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Get ready for a big financial hit


old man emu
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Get ready for a big financial and social hit beginning probably at the start of 2021. By then we hope that physical illness caused by COVID-19 will have melted away, but the financial ramifications will be worse than those of the Wall Street Crash of 1929. The Wall Street Crash was unseen and unexpected, like Titanic's iceberg. This time we can clearly see what is coming. It is the recession we have deliberately created due to the measures we took to maintain the economy, which makes it very different to past recessions that were unexpected and policy-makers were quite shocked at the depth and length of them. Australia knows what's coming. The International Monetary Fund has forecast a 6.7% contraction to the economy. Number crunching by private sector financial analysts has forecast a budget deficit here next year of A$300 bn, or 16% of national income.

 

But what has our government done to warn us? As usual, SFA. All their talk is about the daily numbers of people with the illness, and those numbers are nearly statistically insignificant. Otherwise they bicker about movement of people across arbitrarily drawn lines on a map. About the only good thing for the average Aussie that has come out of this pandemic is the exposure of the criminally poor level of care for our aged people. 

 

So what do we do as individuals and families to prepare ourselves for the shock of the financial hit? I'm optimistic that we can ride out about 5 years of low income, provided that State and Federal governments act to prevent banks foreclosing. Maybe its time to buy a few chooks and turn over a patch in the backyard to grow potatoes. Somehow I think it won't be too long before Uber is Unter.

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As always with any recession/depression/contraction of the economy, there will be a lot of losers and a few winners.

The winners are always the wealthy, who can afford to lose some money - but the "lower-socio-economic" groups will be the biggest losers, with the largest amount of job losses, and the greatest decline in income levels.

As the LSE groups spent a much larger proportion of their income on vital necessary goods, such as food, medicines, household necessities, fuel, rent, and transport costs, they will be ones who will suffer the most from economic contraction.

 

I get angry when I see Govts carrying out "standard economic recovery measures" that involve income tax cuts. The rich are the greatest beneficiaries of income tax cuts, because they are earning good money.

But the LSE groups barely get enough to live on, and income tax changes don't even concern them in most cases. The Govt would be better advised to raise pensions, unemployment allowances, carers allowances, and other welfare rates, because the people who get these payments, HAVE to spend virtually everything they get in income.

 

The rich, on the other hand, put the extra money they get, into luxury items such as high end vehicles, "boys toys", property investment, and superannuation - virtually none of which, benefits the LSE groups - unless you just happen to have a job cleaning luxury cars.

The rich also use extra income to indulge in "tax-minimisation schemes" - thus ensuring they pay even less tax, and reducing Govt income. The LSE groups always pay a higher percentage of their income in tax (via GST and other tax charges), than the rich ever do.

 

Property investment by the rich is the reason why property prices are so high, and rents are high, accordingly. The property market values are currently so far out of kilter with long term values, it's not funny.

Even small shop owners are struggling to pay rents due to high property values. I spoke to a DFO shop owner just a few days ago, he was in a shopping centre where he was paying $1000 a sq metre in annual rent (i.e., $50,000 annual rent for 50 sq m).

But the landlord then increased his rent rate to $1600 a sq m - in one hit. As a result, he pulled out of the shopping centre, and moved to the DFO - where he is still paying $1000 a sq m, though.

Interestingly, the shopping centre that he left, is full of empty shops now, and despite the centre only being about 15 yrs old, they are now talking about knocking it down, and replacing it with a block of apartments.

 

One of the areas where I can see poorer people saving on outgoings in the future is moving to regions where property values and rents are much lower.

If these people are able-bodied, the outlying regions are nearly always looking for reliable labour, so the chances of employment and income are there. Of course, there is often a downside that some of this labour requirement is seasonal.

 

The standard economic theory that putting more money into the hands of the rich, means more jobs and money for the LSE groups is an economic furphy that needs to be buried. The rich continually gain increased wealth by reducing the number of jobs available.

The classic gold-plated version of this is when CEO's go on a company "cost-saving" drive, and reduce the numbers of employees in the company. The CEO and senior management then always receive an increase in renumeration for "increasing company profits".

 

The standard economic theory hinges around the "trickle-down-effect" - which is supposed to mean that the rich spending their money, means the benefits always trickle down to the poor.

The problem is, the "trickle" is exactly that, a mere trickle that millions have to fight over, to get a tiny share of it. It's time to start turfing out a lot of economic theories that drive our nations, as they are long past their use-by dates.

 

Interestingly, Brazil, with its myriads of LSE groups and huge numbers of perennially poor people, has a system of allocating a regular stipend to the poor.

Despite Bolsanaro's poor record on fighting the COVID-19 virus, one thing in his favour is, he's increasing the payments to the poor of Brazil,  obviously fully understanding that people need a basic reliable income, to survive on.

 

https://www.npr.org/2020/08/31/906215778/coronavirus-hit-brazil-considers-major-public-funds-for-poor-and-unemployed

 

 

Trickle-down.jpg

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During recessions and depressins, inflaton generally tends to be low as businesses still have to try and sell and they try and keep prices at levels people can afford to buy. Of course, there have been coincident cases od economic downturn and hyperinflation - this can be due to some external stimulus (e.g. printing additional money and distributing it to end consumers who soend - increases demand without increasing supply and voila - inflation), or where production collapses at a significant enough rate across a basket of goods and services that forces prices up due to scarcity. Alternatively, as per the Wiermarch, inflating one's way out of a crisis is often used (basically massive redction in interest rates with massive government borrowing leading to a stimulation of the economy resulting ion higher demand but not increasing supply). Hyperinflation is often associated with a real increase in demand v supply - for this to happen, people either have to be earning money (increasingly) for not increase in production/productivity, or there is a massive supply collapse. In normal type recessions and depressions, there is a collapse of demand, but production (initially) remains unchanged, so there is a build up of inventory and prices remain or are cut (sometimes leading to deflation) as a result. Given we are looking at the latter, cash would still be king. Of course, a government providing external stimulus may change that, but if you don't have a job or other form of stable/rising inome, there is little you can do. Paying off ones debts when they can will minimise outflows so preserve what cash one has.

 

 

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5 hours ago, Jerry_Atrick said:

In normal type recessions and depressions, there is a collapse of demand, but production (initially) remains unchanged, so there is a build up of inventory and prices remain or are cut (sometimes leading to deflation) as a result

And therein lies the problem. Successive Conservative governments have allowed and encouraged secondary production in Australia to leave. so we can't produce our way out of a wet paper bag. Instead of borrowing huge amounts to give to the un- and under-employed to spend on products made elsewhere, the government could either establish a manufacturing base financed by tax money (but with proper oversight by people with private enterprise expertise) or by actively encouraging the private sector to fire up manufacturing.

 

Unless Australia starts value adding to its resources, we will never reach the potential this country has.

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10 hours ago, onetrack said:

As always with any recession/depression/contraction of the economy, there will be a lot of losers and a few winners.

The winners are always the wealthy, who can afford to lose some money - but the "lower-socio-economic" groups will be the biggest losers, with the largest amount of job losses, and the greatest decline in income levels.

As the LSE groups spent a much larger proportion of their income on vital necessary goods, such as food, medicines, household necessities, fuel, rent, and transport costs, they will be ones who will suffer the most from economic contraction...

In the 1930s people were more resilient and helped each other more. People's behaviour also tended to be moderated by fear of police and the almighty, and I suspect that has greatly diminished..

I fear this Depression will be deeper and longer than anyone realises and that some of the desperate will resort to desperate measures.

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I get angry when I see Govts carrying out "standard economic recovery measures" that involve income tax cuts. The rich are the greatest beneficiaries of income tax cuts, because they are earning good money...

 

In late January next year the world's elite.are meeting in Switzerland to reset global finances. Expect this to be as important as Bretton Woods, 1944. One thing we can be sure about is the golden rule: 

             He who has the Gold, makes the rules.

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If these people are able-bodied, the outlying regions are nearly always looking for reliable labour, so the chances of employment and income are there. Of course, there is often a downside that some of this labour requirement is seasonal...

Seasonal labour may be required in some industries, but how many people really are suited? 

A lot of farmers I know are aging fast, but still put in long hours. They've learned to be vary wary of hired help due to exorbitant costs of insurance and compliance paperwork. Many have been burned by incompetent or downright dangerous workers, so prefer to do it all themselves. 

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The standard economic theory hinges around the "trickle-down-effect" - which is supposed to mean that the rich spending their money, means the benefits always trickle down to the poor...

Sorry, I have to use this again:

 

 

 

image.jpeg

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