Economics

The serious situation of the Three Gorges Dam

AustralianActuary Economics, Life

In case things were not bad enough already in China, there is a serious situation rapidly turning into the risk of a catastrophe with the Three Gorges Dam. In brief, its structural integrity appears to be compromised. Combined with very high rainfall in the catchment area of the Yangtze River, the Dam is buckling and the authorities are releasing as much water as is possible to take the pressure off. But it might not be enough. Should the dam fail, it would cause a catastrophe in China.

The first impact would be humanitarian. Millions of people live and work downstream of the dam. Casualties would be large in number. The second impact would be local economic wipe out. The third would be international economic consequences. The fourth impact would be political reprisal. This is not looking good.

COVID-19, the economics teacher

AustralianActuary Economics

COVID-19 is both a virus and a teacher. The virus bit, you know about. The teaching angle is the subject of this post.

We earn a living only by serving somebody else. Everyone in a market economy has a boss, from Company directors to the newly hired casual in the basement, from the small business owner to the freelancer. To do their job, they must organise inputs in some way to deliver outputs to the satisfaction of the end user. COVID-19 restrictions have disrupted those inputs, the production process and sales, drastically so in some cases. It makes not a jot of difference to the principle at stake whether you are the CEO of the world’s largest corporation, or just starting out in the basement on a casual contract. All that varies is the complexity of the process to be restored.

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COVID-19 update

AustralianActuary Economics, Life

The total number of people that die in any one year across the whole world is currently around 56 million. Of those, around 28 million were over age 70.

The current total number of deaths due to COVID-19 is 56,000 globally. Of those, the proportion aged over 70 appears to be very high, at least 80% based on what scant data is available.

The global workforce is almost entirely aged less than 70 years. Thus COVID-19 has killed around 11,200 people of potential workforce age. In any typical year, the number of deaths globally of potential workers is 28 m. Thus the increase in workforce deaths, so far, is 0.04%.

Source: ourworldindata.org

That’s not a knife

AustralianActuary Economics

Does anyone remember Crocodile Dundee?

Mick

“That’s not a knife!” Mick said dismissively at the New York punks trying to hold him and his girlfriend up with a small folding penknife. “This is a knife!”

Stop me if I told you this before but COVID-19 is not a pandemic. COVID-19 is a penknife. Spanish flu in 1918-19 was a pandemic. It killed more than 20 million people in the space of 18 months. COVID-19 is entering the northern hemisphere spring with fewer than 10,000 deaths globally, having killed the first in November, ie 4 months ago. The virus will be stopped by the sunshine of the northern summer.

COVID-19 kills those who catch it and who are weak for other reasons – age, infirmity, respiratory weakness etc. But not all who are exposed catch it. Not all who catch it die. This panic is misplaced. In fact the cure, as imagined by panicked politicians, is worse than the virus. This is no reason to kill small businesses and strangle taxpayers to support the barely surviving business.

Then the clueless central bankers add to our misery with their incredibly stupid policy response – “whatever it takes, there are no limits to what we will do” said the pathetic creature Philip Lowe, so-called governor of Australia’s central bank. He is willing to trash the Australian currency for this? He obviously never recovered from his university education.

 

Events, dear boy, events!

AustralianActuary Economics, Life

Events are happening. It was the UK prime minister Harold McMillan who reportedly replied to the journalist’s question about what he feared for the times “Events, dear boy, events.” The modern day political leaders with a tendency to fear events have had plenty of material to work with in the last month. Let’s name a few, in no particular order or importance: the south-east Australian bushfires; the assassination of Iranian Republican Guard major-general Soleimani; Brexit; coronavirus; Tesla’s stock price. I will add one more: the impeachment of President DJ Trump, although this is less of an event and more of a political process.

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The great political realignment

AustralianActuary Economics

Regardless of cause, it has arrived. The great political realignment is here. The left parties of Australia (Labor), UK (Labour), US (Democrats) and Canada (Liberals) no longer represent the people that they were originally formed to represent, that is, the wage earners. Instead, the wage earners now support the right of centre parties. There was a hint of this during the premiership of John Howard in Australia over a decade ago – Howard’s battlers were the trades workers in particular. This realignment has emerged in spectacular fashion with the election of Donald Trump, Scott Morrison, Boris Johnson and the recent chastisement of Justin Trudeau, all in the space of three short years. Add to that the allied cause of Brexit and it has been a magnificent three years. Jacinda Ardern in New Zealand should heed the warning signs, but I doubt that she will.

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In search of 5% pa

AustralianActuary Business, Economics

Are investment returns becoming more elusive? In nominal terms, yes. But in real terms, maybe not so much. Possibly the single largest consequence of the Australian grand social experiment that is compulsory superannuation is that nearly everyone now has to decide how to invest financial assets over a very long term. What was previously the domain of a few is now a national occupation. In the current investment environment, it is an occupation that has lost a lot of its charm.

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How to get monetary policy completely wrong

AustralianActuary Economics

There is a difference between the prevailing rates of interest in the money and credit markets and what can be loosely called the natural rate of interest. When the rates diverge, problems emerge.

The central bank in Australia (the RBA) conducts the management of monetary policy, independently of the Government of the day but to a stated aim of constraining inflation between 2% – 3%pa. It has just manipulated down market interest rates twice in two months. Prior to that, the official cash rate (the benchmark the RBA uses to influence all other rates) was held ‘at emergency low levels’ for 3 years. If the old rates were at emergency levels, then what are they now being lower still? The official cash rate is now 1%pa.

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The search for yield

AustralianActuary Economics

Investors want yield. Many will take on quite a degree of risk to earn it. But yield has become difficult to find over the last five to eight years and there is every prospect that it will remain elusive for the foreseeable future. Are we mired in a never-ending low yield out-look?

To a large extent, the low yield environment has been deliberately generated by central bank policy in most countries. Faced with the prospect of a recession after the the sub-prime financial crisis, including the collapse of some banks, US and UK central bank policy engineered a reduction in interest rates by creating cheap easy money (in effect, printing banknotes) as a matter of priority. On top of that, fiscal expenditure programmes were instituted in haste, a course of action followed in Australia to the ludicrous extent of the Government mailing $900 cheques to citizens (including dead ones, of course). The end result has been budget deterioration, increased public debt and, crucially, a distortion in the structure of interest rates in the market and the delay in cleaning out bad investment projects.

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