273 Britain's Climate Change Act to cost £18.3 billion per year

(1) Eastern Europe won't pay what it can't pay - Michael Hudson
(2) Data Mining by investment banks such as Goldman Sachs - the ultimate Insider Trading
(3) Britain's Climate Change Act to cost £18.3 billion per year
(4) Greens call for Resources Tax: 50% tax on excess profits from mining, oil, gas
(5) Bank Deposits hide Foreign Debt
(6) Australia's housing bubble: House Prices are Not Normal - Steve Keen

(1) Eastern Europe won't pay what it can't pay - Michael Hudson

From: Tim OSullivan <timos2003z@hotmail.com> Date: 10.04.2010 02:15 AM

Eastern Europe won't pay what it can't pay

By Michael Hudson

Financial Times,   Thursday 7 April  2010

http://www.ft.com/cms/s/0/952bd6f4-4273-11df-8c60-00144feabdc0.html

Greece is just the first in a series of European debt bombs about to go off. Mortgage debts in the post-communist economies and Iceland are more explosive. Although most of these countries are not in the eurozone, their debts are largely denominated in euros. Some 87 per cent of Latvia's debts are in euros or other foreign currencies, and are owed mainly to Swedish banks, while Hungary and Romania owe euro-debts mainly to Austrian banks. These governments have been borrowing not to finance a budget deficit, as in Greece, but to support their exchange rates and thereby prevent a private-sector default to foreign banks.

All these debts are unpayably high because most of these countries are running deepening trade deficits and are sinking into depression. Now that property prices are plunging, trade deficits are no longer financed by an inflow of foreign-currency mortgage lending. For the past year, these countries have supported their exchange rates by borrowing from the European Union and the International Monetary Fund. The terms of this borrowing are politically unsustainable: sharp public sector budget cuts, higher tax rates on already over-taxed labour, and austerity plans that shrink economies and drive more workers to emigrate.

Bankers in Sweden and Austria, Germany and Britain are about to discover that extending credit to nations that cannot (or will not) pay may be their problem, not that of their debtors. No one wants to accept the fact that debts that cannot be paid, will not be. Someone must bear the cost as debts go into default or are written down, to be paid in sharply depreciated currencies, and many legal experts find debt agreements calling for repayment in euros unenforceable. Every sovereign nation has the right to legislate its own debt terms, and the coming currency re-alignments and debt write-downs will be much more than mere "haircuts".

There is no point in devaluing, unless "to excess" - that is, by enough to actually change trade and production patterns. That is why Franklin Roosevelt devalued the US dollar by 75 per cent against gold in 1933, raising the metal's official price from $20 to $35 an ounce. To avoid raising the US debt burden proportionally, he annulled the "gold clause" indexing payment of bank loans to the price of gold. This is where the political fight will occur today - over the payment of debt in currencies that are devalued.

Another by-product of the Great Depression in the US and Canada was to free mortgage debtors from personal liability, making it possible to recover from bankruptcy. Foreclosing banks can take possession of collateral property, but do not have any further claim on the mortgagees. This practice - grounded in common law - shows how North America has freed itself from the legacy of feudal-style creditor power and the debtors' prisons that made earlier European debt laws so harsh.

The question is, who will bear the loss? Keeping debts denominated in euros would bankrupt much local business. Conversely, re-denominating these debts in local depreciated currency would wipe out the capital of many euro-based banks. But these banks are foreigners, after all - and in the end, governments must represent their own home electorates. Foreign banks do not vote.

There is growing recognition that the post-communist economies were structured from the start to benefit foreign interests, not local economies. For example, Latvian labour is taxed at more than 50 per cent (labour, employer, and social tax) - so high as to make it non-competitive, while property taxes are less than 1 per cent, providing an incentive towards speculation. This skewed tax philosophy made the "Baltic tigers" and central Europe prime loan markets for Swedish and Austrian banks, even as domestic labour struggled to find well-paying work. Nothing like this (or their abysmal workplace protection laws) is found in Western Europe or North America.

It seems unreasonable and unrealistic to expect that large sectors of the new European population can be made subject to salary garnishment throughout their lives, reducing them to a lifetime of debt peonage. Future relations between Old and New Europe will depend on the eurozone's willingness to redesign the post-communist economies on more solvent lines - with more productive credit and a less rentier-biased tax system that promotes employment rather than asset-price inflation. In addition to currency realignments to deal with unaffordable debt, the solution for these countries is a major shift of taxes from labour to land. There is no just alternative. Otherwise, the age-old conflict between creditors and debtors threatens to split Europe into opposing camps, with Iceland the dress rehearsal.

The writer is professor of economics at the University of Missouri and chief economic adviser to the Reform Task Force Latvia, an opposition think-tank.

(2) Data Mining by investment banks such as Goldman Sachs - the ultimate Insider Trading

From: gzibordi <gzibordi@cobraf.com> Date: 10.04.2010 09:15 PM

The frog, the scorpion and Goldman Sachs

By James Rickards

Published: 01/18/10 at 2:35 PM | Updated: 01/22/10 at 1:24 PM

http://dailycaller.com/2010/01/18/the-frog-the-scorpion-and-goldman-sachs/

Americans are quite familiar with customer data mining by large corporations even if they are unaware of the network science behind it. No sooner do clerks scan bar codes at the check-out counter, then e-coupons turn up in our in boxes with just the right timing to get us thinking, “yeah, good idea; let’s buy some ink cartridges while they’re on sale today.” My favorite is Google which posts relevant ads on Gmail before you’re done typing the key words; although they often miss the mark like when you’re writing about the shoe bomber and they offer you a deal on Italian loafers.

These techniques are the benign side of data mining. They are, at worst, mildly annoying and, at best, extremely helpful, allowing us to save money when we were in the market for the suggested goods anyway. This is what economists call value added, that is, taking some raw material, in this case data, and processing it to improve the finished product or lower costs.

Now consider another example of data mining, not done by retail firms, but by giant investment banks such as Goldman Sachs. These banks have thousands of customers transacting in trillions of dollars in stocks, bonds, commodities and foreign exchange daily. By using systems with anodyne names like SecDB, Goldman not only sees the transaction flows but some of the outright positions and whether they are bullish or bearish. Data mining techniques are just as effective for this market information as they are for Google, Amazon, Wal-Mart and others. It’s not necessary to access individual accounts to be useful. The data can be aggregated so that the bank can look at positions on a portfolio basis without knowing the name of each customer.

One need not be a market expert to imagine the power of this information. You can see which way the winds are blowing before the storm hits. You get a sense of when momentum is draining out of a trade so you can get out of it before the market turns. You can see when bullish or bearish sentiment reaches extremes, suggesting it may soon turn the other way. This use of information is the ultimate type of insider trading because it does not break the law; you are not stealing the information, you own it.

So what do Goldman and others do with this mountain of market information? Do they send coupons to customers or text them with great trading ideas? A few lucky customers, usually giant hedge funds, may get a call on some insights, but this mountain of immensely valuable market information is used mainly to power their giant proprietary trading desks allowing them to rack up consistent excess returns. Economists have a name for this also. It’s called “rent seeking,” which means taking value from others without any contribution to productivity. The difference between value-added behavior and rent seeking is like the difference between Amazon trying to sell me a book or planning to steal my library. In nature, the name for a rent seeker is parasite.

The ideal existence for a parasite is symbiosis, or balance, where it offers some minimal service to the host, (some parasites devour insects which annoy the host), while extracting as much sustenance from the host as possible without killing it. But sometimes the symbiosis is disturbed and the parasite takes too much and actually destroys the host, which can end up destroying the parasite as well. This recalls the fable of the scorpion and the frog. Both are on the edge of a river looking for a way to cross. The scorpion cannot swim and asks the frog for a ride on its back. The frog at first says, “no,” for fear of being stung. But the scorpion assures the frog it will not sting him because they would both drown. The frog agrees to carry the scorpion. Once they reach the middle of the river, the scorpion stings the frog and they begin to drown. The frog cries, “why did you do that?” and the scorpion replies, “it’s my nature.”

And that is the nature of Goldman. Gather up as many customers as possible, aggregate the available information to achieve a superior market view and then relentlessly extract rents from the marketplace. Better yet, tell yourself you’re smarter than everyone else and you’ve earned the rents from the symbiosis.

We actually wouldn’t care about this if we weren’t subsidizing it. If Goldman wants to Hoover up information and their customers are willing to be used, that’s their business. We should mind that the taxpayers are supporting it. We should mind that Goldman has the ability to take government guaranteed deposits. We should mind that Goldman was bailed out in the AIG rescue and never even said thank you to working Americans who paid the bill.

Worse yet, the parasite is now killing the host. The United States is drowning in debt, much of it incurred to bail out Goldman, AIG, GMAC, Fannie Mae and all of the other rent seekers. The U.S. is like the frog; well meaning but blind to nature of scorpions.

Wall Street likes to say, “what’s good for Wall Street is good for Main Street.” That’s the scorpion talking. What’s good for Wall Street is good for Wall Street. Never forget it.

James G. Rickards is a writer, lawyer and economist and the former General Counsel of Long-Term Capital Management. Mr. Rickards holds an LL.M. (Taxation) from the New York University School of Law; a J.D. from the University of Pennsylvania Law School; an M.A. in international economics from the School of Advanced International Studies, Washington DC; and a B.A. degree with honors from the School of Arts & Sciences of The Johns Hopkins University. He can be contacted at james.rickards@gmail.com, and on Twitter at @JamesGRickards.

(3) Britain's Climate Change Act to cost £18.3 billion per year

From: John Cameron <blackheathbooks@internode.on.net> Date: 11.04.2010 06:40 AM

http://www.telegraph.co.uk/comment/columnists/christopherbooker/7550164/Climate-Change-Act-has-the-biggest-ever-bill.html

Climate Change Act has the biggest ever bill

Ed Miliband's legislation will cost us hundreds of billions over the next 40 years, says Christopher Booker

By Christopher Booker Published: 03 Apr 2010

One of the best-kept secrets of British politics – although it is there for all to see on a Government website – is the cost of what is by far the most expensive piece of legislation ever put through Parliament. Every year between now and 2050, acccording to Ed Miliband's Department for Energy and Climate Change (Decc), the Climate Change Act is to cost us all up to £18.3 billion – £760 for every household in the country – as we reduce our carbon emissions by 80 per cent.

Last Thursday – with northern Britain again under piles of global warming – another tranche of regulations came into force, as this measure begins to take effect. New road tax rules mean that to put a larger, more CO2-emitting car on the road will now cost £950. New "feed-in" subsidies for small-scale "renewables" mean that the installers of solar panels will be paid up to eight times the going rate for their miserable amount of electricity to be fed into the grid, with the overall bill for this scheme estimated eventually to be billions a year.

A pipedream of six turbines a day until 2020

Not the least bizarre of the Government's strategies, however, is Decc's new Carbon Reduction Commitment (CRC) scheme, requiring up to 30,000 of our largest energy users, such as ministries, councils, universities, hospitals, supermarket chains (and even "monasteries and nunneries"), to pay to register with the Environment Agency. Some 5,000 of them, using more than "6,000 megawatt hours" of electricity each year (equivalent to the needs of 1,250 homes), will then have to carry out a cumbersome audit of their carbon footprint, using "three different metrics", in order to pay £12 for each ton of CO2 they emit – at a total initial cost estimated at £1.4 billion a year. This will eventually be contributed by all of us, either through taxes or, for instance, whenever we visit Tesco.

Even the 25,000 remaining non-participants in the scheme will still have to pay, between them, some £9.75 million to register with the Environment Agency, doubtless so they can be brought into the net at a later date. Meanwhile, as indicated by Decc's 100-page Carbon User's Guide, the "carbon efficiency" performance of the 5,000 participants will place them in an annual league table, with the worst performers having to pay cash penalties, to be given as bonuses to those at the top.

In return for the millions paid to the agency in registration and annual "subsistence" fees, it is hiring an army of officials to carry out audits, to ensure that no one is cheating. Anyone who incorrectly records emissions or fails to submit the stacks of necessary documentation in time will be fined £5,000 plus £500 a day, doubled after 40 days, with unlimited fines or up to two years in jail for more serious offences.

Recent studies show that, even though the first stage of this unbelievably complex scheme came into force on April Fools' Day, more than half the enterprises liable to sign up are not yet aware of what is required of them – so the Government could be looking forward to a huge additional income from those fines.

Once the scheme is established, of course, the idea is that, in future, the total amount of CO2 emitted will be capped, pushing the cost of each ton of CO2 even higher. All this and much more, such as the £100 billion the Government wants to see spent on useless wind farms, is designed to reduce Britain's CO2 emissions within 40 years to where they were in the early 19th century.

Since we contribute less than 2 per cent of global emissions, while China continues to build a new coal-fired power station every week, these empty getures will do nothing to reduce the world's overall "carbon footprint". Not that this makes any difference to global warming anyway – but at least it will give the Government billions more pounds of our money, while we still have any of it left.

(4) Greens call for Resources Tax: 50% tax on excess profits from mining, oil, gas

{they do get some things right - Peter M.}

http://greens.org.au/node/5855

Manage resource boom better to plan for future need

06/04/2010 - 09:27

Australian Greens Leader Bob Brown today called for the creation of a new National Resources Fund and resource rent tax to secure revenue and infrastructure funding for Australia into the future.

The Greens proposed resource rent tax would replace current Commonwealth and state mining tax regimes with a national 50% tax on excess profits on all major mineral production in Australia, including petroleum, gas, coal, iron ore and other minerals.

Depending on international market fluctuations, it could increase current resources revenue by $5 billion - $10 billion per year.

"Australians should be getting more for our natural resources," said Senator Brown. ==

A tax on resources profits would benefit all of us

BOB BROWN

April 6, 2010

http://www.smh.com.au/opinion/politics/a-tax-on-resources-profits-would-benefit-all-of-us-20100406-rp2u.html

Australia is not benefiting enough from the sale of its natural resources.

The value of top mineral production between 2006–2007 totalled around $100 billion. But the Australian community saw little more than 7 per cent returned in state and Commonwealth tax revenue.

Compared with other nations, we are flogging off our vast natural resources at a cut price.

The Greens believe that these rich mineral resources, and the wealth they generate should be shared by all Australians. The minerals are public property until converted, by government licence, into private extraction rights.

While the most recent resource boom brought billions of dollars of profit to mining and resource companies, the benefit to Australian communities is more questionable. Indeed in many places negative impacts including increased rent, housing and skill shortages and strained infrastructure have been more apparent. Billions of dollars of public money have funded infrastructure – road, rail, and wharves – to fund the boom.

With predictions of the post-GFC resource boom prompting warnings from the Reserve Bank, a mechanism is needed to ensure a fairer share of the benefits are delivered to the community in the long term.

The Greens propose the creation of a 50 per cent resource rent tax on mining company profits, to be collected into a National Resources Fund. The fund will allow the Commonwealth to invest in the infrastructure required to furnish a just society for the next 100 years, not just the next 10.

A resource tax has already been mooted as part of the Henry Tax Review. Treasury Secretary Ken Henry has told the state treasurers that Treasury estimated that resource companies should be paying about $20 to $25 billion more if a profits-based tax system (resource rent tax) was applied.

A resource rent tax as proposed by the Greens would raise between $5 billion and $10 billion plus a year, in boom periods, for the National Resources Fund. This would pay for investment in energy efficiency and renewable energy to combat climate change, public education, public transport, planning and investment in infrastructure and services for Australia's ageing population. The investments would be restricted to a set of public-interest guidelines.

The Norwegian Government established a similar scheme in the 1970s in response to the sudden increase in income from the North Sea oil boom. Recognising that oil reserves are limited, the Norwegian Petroleum Fund manages the large and variable income from the oil boom to ensure its availability for future generations.

Revenue raised through our resources rent tax would be placed in the similar National Resources Fund, to be managed by the Future Fund.

Given the location of the majority of resource development projects and the significant disadvantage of the local indigenous communities, investment in those communities should be given special significance. The Greens proposal would also ensure that no state is disadvantaged under the proposed minerals tax regime and maintain where necessary (as in Western Australia) the principle of a fixed proportion of royalty return to regional areas.

Senator Bob Brown is leader of the Australian Greens.

(5) Bank Deposits hide Foreign Debt - Peter Myers, April 12, 2010

We're selling the country off.

Most Australians think we have no Foreign Debt. The media confuses "Government Debt" with "Foreign Debt".

As a result of Free Trade (abolishing tariffs), we now export minerals and import manufactured goods. Nearly all the cars on our roads are imports.

Yet manufactures are much more expensive than raw materials. That's why we have a Current Account Deficit every year.

But our leaders don't worry about it, because the debt is denominated in Australian Dollars.

Exporters from the Surplus countries (Japan, China etc) receive A$ for their products here. They send some home, ie swap it for ¥ (Yen, Yuan etc), but keep some of their profits here, by depositing them in Australian banks.

These are A$ deposits, but owed to foreign countries.

Australia's banks are our biggest foreign debtors, because those deposits are counted as foreign liabilities.

If the export company itself does not want A$ assets, it will take its earnings home (ie swap A$ for ¥), and some other company with ¥ will obtain the A$ to buy assets in Australia or deposit in Australian banks. In some cases, foreign Central Banks have supplied the ¥ for buying $ assets.

Foreign Central banks swap ¥ for $ to keep their currencies down, so that Export Surpluses can continue; this process is called "sterilization". If they didn't do it, the ¥ would rise and the $ would fall.

By one of the above means, Australian banks receive A$ deposits, which are owed to foreign countries.

Those $ deposits owned by the foreign company are then lent out to Australians via home-loans, ie mortgages. This helped fuel the real-estate boom.

Suppose that, instead of running Current Account Deficts every year, we had balanced trade, only importing what our exports pay for. Then, we would import fewer manufactures, making more in our own factories here.

There would be more local employment. So the deposits in bank accounts would be more owned by Australians and less owned by foreigners.

That would mean less foreign debt. But also, that houses in this country would be more owned by Australians and less owned by foreign mortgage-holders.

If large Current Account Deficits continue a few more decades, we will have sold the whole country off - without realising it.

This won't be MY problem; or YOURS. We'll be gone. Perhaps we should wash our hands of it.

But what of our children and grandchildren?

(6) Australia's housing bubble: House Prices are Not Normal - Steve Keen

House Prices are Not Normal

by Steve Keen

DebtWatch No. 44 April 2010

http://www.debtdeflation.com/blogs/2010/04/06/debtwatch-no-44-april-2010-house-prices-are-not-normal/

“I think it is a mistake to assume that a riskless, easy, guaranteed way to prosperity is to be leveraged into property. It isn’t going to be that easy.” (RBA Governor Glenn Stevens, Sunrise Program March 29 2010)

I applaud Glenn Stevens for making the above statement on national television. It was both courageous, and a succinct and accurate statement of the delusion that has come to dominate economic thinking in Australia. He effectively acknowledged that Australia has succumbed to a Ponzi Scheme: the belief that the entire country can make a living from unearned income. This something that, until recently, most public and private commentators have been strenuously denying. The great pity is that this realisation was so long in coming, while the farce is that one wing of Australia’s government has now declared its intention to bring down a Ponzi Scheme that the other wing is trying to maintain.

The data that led Stevens to this realisation is pretty obvious: the most recent quarter saw the largest increase in house prices since the ABS began keeping records in 1986.

The role of the Federal Government in causing this bubble–and earlier ones–via the First Home Owners Grant is also obvious. While previous manipulations of the market by the Grant turned a tepid rate of increase into a bubble, this time the Grant turned the fastest rate of fall in house prices into its greatest rate of increase. The current volatility of house prices is telling: eight of the ten biggest movements–in both directions–have occurred in the last two years.

With the RBA likely to increase rates specifically to prick this bubble, the volatility will doubtless continue. But even without the RBA’s expected–and I have to say justified–anti-bubble interest rate intervention, the real estate market is, as Stevens argued, far from a stable route to riches.

House Prices are Not Normal

One of the great fallacies of conventional “neoclassical” economics that encouraged behaviour that caused the GFC was the proposition that asset prices are “Normal”–in the sense that their volatility fits the pattern described by the “Normal Distribution”.

The superficial beauty of the Normal Distribution is that the behaviour of a variable can be reduced to just two numbers–its mean and standard deviation. But its real, deep beauty is that if a variable follows a Normal Distribution, then extreme events are vanishingly rare. if a variable moves normally, then:

  Movements of 5 standard deviations or more above or below the mean are so rare as to be effectively non-existent; and

  Their rarity means that they play no significant role in shaping the system: its behaviour is completely described by the events that fall within the +/- 5 standard deviations range.
As stock market speculators learnt to their great cost during the GFC, that is so not the case for share prices–since “impossible” or “Black Swan” movements in prices have been the order of the day since 2007.

For example, the average daily movement on the Dow Jones since 1914 is 0.028%, while the standard deviation is 1.13%. If stock market price movements were “Normal”, there would have been just one daily decline of more than 4.5 percent since 1914. In fact, there were 100 such falls, out of a total of 24,593 daily movements in the Index–fully 100 times as many falls as a Normal distribution would predict.

Nor could those falls be ignored in the long run: they caused a collective 612.5 percent fall in the Index, when the sum of all the percentage movements since 1914 is 688 percent.

Anyone who relies upon the Normal Distribution when investing in the stock market is ultimately on a hiding to nothing to lose his shirt, because the Normal Distribution seriously underestimates the odds and the importance of extreme volatility in share prices. A far better guide to how share prices actually behave is the “Power Law”, as well as Didier Sornette’s research based on an analogy to earthquakes.

So how do house prices stack up? Though we have a far shorter time series for house prices than for shares, one thing is for certain: house prices are not Normal. The mean quarterly change in the ABS series for nominal house prices since 1986 is 1.24%, and the standard deviation is 1.786%. If house prices were Normal, the distribution of quarterly changes would look like the red line in the next chart; the actual pattern is shown by the blue bars.

The vast majority of quarterly movements are below the mean, with the largest number–27 out of the 93 quarters–registering just above zero change (an average of 0.267% increase for the quarter). The high overall average of 1.24% growth per quarter in nominal house prices is driven by the smaller number of quarters (26 out of the 93) with increases above the average.

The data is skewed in time as well as magnitude. A truly Normal distribution would have no time pattern to the data, with a large movement just as likely to be followed by a small one. The actual distribution has long periods of low increases with clusters of large changes–and these have increasingly involved large falls as time has gone on. The next chart compares the actual pattern of price movements (in red) to a simulated random pattern (the black crosses).

There are several movements–especially the -3.4% and +7% recorded since the GFC began–which are outside the standard range for a Normal Distribution. They are not so far outside that we can categorically say that a Power Law accurately describes house price movements, as we can with share prices. But the odds are that these two leveraged asset classes share the same fundamental dynamics.

The FHOG of Real EstateIt should also come as no surprise that the First Home Owners Grant scheme significantly distorts the housing market. From the statistics, there is no doubt that the true beneficiaries of the scheme are vendors, real estate agents, and lenders–not first home buyers.

There are several ways to slice and dice the data on this point: there are years when there was no Grant, and years when there was a grant in some form or another; periods prior to the introduction of a Grant, or a change in its magnitude, and periods after the change; and periods when the Grant was doubled. The following charts show these dissections.

Periods without a FHOG had significantly lower growth in house prices, and significantly lower volatility in prices. The average quarterly price change without a FHOG was a mere 0.44%–one third of the average for the entire series. The volatility was also substantially lower, with all movements being between -1 and +2.5%.

Periods with a FHOG had both substantially higher average price rises (2% p.a. vs 1.25% for the entire set) and substantially greater volatility (ranging from -3.4% to + 7%).

A closer look at the impact of the FHOG shows that its role is that of a storm trooper for the housing market. The next chart looks at the movements in house prices in the 2 years after an introduction or change to the Scheme, and in particular at what happens to prices in the 2 years after the payment was doubled (in 2001 under Howard and 2008 under Rudd). The “Pre-FHOG” is all other quarters apart from these 2 year segments.

All but one of the large increases in house prices (4% or more in a quarter) occurred after the FHOG was doubled, while the average quarterly change in prices was over 2.9 percent. If the FHOG is the real estate sector’s storm trooper, then doubling the FHOG is its Panzer division.

The next table summarises the statistical properties of house price changes, including “Kurtosis”–a measure of how peaked the distribution is compared to the Normal Distribution–and “Skew”–a measure of how biased the distribution is towards above or below mean movements. Periods without a FHOG have a peaked distribution (Kurtosis greater than zero) and few price changes below this peak with many above (Skew greater than zero); periods with a FHOG have a flattened distribution (Kurtosis below zero, meaning that price movements are more widely dispersed), and a negative skew (meaning that there are more price movements below the mean than above).

The role of the FHOG in causing house prices to rise faster than consumer prices is even more apparent if we consider the annual CPI-deflated series–but what is then also obvious is its decreasing effectiveness over time. When rolling annual price changes are considered–a more realistic time frame for changes in house prices, since this is a slow moving asset market–the biggest price inflation bang for the FHOG buck was back in 1988, when the rate of increase hit almost 30%. Howard’s doubling could only score a 16.5% maximum rate of growth of real house prices; Rudd’s has thus far peaked at 11.25%–though this omits the impact of the most recent 7% increase in nominal house prices (since CPI numbers are only available till December 2010).

The real house price data emphasises the message that the real beneficiaries of this government intervention are not first home buyers, but vendors, real estate agents, and banks–in increasing order of benefit.

The vendors benefit from a higher price; the agents benefit from higher turnover and fees; while the banks benefit from the increased mortgage debt that first home buyers–and then the vendors they sell to–take on in order to buy into a government-supported Ponzi Scheme. The banks and mortgage lenders in general have been the biggest beneficiaries as mortgage debt has risen from under 20% of GDP in 1990 to over 85% at the end of 2009.

The revival of this Ponzi Scheme played a key role in Australia’s sidestep of the GFC. As is obvious in the next chart, the mortgage debt to GDP ratio began to fall prior to the First Home Vendors Boost, but then accelerated once the Boost was available.

The Australian economy has thus returned to debt-driven growth, with the household sector carrying the full burden for the private sector. I remain sceptical this period of debt-driven growth will last as long as in previous bubbles when our private debt to GDP ratio was half what it is today.