Friday, January 7, 2011

how to budget personal finances


The party is over in Australia. Many anti-dollar investors and Pollyannas living down under just don't realize it yet. Nonetheless, Australia faces an economic crunch as family finances collapse under the burden of record debts, rising interest rates and utility bills.

Please consider Australians sinking under debt burden

With banks warning they will be forced to raise mortgage rates by 0.50 per cent in 2011 and Sydney rents forecast to rise by between $160 and $190 a month, according to analysts Residex, householders look set to suffer.

Repossessions and tenant evictions are expected to rise sharply. "It's going to be tough" said Shane Oliver, chief economist at AMP Capital. "Families face many rising costs and while most people have slowed their borrowing, our debt is still growing and that's a big problem."

Despite more cautious spending in recent months, household debt is still up by 5.8 per cent on a year ago and a recent survey by Westpac found only about 20 per cent of people thought paying off debts was the best use of their money. Most households in the US, UK and much of Europe are still busily paying down their borrowings, particularly unsecured debts such as personal loans and credit cards.

"Unlike the rest of the world, Australia has slipped back into its old habits," said Steve Keen, professor of economics at the University of Western Sydney. "We're spending ourselves right back into trouble. With so much extra debt to service, we don't need interest rates to reach anything like the 9.6 per cent they hit in 2008.

"We may find repossessions spiking much more quickly than they did two years ago."
Weekly Living Costs Up $100

Real estate has peaked and so has the shopping center economic model based on the strong Australian dollar. There is no reason here to like either Australian equities or the Australian dollar. Strong commodity prices will no longer help Australia.

Australian real estate has already been hit by rising interest rates and with Weekly living costs up $100, more rate hikes may be coming.
FAMILIES face cost-of-living increases that could drain the weekly budget by up to $100 this year.

New data shows Australians are being levelled with record expenses for basic services and Sydney residents are some of the hardest hit in the country.

After floods that have wiped out crops in Queensland and NSW, fruit and vegetable prices are predicted to rise by up to 50 per cent.
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Any hope the strong Australian dollar would shield motorists from increases in fuel prices have been dashed - global oil prices are tipped to hit record highs.

This year's price increases will compound the cost pressures already inflicted on households.

The trio of utility costs alone represents an extra yearly burden of about $1000 - or $20 a week - for an average household of four, while grocery bills are set to rise on average by $50 a week, based on a weekly bill of $150.

Housing affordability has taken another dive, with industry figures showing the largest annual decrease in a decade.

A report by the Real Estate Institute of Australia showed the proportion of income required to meet loan repayments increased 5.8 per cent to 34.8 per cent over last year, a 10-year high.

Additionally, the amount of rent people are paying has increased by 18.6 per cent in Sydney over three years, above the national average.

The Bureau of Statistics also identified health costs, communications services and petrol prices as having risen sharply over the year.
$AORD - Australian Stock Market Index Monthly



$AORD - Australian Stock Market Index Weekly



$SSEC - Shanghai Stock Market Index Weekly



Both the Australian stock market and the Chinese stock market have been weak. This is in spite of the fact that commodities have been on fire. Both countries have had overheating economies led by real estate bubbles.

It will be interesting to see how the Reserve Bank of Australia handles this. Failure to hike rates would hurt the Australian dollar and increase the price of imports while hiking rates further will crush the real estate bubble.

China's problem is far more complex. For more on China please see

  • Misguided Love Affair with China; China's Massive Monetary Expansion and Crackup Boom
  • China Hikes Rates, Ponders Capital Controls to Halt Currency Inflows; Eight Reasons China Faces Hard Landing

There are no good solutions when the central bank lets real estate bubbles get out of hand as has happened in the US, China, Australia, Canada, Ireland, Spain, the UK and numerous other places.

The difference so far is the US, Ireland, and Spain property bubble have popped, while those in Australia, Canada, and China are just now facing the pressure.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List


It’s a fact of life that sometimes you have to spend money to save money. We all know this in our personal lives. For example, it may be cheaper to buy a new car than keep spending money repairing an old one, or to invest in a more efficient new furnace that may pay for itself by lowering one’s heating bill. The same is true with government. Closing an obsolete military base costs money in the short run, but saves money in the long run.


Another way Congress may need to spend money now to save much more later is by investing in the analysis and research necessary to understand the enormous complexity of federal finances. The fact is that permanent solutions to our budget problems will necessarily require changes in a great many laws that govern the eligibility for government benefits, contracting, federal financing for programs administered by the states, and many other things.


Only experts understand the complexities of programs like Medicare and how difficult it is to change the law in such a way as to achieve meaningful savings. They know that those who benefit from such programs – by which I don’t mean individual beneficiaries, but institutions such as hospitals, HMOs and insurance companies – employ people who know the law and program details and get paid a lot to frustrate ill-devised efforts to reduce their revenues.


Experts also know the history of efforts to control spending and why they failed. One reason is that Congress often enacts cuts with great fanfare and then undoes them when they start to actually have an impact. For example, in 1997 it enacted a law to control Medicare spending by preventing fees for doctors’ services from rising faster than a formula called the sustainable growth rate. But once the law began to bite in 2002, a Republican Congress blocked it from taking effect, but didn’t repeal it. By 2010, it reached the point where the law would have required a 25 percent cut in doctors’ fees. At the last minute, Congress punted the ball by delaying implementation of the 1997 law yet again, at a one-year cost of $15 billion.


Some may lament that this is simply an example of the perverse power of special interests and a failure of will by Congress. Perhaps so, but as long as we live in a democracy, those affected by government have the right to make their opinions known and to influence our elected representatives through a variety of legal means, including lobbying, advertising, campaign contributions, moral suasion and so on.


Although campaign contributions get the most attention, it’s worth remembering that the most powerful lobby in Washington is the AARP and it makes no contributions to any candidate. It doesn’t have to because it has some 40 million members, which shows that at some point just about everyone is a special interest. As Pogo put it, “We have met the enemy and he is us.” The point is that spending and deficits are not going to be controlled by taking a meat-ax to the budget, as many of those in the Tea Party want to do. You can’t just enact across the board cuts in every program or abolish departments and agencies and expect their functions to completely disappear. Interest on the debt can’t be cut; defense can’t be reduced significantly without scaling back the Defense Department’s commitments, withdrawing from Iraq and Afghanistan, canceling weapons systems that create jobs in hundreds of different congressional districts, reducing the pay and benefits of our armed forces and so on; and abolishing every so-called earmark in the budget and foreign aid, as well, would together only reduce spending by 1 percent.


The reality is that Social Security, Medicare and Medicaid are where the real money is, and reducing outlays for these programs is very, very hard; not just for political reasons, but because they are highly complex programs and require changes in the law governing eligibility to reduce spending in the long run. Doing so in a way that can’t be gamed by beneficiaries or create massive unfairness is a major challenge.


Congress needs the best possible analysis and research to help it understand the nature of the programs it wants to cut and how to write laws that will achieve its goal. Fortunately, it already has an organization at its disposal called the Congressional Budget Office to do this. Established in 1974, it has 250 of the best budget analysts and economists in Washington and deep institutional knowledge of every facet of government spending. (A parallel organization called the Joint Committee on Taxation does the same thing for tax policy.


Unfortunately, Republicans have long had it in for the CBO.Many would like nothing better than to abolish it altogether, just as they abolished the Office of Technology Assessment and the Advisory Commission on Intergovernmental Relations when they took control of Congress in 1995. Even those Republicans that don’t hate the CBO see its close to $50 million per year budget as an inviting target for false economy.


CBO’s great sin, in Republican eyes, is that it’s always telling them that their pet ideas are wrong: tax cuts don’t automatically pay for themselves through the Laffer Curve, the Affordable Care Act didn’t raise the deficit, the budget can’t be balanced only by cutting domestic discretionary spending, and other heresies to Republican dogma.


Moreover, CBO director Doug Elmendorf has been a lightning rod for Republicans. Many hold a grudge against him for attending a White House meeting in the summer of 2009 on health care reform. In a July 23, 2009, report, the Wall Street Journal implied that Elmendorf had been pressured into changing the CBO’s score on health care reform. It called the meeting “extraordinary and inappropriate.”


Subsequently, the CBO scored the health legislation as reducing the deficit in both the short-run and the long-run – a view that every Republican finds incredible and factually wrong. They all believe that ACA increases the deficit, which is why they plan to vote on its repeal next week.


Interestingly, CBO was not asked to score the cost of repeal by its sponsors, which is normally required for all bills that affect spending. However, it did so anyway. Yesterday, CBO estimated that ACA repeal will increase the deficit by $230 billion over the next 10 years. Keep in mind that repeal would not only reduce spending for new benefits, but also reverse all of the cost savings that paid for them. Undoing those savings means increasing Medicare spending by about $500 billion. That’s why Republicans had to bend their own rules to permit a vote on ACA repeal in order to get around their promise never to increase entitlement spending without offsetting it with entitlement cuts.


One way Republicans could demonstrate some integrity would be by reappointing Elmendorf to his position as soon as possible. His term as CBO director expired at noon on Jan. 3, although he is permitted to continue serving in that capacity until a replacement is named. Congress does not have to vote on his reappointment to a full four-year term; it requires only the agreement of the speaker of the House and the president pro tempore of the Senate, Rep. John Boehner, R-Ohio, and Sen. Daniel Inouye, D-Hawaii, respectively. Traditionally, they simply follow the recommendations of the chairmen of the House and Senate Budget committees, currently Rep. Paul Ryan, R-Wis., and Sen. Kent Conrad, D-N.D.


Both Conrad and Ryan have publicly called for Elmendorf to be reappointed. However, the final decision is above their pay grade and Boehner in particular may not want to make it any time soon.


Unfortunately, this means that in some of the contentious budget fights expected in coming months there will be a strong temptation to threaten Elmendorf by denying him reappointment unless he gives the Republicans the numbers they want. It would be highly desirable to remove even the suspicion of this possibility by reappointing him now.


It goes without saying that CBO is not infallible; I’ve been known to criticize it from time to time myself. But contrary to popular belief among Republicans, CBO’s analyses are not affected by the partisan or ideological leanings of its staff, in my opinion. Its errors are nearly always the result of a lack of time, data and resources; conditions imposed upon it by the necessity of having to take legislative language at face value even when it is obviously written to game CBO’s scoring system; and the limitations of economic science itself. It would be a tragedy for the country if Republicans undermine its integrity and ability to do its job. If they mean what they say about getting the nation’s finances in order, a strong and independent CBO is their strongest ally.


This article originally appeared at The Fiscal Times.


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