pens is going broke.

What if you want to own a Crayon or Pencil? In our above scenario, you exchange one Pen Token for a Pencil Token and buy one Pencil. This is foreign exchange. But what if there are different numbers of tokens for Pencils or Crayons? What if the value of a token changes? I’ll come to this..

Inflation – the big bad boogy man, that ordinary people sort of understand.

The media usually describes inflation as a result of Event 1, above – the value of an item increases.

BUT, inflation is also a result of the total number of Items or Tokens increasing – like inflating a tyre with more air.

IF Event 2 occurs, this is a natural event in an expanding economy.

IF the first scenario in Event 3 occurs, and more tokens, money, are made then the value of your Pen halves, relative to a Pencil from Pencil country. You need two Pens to buy one pencil.. those that have two Pens are ok, those that haven’t blame the Government and eventually it is “on for young and old”. You have more tokens but they buy half as much.

SO, inflation is the value of an item rising AND it is also the total volume of items or tokens rising.

Good government and money supply seeks to match the supply of money with the demand for goods – resulting in stable prices. IE the total number of tokens remains relative to the total number of items. This is good inflation as prices remain stable. It allows us to buy Pencils and Crayons with ease – Event 2.

Event 3, first scenario? Why would anyone want to do this?

First, you have to understand what the “Money Umpire – a Central Bank” does.

Good governments create “Central Banks”, that act as game umpires and seek to control the flow of money. They can influence this by adding more money to commercial banks and institutions. They do this by buying other peoples/business debt and the people/banks then have more money invest. This is good in an event two situation. They buy Government bonds, ie they loan the government money. They can also play with how much interest is charged on key forms of loans, that filters through to all lending. This will stimulate or shrink lending.. and thus the flow of money.

The USA receives significantly less Income Tax than it spends on “butter and bombs” and recently 40% of spending was borrowed money. They are also unable to pay their debts, their debt exceeds income by 7 to 1. They are broke. They need to borrow huge amounts of money to pay their bills. Only a portion of that debt comes due at any given time but they don’t have the money to meet that debt…. well, they may be able to, but they would not be able to “buy the butter or the bombs” for a long time …. and that would be political suicide.

To meet the debt repayments they have done two things. They have:

  • Borrowed more money. A vital lender is Foreigners – about 1/2 of all US Gov debt is owed to them. Americans are unable or unwilling to lend all the money their government needs, so they borrow it from foreigners.. EG, the Pen and Pencil example above.
  • Created more money or “Printed Money”. They basically do this by convincing the Central Bank that the bank should more buy Government Bonds or just simple print more money, which requires the Fed Bank to secure that with Government Bonds. This is OK in event 2 and can be used to stimulate an Event 2. Our government said spending our reserves after the GFC on pink batts, plasma TV’s and fences around schools saved our bacon. Some beg to differ on this opinion. This is not good in an Event 3. The creating of money did not generate sufficient demand or productivity needed to result in an Event 2 situation in the USA. It is better but not enough. It is not growing fast enough and the debt is too big and the will do fix it too small.

Debt is not a bad thing. It gives us what we want sooner than saving for it, but we have to have the cash flow to repay it. It is essential for most businesses to grow.

Debt is, for example: I lend 100 tokens and am promised to get back my 100 tokens plus 10 more tokens.. These 100 tokens are then used to buy something or is lent to someone else.. etc. etc. this explains why there is a lot more money lent than actually exists. When my original debt is repaid that means that the total amount of money (money supply) shrinks. (because it is not being reused). Remember this.

Debt is also created where there are no tokens to lend, no deposits of assets or cash to “underwrite” the loan, essentially a promise is made to repay.  It is called “shadow banking”.  There are lots of different forms of shadow banking.  It works well as long as people keep on borrowing.  Total liabilities in Shadow Banking was significantly more than traditional lending, just prior to the Global Financial Crisis and shrank dramatically after the GFC.  Scary, but true.

Again, there is a lot more debt than there is money. It is also traded to share the risk of a debt and make more money. Finally, as long as the repayments continue, all is well.

Humans do bad things. They borrow money they are not able to repay, or don’t want to. China, last century borrowed huge amounts overseas and defaulted on the loans. Remember the Global Financial Crisis of 2008 was caused by greedy and irresponsible borrowers overcommitting and the same minded lenders profiting.

Four “Bubbles” burst – the share market, property, personal debt and discretionary spending. People were living beyond their means, the banks encouraged it, and the government ignored it.

These bubbles are key drivers of an economy… and they all crashed.

US government regulators also trusted in the honesty and integrity of the lenders, or maybe just “turned a blind eye”. The lenders also parcelled their bad debt and sold it to the Europeans who repeated the deed, themselves.

No-one knew who had the bad debt, so lending ground to a holt. Interest rates increased and lenders took less risks. People didn’t know what was going on so they stopped buying or couldn’t because they couldn’t borrow money. Government and their “Money Umpires” bought a LOT of that debt. Which means what they are now owed the money.. (this includes “cancerous” un-payable debt).

So, if you think of money owed as something tangible, like my original 100 tokens I lent above, then they have an asset… but they didn’t have the money to pay for that debt… so what they owed increased too. Make sense? Sounds scary to me. They called this “Quantitative Easing”. The problem is who they bought the debt from – the banks etc who lent the bad loans, didn’t use all of it to stimulate an Event 2 and produce demand for Pens, they spent it on themselves or bought other peoples Pencils or Crayons or Pencil/Crayon tokens.

Four years later – the Greeks are stuffed, Ireland, Spain, Iceland and even Italy are heading in the same direction. Economies are stagnant and demand is suppressed. This is Europe. What if one of them decides not to pay it’s debt bills?

Then it doesn’t matter what good has happened since then, in the US. This is because we are all connected in a big global family of trade and foreign exchange.

There is another “bubble” primed to burst – Government debt. The US Government is incapable of meeting its loans that are due. Their strategy continues to be create more debt.

Remember Event 3, the first scenario – printing money to pay debt. It is called Monetary Easing. This is when money is created because governments can’t pay their bills.. or debt.. or borrow money to pay debt falling due. Money Umpires and governments will not admit they are doing this – because it scares the bejesus out of everyone.

Money Umpires can seek to stimulate an Event 2 or 3 by controlling the amount of money private banks can lend. They do this by reducing interest rates, allowing more people to afford to borrow… problem is the USA’s interest rate has effectively been Zero for some time.. So the only other legal means is to borrow more money.. even to print more notes and coins money.. the Yank Money Umpire has to secure more printed money with Government Treasury Bonds (debt).

So when does an Event 2, Quantitative Easing, become an Event 3, Monetary Easing?

In reality, when the market concludes the Money Umpire and Government are borrowing to pay bills and debt and its not going to get better in a hurry.

The “Printing of Money” is particularly relevant for foreigners. What if the Pencil country, China, lent money to the Pen country, USA, and then the Pen country printed more money in an Event 3 situation? It means when the Pencil country wants their tokens back they will get half their money back. China did and USA has, so China will lose on their investment.

“Hmm”, says Pencil Country, “Pen country still has to borrow or print more money, and needs to do it again in the not too distant future. My existing purchases of Pen tokens and Pens is now worth less, so I don’t want to buy Pen Tokens any more. I don’t want to buy Pen Government Bonds…. Pencil country exchanged 1 Pencil token for one Pen token but the Pen token will be worth only 1/2 a Pencil token when they exchange it back.

In Germany, recently, Government bonds offer a negative return… you get back less than what you give them. This is because too many people think that Europe is about to go down the toilet and think a small negative return guaranteed by Germany is better than other options.

So Pen Country is forced to print more tokens, ie scenario one, Event 3, and offer Pen Government Bonds to attract more tokens.

Foreign investors will want more interest on the borrowings in the USA. Banks will want more interest to maintain the value of money lent… remember banks everywhere in the developed world borrow money globally. So less money will be available to lend and it will cost more.. slowing down business growth further… The US $ will decline in value, some say, a lot. As said, if demand drops and the seller has to sell then the price drops – scenario 2.

This is the last “bubble” – the value of the Pen token – the dollar.

Businesses in the US will shut because they can’t borrow or sell enough, unemployment will increase, total income will decline and thus will government income – taxation – and they will be forced to cut back on spending on “butter and bombs”, and a lot of debt will not be repaid. This is not pie in the sky, it is a logical culmination of events. How much of it will occur is the issue.

In simple terms, a lot of people, businesses and banks will get burnt. What is owned will decline if value.

However, after this settles down, the un-payable debt will be written off, the US will still be the currency of choice and US manufacturing will be considerably more competitive because of the lower $US and lower labour costs. This will affect the Asians and the BRIC countries (Brasil, Russia, India, China). Already, this week the media reported that by 2015 some US states costs of manufacturing will be equal to China’s, which is increasing relatively quickly.

Scary, hey? Some experts say this will start to happen sometime in 2013/14.

What could trigger it?

  • The market admits the government is creating money to meet it’s debt commitments and is unable/unwilling thus unable to fix it and concludes this is bad. (Somewhat like the children’s fable about the king who goes around naked, because he is conned into thinking he is wearing a fancy outfit, and no-one is willing to tell him, until a child shouts out that he is naked.) I think this is what is going on right now – people are deliberately ignoring the truth. They are hoping the economy will recover, but the debt is too big and expenditure too great and no-one wants to take the bad medicine to fix the illness.
  • Too many people start saying, “the sky is falling, the sky is falling”, and people get scared and stop buying.
  • Inflation goes through the roof (experts say it takes about two years for an influx of printed money with no corresponding growth to cause inflation.. the Yanks printed their money last two years ago and are due to make more debt repayments),
  • Foreigners decide it is no longer a good idea to purchase US Government debt because of a real or imagined loss (and interest rates go up to attract risk takers etc..) Without foreign money the US government has to print money, whilst status quo remains. This will make both event three scenarios worse. Their central bank also had to buy US government debt.. ie Treasury Bonds.
  • Borrowed money is harder to get and more expensive, forcing item prices to go up (reducing profit margin and dampening demand) Assets drop in value because people aren’t buying.
  • The US politicians won’t see past their self-centred noses and make the decisions they need to make and the Yanks default on their loans.
  • The US falls off the “Fiscal Cliff” – the expiration of the 2012 Budget Amendment Act in early 2013. Taxes go up and cutbacks occur in Defense and Government Spending.

What will happen in Crayon Country, (Australia)? We will be affected, but not so much. There are a few of reasons why.

  • The first is, our banking regulators, I think, understand human nature better than the Yanks and have tighter controls on money lending.
  • We don’t owe as much overseas as others do. The amount of debt we have is relatively a lot less than what other countries have. Thanks to Paul Keating, John Howard and Peter Costello.
  • Keating started a revolution in business by floating the dollar and forcing us to be competitive on the world stage, back in the 80’s and much of what we make is for our own use, plus we became a quarry and food basket for the world. Howard and Costello continued this process. Costello realised the rest of the world wasn’t going to protect countries like ours from large money traders screwing around with exchange rates and hurting our economy. This happened when he went to the US regulators to ask for help and they basically said, “not our problem”, even though Wall Street companies were the main problem. So, he implemented a plan to balance our books and put us in surplus; thus we were one of the few countries with money in the bank when the CFC happened.
  • Even though we are in a better position than nearly all of the rest of the world, it will still hurt us. Because we need Pencils and Pens and foreign tokens and debt is globally traded. But, we make much of what need.
  • Mining is worth about 9-10% of our country’s output and employs 1.5% of employees. There is strong argument that the bulk of Australians would be better off if mining wasn’t so important… as only a small percentage of Aussies are benefiting from very high wages.
  • We will still be in demand as a Quarry and Food Basket, even during and after this problem is resolved.
  • But our tokens will not be in demand as much, it is said, so this will make our Crayon Tokens more competitively priced with Pencil and Pen Tokens which will make our Crayons more competitively priced with Pencils and Pens. IE Manufacturers in Australia will be better off. This is a good thing. Internet selling will be less attractive because our dollar will buy less. (It is of note that the media this week reported our dollar is 5 to 15c higher than is should be. This is because we are one of only 6 developed economies with a AAA credit rating and we pay double the interest of any of the others; so, other Central Banks are buying our government bonds. There is talk we should be printing money to give to these banks, to drive down the value of our dollar. The Swiss have a similar problem and they are putting a cap on their currency)

So what about we who make things and supply to those who do?

We, in the second speed economy, have been declining because it is easier to buy Pencils and Pens than before and our Crayon Tokens are much in demand, thus making foreign Pencils and Pens cheaper to buy than our Crayons. Also we are not buying as many Pencils, Pens and Crayons because costs are rising and real nett income is declining.

So the solution is…? Well, whoever has tokens will get richer at the expense of those who’ll get burnt.

Those with lots of debt and slim margins; in particular, will get burnt.

Lately the solution has been to “squeeze the lemon dry”, ie reduce costs and reduce prices to attract more business. But this is only a quick fix and will slowly strangle any business – as any business owner will testify. Profits decline, staff get overworked, customers get screwed around.

For my money… cash up, wait and subscribe to the “carpe diem” philosophy – seize the moment. Keep an eye out for “fresh lemons” and respond quickly.