Monday, November 28, 2011

Cartoons of the Past few Weeks

International House Prices: Australia Compared

The Economist has just released the latest version of its interactive global house price graphic. They explain it this way:
The Economist has been publishing data on global house prices since 2002. The interactive tool above enables you to compare nominal and real house prices across 20 markets over time. And to get a sense of whether buying a property is becoming more or less affordable, you can also look at the changing relationships between house prices and rents, and between house prices and incomes.
Whichever way you look at it - and it's worth moving the dates around to get a good idea of the changes - Australia has done 'better' than nearly anywhere else. But we too are now in decline.

If you push the date to start at Q1 2007, you get a real insight into how house prices have fallen in the rest of the developed world.

Going back to 2000, Australia has done well - if you think rising house prices is necessarily a good thing (and I don't). Japan has done particularly poorly (falling prices are not a good thing either)

Going back even further to 1990 and the country that stands out the most is South Africa with an amazing rise in house prices. Australia still stands out, but the most interesting figure is the gradual rise in house prices in Germany - no boom there, just a gradual orderly rise (the best of all outcomes in my view). And look at that fall in the Celtic 'tiger' - financialisation not looking like such a great idea now.

The Economist has been a long-time bear on Australian house prices arguing that:
SOME four years after house prices peaked in much of the rich world, housing remains over-valued, when compared to its long-run relationship with housing rents and income per person. Housing prices in Australia, Canada and France, which had only a slight wobble in 2008 before climbing to new highs, look particularly frothy. In contrast, prices in America have fallen so far that they now look cheap when compared against both rents and income. But given the huge stock of foreclosed homes that is yet to come on to the market, the chances are that they could yet fall further.
From this accompanying article The Economist reports:
Never before had house prices risen so fast, for so long, in so many countries. Yet the bust has been much less widespread than the boom. Home prices tumbled by 34% in America from 2006 to their low point earlier this year; in Ireland they plunged by an even more painful 45% from their peak in 2007; and prices have fallen by around 15% in Spain and Denmark.

The suggestions from the overvalued nature of house prices against income increases and rent changes is particularly bracing.

The ABS and other private sector organisations argue that house prices have fallen further than the 2.2 per cent listed here.

Wednesday, November 23, 2011

Superannuation (Pensions)

Ever wondered why Australians are so obsessed by the economy?

There are lots of reasons given, including these in a recent speech by former Reserve Bank governor Ian Macfarlane.

I think it's got a lot to do with the fact that Australians have a higher percentage of variable rate mortgages than most countries. meaning that decisions by the RBA (a key piece of economic news) matter more to Australians than those people in countries where mortgages are fixed. According to the RBA:
In some countries, including Australia and the United Kingdom, variable-rate loans predominate, whereas in New Zealand and Canada, fixed-rate loans of between two and five years are more common; in the United States and some European countries long-term fixed-rate mortgages predominate. The features offered on housing loans also differ significantly across countries; for example, loans with redraw facilities and flexible repayment structures are relatively uncommon in many continental European countries.
It's also got something to do with the globalisation of the economy and the efforts by the Labor governments of the 1980s and 1990s, particularly Paul Keating to 'educate' - persuade and coerce - Australians about the need for change.

But it might also have something to do with the fact that more Australians have their super tied up in shares than anywhere else. This graph from the OECD was reproduced on MacroBusiness:

The Indian and Chinese Diasporas

From The Economist:

The major question is what is the significance of these external communities for the future development of their economies and international relations? 1.3 million Chinese in Peru?

Tuesday, November 22, 2011

US Troop Deployments Around the World

From The Economist:

Three significant events that changed troop deployments: World War II, Vietnam and post-September 11th.

According to The Economist:
THE American government is keen to show its commitment to security in Asia by putting boots on the ground there. As this analysis shows, the number of American troops (Army, Navy, Marines and Air Force active duty personnel) in Asia is only slightly smaller than the number in Europe, where Americans in uniform are largely a hangover from the carve-up of the continent at the Yalta conference in 1945. Indeed, the one lesson that can be drawn from the data is that today's strategic priorities can shape deployments for decades to come, long after the original reason for putting G.I.s in a particular region has gone. Another is that American forces do not pay much attention to Africa, despite the number of active or dormant conflicts there. The methodology used for this analysis has changed slightly from 2006 as the Department of Defence reports deployments in Iraq and Afghanistan based on contributing troops rather than actual boots on the ground, but that does not seem to make a huge difference, at least to this chart

Equal Pay, Housing, Employment and Bonuses

Equal Pay
Now for childcare workers because there’s probably no more important job than looking after very young children.  Childcare in lower socio-economic areas should have subsidized teachers to increase educational opportunities and outcomes for families that don’t have the time or inclination to read to and stimulate their kids. But what to do about those that don’t work and don’t care?

“The proportion of households [i.e. outright owners] without a mortgage has declined from 42% to 33%, while the proportion with a mortgage has risen from 30% to 35% in 2007-08. The decline in outright home ownership may reflect increasing uptake of flexible low-cost financing options which allow households to extend their existing home mortgages for purposes other than the original home purchase”
“Australia's preference for a free-standing house on its own block of land is most evident among home owners. Of the 5.5 million households that owned their home in 2007-08, 88% lived in separate houses (graph 10.8). Over a half (56%) of all renter households lived in separate houses; 30% lived in flats, units or apartments; and 14% lived in semi-detached dwellings.”
“At the 1966 Census of Population and Housing, 71% of all occupied private dwellings were either owned outright or owned with a mortgage by their occupants. Following the 1967 Referendum and changes to the Census Indigenous question in 1971, the Indigenous count increased 45%. Lower average Indigenous home ownership rates at that time, compared to the population as a whole, contributed in part to the decrease, to 69%, in average home ownership recorded in the 1971 Census. Since then the rate of home ownership in Australia, as measured in the Census, has ranged between 68% and 70%”.

The ABS has a very revealing interactive graphic on employment, showing the growth of mining sector employment and the decline of manufacturing jobs.
For a primer on understanding labour force figures see

No Bonuses
From Nicholas Taleb in the New York Times
Consider that we trust military and homeland security personnel with our lives, yet we don’t give them lavish bonuses. They get promotions and the honor of a job well done if they succeed, and the severe disincentive of shame if they fail. For bankers, it is the opposite: a bonus if they make short-term profits and a bailout if they go bust.”
Banning bonuses addresses the principal-agent problem in economics: the separation between an agent’s interests and those of the client, or principal, he is supposed to represent.”

Tuesday, November 15, 2011

Renewable Energy

Renewable energy sources have been growing rapidly but still constitute a minuscule amount of total primary energy production.

Hydro power still dominates renewable energy production, although solar and wind power have been growing rapidly from a very small base. Hydro power is likely to gradually lose its dominance given the rapid growth of wind and solar power, although both have a long way to go.

From The Economist's Daily Chart.

According to The Economist: "Solar power saw the biggest leap in 2010, with the installed base jumping 70% compared with 2009 to 40 gigawatts. Wind power also grew strongly, adding 24% of generating capacity. Yet the biggest source of renewable electricity, hydropower, and the smallest, geothermal, both only added 3% to capacity".

Not surprisingly North America lags both Europe and Asia.

While these figures sound impressive, it's worth getting a grip on the reality of renewable energy production. To get an idea of the scale of renewables compared to other sources of energy, you can go to the International Energy Agency's website and in particular look at the World Energy Outlook.

The latest report reveals some very interesting graphs both backward and forward looking.

While economists often worry about the level of renewable subsidies they pale into insignificance when compared to fossil fuel subsidies. As the IEA reports:

Energy subsidies – government measures that artificially lower the price of energy paid by consumers, raise the price received by producers or lower the cost of production – are large and pervasive. When they are well-designed, subsidies to renewables and low-carbon energy technologies can bring long-term economic and environmental benefits. However, when they are directed at fossil fuels, the costs generally outweigh the benefits. 
Fossil-fuel consumption subsidies worldwide amounted to $409 billion in 2010, with subsidies to oil products representing almost half of the total. Persistently high oil prices have made the cost of subsidies unsustainable in many countries and prompted some governments to try to reduce them. In a global survey covering 37 countries where subsidies exist, at least 15 have taken steps to phase them out since the start of 2010. Without further reform, the cost of fossil-fuel consumption subsidies is set to reach $660 billion in 2020, or 0.7% of global GDP (at market exchange rates).  
The share of energy subsidies going to renewable energy is poised to continue to grow. Global renewable-energy subsidies increased from $39 billion in 2007 to $66 billion in 2010, in line with rising production of biofuels and electricity from renewable sources. Despite a projected decline in unit production costs due to cost reductions and rising wholesale prices for electricity and transport fuels, subsidies would need to expand even further to meet existing targets for renewable energy production. In all three scenarios most renewable energy sources need to be subsidised in order to compete in the market. 
In 2035, subsidies to renewables reach almost $250 billion in the New Policies Scenario. Onshore wind becomes competitive around 2020 in the European Union and 2030 in China, but not in the United States by the end of the projection period. All other technologies require continuing subsidies.

While the current position is marginal the IEA predicts their use will grow rapidly up to 2035.

Solar, wind, geothermal etc are included under "Other". That's it that red section - can't see it? That's because it's so small. Biofuels and hydro are of course renewables as well. 

The big reduction has been in oil usage (after the twin 1970s oil shocks). "Other" has increased by a factor of 8 but still accounts for less than 1 per cent. Nuclear has grown considerably as well and coal has increased its share.

Some other interesting graphs are below. All latest stats. Remember there is a distinction between electricity and total primary energy supply. 

When it comes to electricity supply, coal still dominates.

Saturday, November 12, 2011

The Internet and the Death of Retail?

[O]ne of the most harmful habits in contemporary thought, in modern thought even; at any rate, in post-Hegelian thought: the analysis of the present as being precisely, in history, a present of rupture, or of high point, or of completion, or of a returning dawn ... I think we should have the modesty to say to ourselves that, on the one hand, the time we live in is not the unique or fundamental or irruptive point in history where everything is completed and begun again.  We must also have the modesty to say, on the other hand, that . . . the time we live in is very interesting; it needs to be analysed and broken down, and that we would do well to ask ourselves, ‘What is the nature of our present?’ ...  With the proviso that we do not allow ourselves the facile, rather theatrical declaration that this moment in which we exist is one of total perdition, in the abyss of darkness, or a triumphant daybreak, etc.  It is a time like any other, or rather, a time which is never quite like any other.
Michel Foucault 1983
The end of everything we call life is close at hand and cannot be evaded.
H.G Wells 1946
Is the Internet killing traditional bricks and mortar retail? There's no doubt that retailers are doing it tough at the moment, but the Internet is only one of a series of problems facing the sector. The major concern about the Internet for the retail sector is prospective, rather than current, loss of sales.

The major short- to medium-term problem for retailers is the paying down of debt by Australian households and the end of debt-fuelled consumption. This is reflected in increased saving by Australians. Together these pressures are damaging confidence about future possibilities for retailers to make money with their traditional model.

While many in the industry want the government to 'do something' to fix things, it's clear that adaptation to changing consumption habits and technologies will be essential for medium to longer-term retail survival. In this post I consider a variety of statistics and measures about the impact of the Internet on the retail sector and outline some of my own experiences. I conclude that the future has not yet arrived and that retail sector still has time to adapt to change that is happening more slowly than many imagine. 

According to the Productivity Commission (PC) there are "140 000 retail businesses in Australia, accounting for 4.2 per cent of GDP and 10.7 per cent of employment". This makes it one of the most important sectors for employment after "health care and social assistance", at 11.4 per cent of employment. (For a detailed account of the structure of the Australian economy see here)

Let's begin by something close to my heart - books. I buy a lot more books from overseas suppliers than I used to because they simply are much cheaper. Books from the Book Depository (no postage) and Amazon are generally less expensive than bookshops or online suppliers in Australia, although not always, especially for Australian books (Fetch, for example, provides an online comparison service for online book purchases).

The longer-term worry for book sellers might be from eBooks rather than overseas suppliers of paper copies, but currently it's online sales that are the major threat. So what are the numbers? Luckily the Department of Innovation, Industry, Science and Research has just produced a report on the Book Industry. Its market analysis estimated that "the total value of books sold in Australia during 2010 was $2.3 billion", with "online book sales worth $280 million in 2010, or 12 per cent of the total book market."

In a survey of "1,000 Australians, 53 per cent of books purchased online in 2010 were bought from overseas online booksellers". If we tie these two figures (improperly) together we get a figure of about 6 per cent of total sales bought from overseas book sellers.

The analysis also reported that:
Adjusted for inflation, the total value of books sold in Australia increased by an annual average of 1.1 per cent from 2001 to 2010. Relative to other retail industries, the Australian book industry underperformed over the past decade. It performed more favourably, however, when compared against other creative industries in Australia and overseas book industries.
So what about eBooks?
Australians purchased approximately $35 million worth of eBooks in 2010, which is equal to 1.5 per cent of the total value of book sales for that year. The eBook market in Australia is projected to reach between $150 million and $700 million in 2014, representing between 6 per cent and 24 per cent of total estimated book sales.
Between $150 million and $700 million? That's a fairly big grey area of $550 million. In other words, they have no idea.

So people are still buying hard copy books, just not from Borders anymore. Borders might have been a great store to visit, but you would have to be making a last minute purchase, uninformed or insane to buy books there. The mark up on books (and CDs) at Borders was ridiculous when compared to the Book Depository or even other bricks and mortar book stores. I can remember trying to buy my son a copy of the yearly AFL Record at Borders and finding out that their price was about $8 dearer than the recommended retail price.

Still my son and I used to love going to Borders at the mall to browse and we miss it now that it's gone. I hope that bookshops survive, but generally I only buy books from book stores when I want the book for someone else as a last minute gift or for my son when he's finished his last one and doesn't want to wait the 4-5 working days the Book Depository takes to deliver.

It's not all bad news for bookshops. Recently I visited Avid Reader in West End, Brisbane, on a Saturday morning. My son bought some books and I bought a coffee. The shop was packed with browsers and, it seemed, buyers. If there's a future model for bookshop, Avid certainly looks like it. If Avid or Riverbend Books in Bulimba can't survive I'd be extremely worried for all book shops.

But it's not just books of course that are facing growing competition from the Internet, StrawberryNet is considerably cheaper for skincare, cosmetics and perfume and less trying on the olfactory system than than those huge, smelly sections of department stores. Buying a pair of ASICS Gel Kayanos will set you back $250 at Rebel Sports, but I've seen them online (from the US) for just over $100.

The higher Australian dollar and the GST exemption on purchases under $1000 are also factors in the appeal of overseas Internet purchases, but the major factor in the excessive price differential appears to be high mark ups by retailers to cover employees, rent and profits (obviously).

I know that my friends increasingly look to the Internet for many different types of goods, but as someone once said "the plural of anecdote is not data" so it's important to try to get some indication about the total level of Internet purchases. (Apparently the original quote was "the plural of anecdote is data", but I much prefer the later more cynical version!)

According to the best estimate of the PC, "online retailing represents 6 per cent of total Australian retail sales - made up of 4 per cent domestic online ($8.4 billion) and 2 per cent from overseas ($4.2 billion)". The Reserve Bank of Australia reports that there are "no official data on the total value of online purchases, although a range of industry estimates suggest that these purchases are equivalent to around 3 per cent of household consumption".

Note that total retail sales and household consumption are different measures. Nevertheless it is clear that both the PC and the RBA acknowledge that sales have grown rapidly in recent years from albeit low bases.
While there are some structural breaks in the data due to changes in reporting over time, the data on domestic spending show rapid growth in online purchases over recent years. Since 2005, the value of online spending on debit and credit cards has grown at an average annual rate of more than 15 per cent, although over the past year there has been little change in this type of spending. In contrast, traditional card spending has increased at a slower average rate of around 9 per cent since 2005. It is important to note that despite the stronger growth in online spending, online payments account for only around 10 per cent of total domestic payments on credit and debit cards.

According to the RBA:
The data on payments made on Australian cards at overseas merchants include payments made when Australians travel overseas, as well as payments made by Australians for online purchases from overseas merchants. In total, the value of international electronic purchases has grown at an average rate of 15½ per cent since 2005, which is faster than the growth in electronic domestic purchases of 10 per cent.

To buy online obviously requires access to the Internet and that has grown rapidly as well. The Australian Bureau of Statistics (ABS) reports that "at the end of June 2011, there were 10.9 million Internet subscribers in Australia" a figure which excludes "Internet connections through mobile handsets".

Internet usage increased at an annual rate of nearly 15 per cent and increased by 4.4% since the end of 2010. Significantly 95 per cent of connections are now broad-band and 87 per cent of Australian Internet users are accessing download speeds of 1.5Mbps or greater. All of this adds up to greater Internet penetration and the potential for further inroads into traditional retail.

International purchases have not just been spurred by the Internet, but by the massive increase in the number of Australians travelling overseas. As the RBA reports:
It is likely that much of this growth in international purchases reflects the significant increase in the number of Australians travelling overseas. In 2010, Australians made around 6¼ million trips overseas, excluding business-related trips. This has increased by 55 per cent since 2005, with this growth in travel leading to increased spending overseas. In addition, the appreciation of the exchange rate has made foreign goods and services cheaper. While this has reduced the value of a given quantity of foreign goods and services in Australian dollar terms, it is also likely to have led households to increase the quantity of purchases abroad. Although it is not possible to specifically identify online offshore purchases, the data suggest that the share of this type of purchase in total spending remains relatively low. In aggregate, total spending at foreign merchants – including spending by Australians travelling abroad – is less than 4 per cent of total payments.
According to the ABS, the real change is in the number of Australians going overseas with the number of foreign visitors remaining relatively static. Increases in overseas travel means less domestic travel and less domestic spending.

Visitor Arrivals, short term 

Resident Departures, short term

So Internet and international purchases are growing rapidly, but with a long way to go until we can definitively announce the death of traditional retail.

Another way the RBA considers the growth of Internet purchases is by considering "the number of inbound postal items delivered through the Australia Post network". While it doesn't seem that long ago that pundits were arguing that email would kill traditional postal services since 2005, "the total number of items delivered has increased at an average annual rate of around 10 per cent, in contrast to an average annual decline of 1 per cent in the total number of domestic and outbound postage flows."

Another measure is the "steady increase over a number of years in the number of Google searches for ‘Amazon’ and ‘eBay US’". As the Australian dollar appreciated from mid-2010 these searches increased significantly.

Another thing close to my heart are movies and television. I wonder how long video stores will survive? Will they also find  new ways to stay profitable like Australia Post and other parcel deliverers? Or will they gradually fade away as more and more people connect their televisions to the Internet?

People have long been predicting the death of the video store, but they continue to survive and appear to be doing reasonable business, at least whenever I visit. Still it's not really a business with great growth prospects. I certainly wouldn't be encouraging anyone to invest in a video store right now. Perhaps technologically adept Internet store employees will create businesses to help people like me set up their television and Internet combinations! 

The reasonably tech savvy, especially 'the downloaders', probably still account for only a minor percentage of DVD watchers. Nevertheless Torrent Freak reports that 15 per cent of all torrent downloads of the final episode of Lost "originated from Australia, despite the country representing only 0.3% of the world’s population", proving that Australians are both reasonably technologically competent and frustrated by the lack of immediate access to popular shows. 

Another report estimated that one million Australians accessed illegal downloads via BitTorrent sites in April 2009, a figure that no doubt would have increased since then. Rolling Stone reveals that most illegal downloading (as a percentage of total downloads) occurs outside of the US and Europe, but "fewer than 20 percent of Internet users worldwide pay for downloads of individual songs, and even fewer pay for downloads of full albums".

The difference between the US and Europe and the rest of the world is borne out by a mid-2010 survey of 7000 illegal downloaders who reported that they "would pay for them if there was a cheap and legal service as convenient as file-sharing tools like BitTorrent".

Such findings tie in with my personal conversations with friends and students, many of whom tell me that they would be happy to pay for legal downloads as long as the costs are not too great and they could get immediate access. A friend recently laughed at me when I told them I still occasionally bought CDs i.e. the physical item in a plastic case. Students are always amused when I show a video (as in VHS) in class. Video, of course, was once the wonder technology: "You mean I can record a television program?". I wonder what young people think of those who still buy vinyl, let alone those who continue to use reel-to-reel players.


Like so many things in the world today, we tend to imagine a possible future and then 'teleport' it back into the present as though it were already the current reality. This has probably always been true as Dan Gardner outlines in Future Babble: "Excited predictions of the amazing technologies to come — Driverless cars! Robot maids! Jet packs! — have been dazzling the public since the late nineteenth century." Gardner outlines how Herman Kahn published  a book in 1967 called The Year 2000. In it he wrote that "by the end of the century nuclear explosives would be used for excavation and mining, 'artificial moons' would be used to illuminate large areas at night, and there would be permanent undersea colonies." As you might realise, he was wrong about this and he was also wrong when he argued that the Soviet Union would be "one of the world’s fastest-growing economies at the turn of the millennium".
I also vaguely remember visions of future technology in the 1980s, such as the hopes for full immersion virtual reality. If I remember correctly it was almost certain that by 2011 we'd be able to lose ourselves completely in virtual worlds and not just by looking at computer screens. But perhaps I was just watching too many 'futuristic' movies.

As Ferdinand Mount wrote quite some time ago, apocalyptic visions are more interesting than the idea that things will gradually change.
Of making end-of books, there is no end. Whitaker’s Books in Print, 1994, lists 150 books entitled The End of ... Among those things designated for termination are Art Theory, Beauty, British Politics, Central Planning, Christendom (by Malcolm Muggeridge), Comedy, Conversation, Education, Elitism, Empire, Eternity, Gin-and-Tonic-Man (a book about public relations), Housework, Innocence, Insularity, Laissez Faire, Marriage, Modernity, Motherhood, Philosophy, Punishment, Science, the Cold War (six titles), the Family, the Novel, the World, Time and Zionism – not to mention the most celebrated post-war exercises in Endism, Ideology and History.
Things generally tend to fade away rather than end completely. But not always. I remember writing an essay in the course "Soviet foreign policy" in 1991, thinking that the Soviet Union would gradually change rather fall apart as it did. Wrong. Still, while Soviet-style central planning appears to have fallen off the back of the history bus, desires among authoritarian governments for more centralised control has not.

In various places in the back streets of Brisbane (and no doubt other cities) one can see the remnants of old delicatessens, butchers and the like, seemingly gone forever. But more recently, the corner shop appears to have made a bit of of a comeback, in parts of Brisbane at least. The
New York Times recently had an article on how to order cuts of meat from butcher shops, which apparently are making a comeback in New York.

The world is changing rapidly and the Internet is playing a big role, but we're not as close to the future as we might think. More recent figures show that retail has not been doing as badly in recent months.

Recent figures show that retail as a whole is not in as bigger hole as the news stories seem to suggest. Turnover has increased over the past 3 months and the interest rate cut should make a difference as well, especially coming just before Christmas.

According to the ABS: "In trend terms, Australian turnover rose 2.4% in September 2011 compared with September 2010.

The following industries rose in trend terms in September 2011: Food retailing (0.5%), Other retailing (0.6%), Cafes, restaurants and takeaway food services (0.6%) and Household goods retailing (0.5%). Clothing, footwear and personal accessory retailing (-1.4%) and Department stores (-0.4%) fell in trend terms in September 2011.

All states and territories rose in trend terms in September 2011: New South Wales (0.4%), Western Australia (0.7%), Queensland (0.2%), South Australia (0.3%), Victoria (0.1%), Tasmania (0.7%), the Northern Territory (0.5%) and the Australian Capital Territory (0.3%).
Traditional retail will have to adapt, but it won't die. People will still want to walk around shops and buy things legally, but the days of soft profits and complacency seem to be numbered!

From 1956: