#US

Drinking the UnKool-Aid

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It appears President Trump has been bullying the US Federal Reserve to drop rates by 1% and get them to reopen the spigots on QE. What he is failing to grasp is that businesses invest because they see a cycle, not because interest rates fall.

Trump tweeted,

China is adding great stimulus to its economy while at the same time keeping interest rates low. Our Federal Reserve has incessantly lifted interest rates, even though inflation is very low, and instituted a very big dose of quantitative tightening. We have the potential to go…up like a rocket if we did some lowering of rates, like one point, and some quantitative easing. Yes, we are doing very well at 3.2% GDP, but with our wonderfully low inflation, we could be setting major records &, at the same time, make our National Debt start to look small!

This is a frightening proposal. Rates are at 2.25~2.50%. Although it masks a more important reality. Can Trump avoid a market calamity ahead of the next election? The real engine of the economy is slowing.

Despite the headline US GDP print of 3.2%, consumer spending and business investment slumped to the lowest levels under his presidency. Business investment spending was dominated by “intellectual capital” (soft) which is a pretty hard metric to put a reliable number next to. Equipment and structures (hard) contribution to business investment was near as makes no difference zero. Personal consumption of durable goods slumped to their lowest reading since 2011. Wholesale inventories (ex-autos/petroleum) surged ahead of sales.

Trump might argue China is adding stimulus. He is right. China’s Aggregate Financing (approximately system Credit growth less government borrowings) jumped 2.860 billion yuan, or $427 billion – during the 31 days of March ($13.8bn/day or $5.0 Trillion annualised (a Japanese GDP)). This was 55% above estimates and a full 80% ahead of March 2018. This pump priming added 8% to the Chinese stock indices but since then the market has been rolling off.

The world does not need more debt to be inflated away to get us out of the current mess we are in. A recession is inevitable. To put it into context, the world, since GFC, has added $140 trillion in debt for a grand total of $20 trillion in global GDP growth. That is right. $7 of debt only got us $1 of GDP. So if the Fed acquiesces President Trump he will probably get even worse metrics.

Then again perhaps we can take the words of a venture capitalist, Chamath Palihapitiya, who said on CNBC that “central banks have created an environment where major downturns and expansions are almost impossible.” It is statements like this that almost guarantee that central banks have lost control. Central banks have one role – ensure that markets maintain “confidence”. Powell’s latest move to cut rates after such a shallow peak tells us that “confidence” is waning. 

Profligacy paid for by wishful thinking

Lots of promises. Lots of grand assumptions. To be honest, best just ignore the minutiae. It’s a complete waste of time. The biggest question is, if the global economy, by Treasurer Josh Frydenberg’s own admission, is slowing down (just look at government bond yields flattening/gone negative) how on earth is Australia going to grow receipts from $485.2bn in 2018/19 to $566.9b in 2021/22? A 17% growth in tax revenue. Expenses will rise from $487bn to $559.9bn respectively. Give aways +15%. Best hope the world economy doesn’t tank. Expenses are locked in. Tax revenues aren’t.

Worse, these projections have all been massaged higher than the 2018-19 budget. What has changed to our overall net position in the last 12 months to gain such confidence? Climate alarmists would blush at the extent of the upward massaging of numbers. Did Treasury sit down after consuming 3 bottles of Absinthe to come up with these revisions? Think about it. How can we get an extra $5.9bn in tax receipts in 2021-22 when conditions are sure to be worsening?

This is NOT an old school Coalition budget by any measure. This is a crossing fingers, closing the eyes and hoping we muddle through budget. If the proverbial hits the fan, a monster deficit is assured. Take it to the bank.

We are technically at full employment. Unless we embark on mass migration (which we’re looking to cut) how will flat wage enduring Aussies and corporates contribute to a 17% rise in the Canberra coffers? Wishful thinking. The government targets around 23.9% of GDP for tax receipts and pats itself on the back for “the government’s average real spending growth is expected to be the lowest of any Commonwealth government in over 50 years.” Although that claim is dispelled by their own tables contained here.

Cutting taxes can create more tax revenue. Poland sliced its corporate taxes in half in 2004 and doubled revenue. However that was more a grey money grab than pure unadulterated tax policy spurring public revenue growth.

Giving away more money to the middle class through tax cuts and hand outs in the hope they spend more seems wishful thinking. The problem is if global growth hits a wall, we don’t have a Howard/Costello surplus to buffer the storm. No $38bn backstop in the war chest.

China, the US and EU are struggling. Things are so bad in the US that the Federal Reserve had to chicken out of any more rate rises because it would tank the economy. Our growth will stall if the world slows. Forget 28 straight years of continuous growth in Australia. The knock on effects will see unemployment surge, consumption fall off a cliff, housing prices crash and tax revenues slump. Forget a $7.1bn surplus. Think $20bn deficit because the promises are too grand and the tax receipts blindingly optimistic.

Of note in the 2019-20 budget is the expansion of the ATO’s tax grab from evil multinationals and HNW individuals who’ve avoided paying their fair share. That will result in a $3.612bn extr over the next 4 years. That against the $5.74bn tax cut for middle class Aussies over the same period. Spending up everywhere. Just not sure why the Treasury hasn’t pointed to where the extra revenue is coming from.

Take the assumptions of 2.75% GDP growth flat to 2020/21. Unrealistic. Treasury assumes the same labour force participation rate with unemployment remaining to 5% and wage growth of 3.25% in 2020/21, up from 2.1%. All looks so simple. Yet inflation is expected to grow to 2.5% meaning real wages will be flat.

Aussies, saddled under 180% debt to GDP, shouldn’t take any sense of comfort from this budget. What Frydenberg presented tonight was nothing more than a hope that the most rosy scenarios play out when thunder clouds are so obviously rolling in. It’s utterly irresponsible. Yet that’s today’s political class – spineless. They’re unprepared to tell Aussies that they have to be prepared to live with much less. Instead of asking us to tighten our belts, a whole load of freebies that can’t be paid for end in our laps so they can hold on to power for a bit longer.

NATO – 19 nations may hit 2% promise 18 years after committing to do so

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It is a farce. In 2006, NATO Defence Ministers agreed to commit a minimum of 2% of their Gross Domestic Product (GDP) to defence spending. This guideline, according to NATO,  “principally serves as an indicator of a country’s political will to contribute to the Alliance’s common defence efforts.” In 2017, only 5 of the 28 members outside the US have met the 2% threshold – Greece, Estonia, UK, Romania & Poland in that order. Despite Greece’s economic problems elsewhere, it manages to honour the deal. NATO Secretary General Jens Stoltenberg said “the majority [not all] of allies now have plans to do so by 2024.” 3 more are expected to hit the target in 2018. So for all the good will in the world, is POTUS wrong to call the other 19 members slackers that ride off the US taxpayer when so many of them are only likely to hit the target 18 years after ‘committing’ to it?

NATO commitment in 2017 can be seen as follows.

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Although all credit to the Europeans and Canadians for getting away with it for so long. Previous US presidents have obviously not concerned themselves with getting a fair deal on mutually agreed commitments. Although in what world would American taxpayers be upset to see the rest of the team pick up the slack?

Naturally the media are getting mileage out of the insensitive bully attacking his supposed allies. In fact Stoltenberg said last month on record that, “burden sharing will be a key theme of our summit next month, and I expect all allies to continue their efforts.” He reiterated that to Trump yesterday.

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To be brutally honest, how effective can a NATO force truly be if words aren’t put into action? What good is a promise if it is to be honored 18 years later. Imagine if that is the mindset should NATO be forced to act militarily. Would those meeting their obligations feel within their rights to have a bigger say in how NATO should work?

The problem with such a lack of commitment is that over the 12 years where 23 nations have not come close to meeting their obligations, the sum total of the actual defence capabilities suffers for the duration. The US is 67% of total NATO spend and the UK, France  & Germany make up half of the remainder. Yet building a sustainable capability in defence does not come through half measures or poorly thought out procurement. What is missed on many is that over 70% of defence budgets are allocated to soldier pay, housing, healthcare, training and so forth. Procurement and RDT&E get funded out of the balance. Have a skirmish somewhere and yet more money is chewed out of buying new equipment for the sake of logistics (feeding 10,000 troops and servicing hardware in a foreign land). Then there is the subject of terribly managed procurement programs.

Take the French disaster that is the aircraft carrier Charles De Gaulle. Despite delays because of problems with a retrofit for radiation shields, the naval brass had to add 14 feet of deck because it realized that the E2-C Hawkeye surveillance planes it purchased couldn’t take off and land in its original build spec. Even now the flight deck is not long enough to conduct simultaneous launch and recovery operations. Even worse the blueprints for the CdG‘s propellers had been lost in a fire, which meant that the ship had to be refitted with hand-me down screws from carriers Foch and Clemenceau which meant her speed was cut from 27 knots to about 24 knots—which was unfortunate since her predecessors steamed at 32 knots. Speed to war zones is kind of important to gain a decisive edge. All of the spend to fix poorly thought out designs cuts from being able to procure other equipment and materiel. Scary to think Australia is buying 12 subs from the French! The problems are already revealing themselves despite not one boat having hit the dry dock.

History tells us many things of how NATO type organisations have failed in the past.The Peloponnesian Wars (431BC – 404BC) highlighted how things can change when allies do not keep up commitments and capabilities aren’t maintained.

Athens required her Delian League member states (consisting of city states mainly along the Ionian Sea) to pay tributes (phoros) to the treasury which was used to build and maintain the naval fleet led by Athens. Yet over time the member states relied too much on the wealth of Athens and over the course of the draining war and the costly campaign to Sicily, failed to honour the ever increasing demands to fund the league with the appropriate level of tributes which drove Athens into massive debt. Defence spending by the Athenians had been cut to around 30-60% of the average over the previous decade. The Delian League’s capabilities dwindled as a result and the Spartans, funded by Persia, took advantage of this and crushed it for good, in the very art of war that Athens was renowned for – the navy.

It is not hard to think of Trump feeling like a modern day Pericles. NATO is the Delian League and its projected enemies chip away all the while members dither over commitments, forcing the US to sustain the limited capability. Like the Athenians, the US has the most powerful navy in the world with a fleet bigger than the next 11 countries combined but even it has pared back the number of ships to less than 10% of what it had in WW2. Enhanced capability is one factor in cutting the surface fleet but even the US DoD realised that the conventionally powered US Kitty Hawk consumed 2% of the entire US military fuel bill annually so it was taken out of service to save money.

One can argue the $750 billion annual defence budget is plentiful but the US realises that power projection is an expensive business. Even Japan understands it can’t stay nestled in the bosom of US stationed forces forever without taking a proactive stance to defend itself. That is the same message to the 19 members NATO failing to pull their weight.

Child Abuse – the shocking stats

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Child abuse is reaching shocking proportions globally. The stats you are about to read show just how widespread the problem has become.The National Institute of Health reports that approximately 80 % of those who attempted suicide had a history of child abuse. About 30% of abused and neglected children will later abuse their own childrencontinuing the horrible negative spiral.

We examine the US, UK, Australia and an outlier Japan, where child abuse cases have soared 111-fold in the last 30 years. Over 4,000,000 child abuse cases were reported in the US in 2015. Abused children show much higher tendencies for risky behaviours in later life. CM wrote about the shocking outcome of the independent report on child grooming gangs in Rotherham showing that the police and government were complicit for decades. We also wrote about abuse affecting safety at US schools, including mass shootings.

Warning – the data make for quite heavy reading. 

JAPAN

In 2016, CM wrote a piece on the breakdown in the nuclear family in Japan. The Ministry of Health, Labor & Welfare (MHLW) denoted that cases handled for child abuse in 2016 hit a record 122,578 cases, 111x the level of 1989. Part of the problem here would be due to a lack of reporting back then. However the growth in the last decade is still extreme. The MHLW denote over the last decade:

  • Physical related violence fell from 41.2% to 26% (despite doubling in absolute terms).
  • Neglect fell 38.5% to 21.1% (despite an 80% increase in absolute terms)
  • Sexual abuse fell from 3.2% to 1.3% (despite a 50% increase in absolute terms)
  • Psychological abuse jumped from 17.2% to 51.5% (a 10-fold absolute increase)

In the last decade filings of child abuse with the police have surged from 7% of all cases to 45%. Reporting to family or relatives has declined but neighbours remain the second largest factor in reporting abuse.

By prefecture, child abuse per 1000 children looks as follows as at 2016. The national average stands at 7.3 children per 1,000.

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AUSTRALIA

While the rate of growth is high, Australia’s Institute of Family Studies has reported in its June 2017 statistics that in 2015/16 a total of 355,935 notifications of child abuse were made vs 252,962 made in 2011/12. Total substantiations grew from 48,420 to 60,989 respectively.

The rate of notifications has risen from 33.8 per 1,000 children in 2011-12 to 42.0 per 1,000 in 2015-16 (AIHW, 2011, 2017).

  • Physical abuse accounted for 18.3%
  • Neglect  accounted for 24.9%
  • Sexual abuse accounted for 12.2%
  • Psychological abuse accounted for 44.5%
  • 51% of victims were female.

In Queensland, South Australia and the Northern Territory neglect was the most common type of substantiated maltreatment. Victoria had the largest proportion of emotional abuse substantiations (64.5%) compared to other states and territories, whereas South Australia had the smallest proportion of emotional abuse cases (25.2%).

While there were some gender differences for all abuse and neglect types, girls were significantly more likely to be the subject of substantiation cases of sexual abuse (15.8%) compared to boys (8.5%). The proportion of substantiated cases of harm/risk of harm from child maltreatment related to sexual abuse ranged from 3.4% in the Northern Territory to 16.6% in New South Wales and Western Australia.

Infants (children aged less than 1 year) were most likely to be the subject of a substantiation (16.1 per 1,000 infants), followed by children aged 1-4 years (9.0 per 1,000 children aged 1-4). Children aged 15-17 years were the least likely to be the subjects of a substantiation (3.9 per 1,000 children aged 15-17).

Australian children from remote and very remote areas were most likely to be the subject of a substantiation (16.2 per 1000 and 23.5 per 1000 respectively) compared with children in major cities (6.2 per 1000). Children in lower socio-economic areas were more likely to be the subject of a substantiation than children in higher socio-economic areas, with 6.9% of substantiations occurring in the highest socio-economic areas compared with 35.7% in the lowest socio-economic areas. 

This contradicts the trend in Japan were relatively poorer (tend to be remote) areas seem less prone to incidents of child abuse.

Perhaps the disturbing sign in Australia is the incidence of out of home care (OOHC) which continues to swell in numbers. Between the years 2014-15 and 2015-16 there was a 10.8% increase in children (from 11,581 to 12,829 children) admitted to OOHC. In 2015-16 there were 3,035 more children admitted to OOHC than were discharged.  In 2015-16, the median age of admission to OOHC was 6 years, with 46% of children admitted to OOHC aged under 5. In comparison, the median age of discharge from OOHC was 9 years and 32% were aged 15-17, compared with 8% admitted to OOHC.

Most children who were in OOHC on 30 June 2016 were residing in home-based care (94%). Of these children, 39% were in foster care, 49% were in relative/kinship care, 5% in third-party parental care and 1% were in some other type of home-based care.

USA

The US is a whole other category. While the media screams about the mistreatment of children at the Mexican border how many of them know the extent of child abuse within their own country? The American Society of Positive Care of Children notes,

  • 4 million child mistreatment referral reports received in 2015 vs 3.6mn in 2014.
  • Child abuse reports involved 7.2 million children vs 6.2mn in 2014.
  • 207,000 children received foster care services.
  • The financial cost of child abuse and neglect in the US is estimated at $585 billion (equivalent to the GDP of Sweden or Taiwan)
  • 75.3% of victims are neglected.
  • 17.2% of victims are physically abused.
  • 8.4% of victims are sexually abused.
  • 6.9% of victims are psychologically mistreated.
  • Highest rate of child abuse in children under one (24.2% per 1,000).
  • Over one-quarter (27%) of victims are younger than 3 years.
  • Almost five children die every day from child abuse.
  • 80% of child fatalities involve at least one parent.
  • 74.8% of child fatalities are under the age of 3.
  • 72.9% of the child abuse victims die from neglect.
  • 43.9% of the child abuse victims die from physical abuse.
  • 49.4% of children who die from child abuse are under one year.
  • Almost 60,000 children are sexually abused.
  • More than 90% of juvenile sexual abuse victims know their perpetrator.
  • 14% of all men in prison and 36% of women in US prisons were abused as children, twice the frequency seen in the general population.
  • In 2016, more than 2,300 children were reported as victims to the National Human Trafficking Hotline.
  • Average age of entry by a child prostitute is 13 yo. Life expectancy after becoming a prostitute is only 7 years57% of prostitutes were sexually abused as children.

UK

Government figures show that 3,171 offences have been recorded in England and Wales across 80 platforms in England and Wales since a new anti-grooming law was introduced in 2017 which criminalizes sexual communication with a child. This amounts to almost 9 grooming offences on average per day. The police noted that

  • girls aged 12-15 were recorded in 62% of cases of grooming
  • under-11s were recorded in nearly 25% of cases.

Child abuse figures in the UK according to the NSPCC reveal

  • 1 in 20 children in the UK have been sexually abused
  • Over 8,000 contacts to the NSPCC’s helpline last year were concerns about sexual abuse
  • There are an estimated 137,000 women and girls affected by FGM in England and Wales
  • 1 in 14 children have experienced emotional abuse by a parent or guardian.
  • Over 19,000 children were identified as needing protection from emotional abuse in 2017.
  • 6.9% of children said they had experienced physical violence at the hands of a parent or guardian (3.7% said severe physical violence).
  • The NSPCC’s helpline responded to over 11,000 contacts about physical abuse in 2016/17
  • Over 6,000 children were identified as needing protection from physical abuse last year

The message is clear. The incidence of child abuse continues to rise to sickening levels. Perhaps the EU sums up its problem to an even more shocking degree:

“Few studies have been done on neglect, but analyses of worldwide research shows that prevalence is also high − 16.3% for physical neglect and 18.4% for emotional…They show a prevalence rate of 9.6% for sexual abuse (13.4% in girls and 5.7% in boys), 22.9% for physical and 29.1% for mental. Applying these figures to the population of children in Europe suggests that 18 million children suffer from sexual abuse, 44 million from physical abuse and 55 million from mental abuse.”

Maybe part of preventing neglect starts with the very basics:

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So when we see media reports wailing about injustices which are relatively tiny in the grand scheme of things, perhaps we can reflect on the real problems that are right in front of our noses. #LetsEndChildAbuse