The End for the ‘Sharing Economy’?

Well done to the PM.

Prime Minister Malcolm Turnbull wins the gold medal for ‘Stating the Obvious’. As he told Melbourne radio station 3AW:

There is no question that the debt could blow out by A$100b or more if the parliament is not prepared to face up to reality.

Your editor and our colleagues have pointed this out for years. Ever since the Fairy Ruddfather bestowed $900 cheques on a delirious population.

Unfortunately, they didn’t realise that the government would soon swipe that money back. First with the Queensland Flood Levy. Then with the so-called Temporary Budget Repair Levy.

And just how have those levies helped with the government’s finances?

They haven’t helped at all. The government’s budget deficit continues to grow. And the more the deficit grows, the greater the government’s debt becomes.

It’s one of those things that, unfortunately, most folks don’t understand. When they hear politicians talk about cutting the deficit, most actually think it means the government is cutting debt.

But that’s not true. The national debt and the budget deficit are two different things. Even if the government were to cut the budget deficit, the national debt would still grow.

That’s because, whatever the deficit, the government has to issue bonds to cover it. The deficit being the difference between what the government takes in through taxes and what it pays out in spending.

Today, federal government debt stands at $431.6 billion.

For the 2015–16 financial year, the government spent $431.4 billion. It received $396.4 billion in revenue. That was a budget deficit of $35 billion.

That means the government needed to borrow $35 billion, increasing the national debt.

For the 2016–17 financial year, the government expects to spend $450.5 billion, while generating tax revenues of $416.9 billion. That will result in a deficit of $33.6 billion.

The government will need to issue new debt totalling $33.6 billion to cover this shortfall. That’s on top of the debt that already exists, some of which the government will need to rollover into new bond issues.

For the 2017–18 financial year, government spending is expected to be $464.8 billion. And, rather optimistically, the government forecasts revenue of $449.5 billion.

That would result in a budget deficit of $15.3 billion. Assuming the government reaps that much in taxes, it will still need to issue more debt to cover the deficit.

Although, you have to wonder about the likelihood of the government being able to increase tax revenues by $33 billion in the space of a year. Not that we’d put it past them to try.

It’s just that it will be hard to do…especially if Australia, and the world, is in the midst of a crippling financial depression.

Stop the presses!

But wait, as Bloomberg reported last week:

In extracts of a speech to be delivered Wednesday, Turnbull said the budget bottom line outlined by the Labor party during the election campaign relied on more than A$6 billion of savings measures proposed by his government. He said he will test that commitment to balancing the budget by introducing the legislation after parliament resumes on Aug. 30.

Hooray. The government wants to cut $6 billion off the deficit for this year. Only $27.6 billion to go, and then we may actually take them seriously.

Aussie banks playing with the big boys

The Aussie banks should be careful when they’re playing with the big boys.

The Age reports:

“Rare smoking gun evidence” has led to two US hedge funds and a derivative trader suing the big four banks and Macquarie Group in New York over the alleged rigging of the bank bill swap rate — a case that could end up costing the Australian banks billions of dollars.

Several international banks are also being sued as part of the action filed in the US District Court for the Southern District of New York this week.

This of course stems from allegations that bond traders at Aussie banks acted in an unlawful way to manipulate interest rates.

These are all just allegations at the moment. The courts will no doubt decide who or what ‘did anything wrong’.

Of course, our naïve brain still struggles to understand the whole thing. Even if we assume the Aussie banks manipulated interest rates, we can’t quite see how that is any different to a central bank manipulating interest rates.

Ok. The argument could be that the central bank is neutral. That the central bank doesn’t itself benefit from either a rising or falling interest rate.

We’ll accept that. Or rather, we would accept it (or would be prepared to accept it) if central bankers were truly neutral.

The reality is that they aren’t neutral, and arguably never have been.

The central bank is funded, in part, by its national government. Employees of the central bank are public servants — employed by the government.

Senior members of the interest rate setting committee are appointed by the government.

This is because the central bank is in effect the private bank of the government.

While the central bank may not directly benefit from either rising or falling interest rates, the government does. It’s why — especially in recent years — governments and central banks have supported each other’s actions and worked together on various stimulus programs.

The actions of the US Federal Reserve are perhaps the best example. The Fed instituted a policy, which involved buying federal government bonds. This allowed the government to issue more bonds at ever lower yields.

Regardless, the Aussie banks now appear to be in a fine mess. We shall of course watch the courtroom developments with keen interest.

No more sharing

It’s all very high-tech, but we still don’t understand the necessity of them. We’re talking about driverless cars.

But what does anyone care what we think? The technology appears to be going full steam ahead.

As Bloomberg reports:

Starting later this month, Uber will allow customers in downtown Pittsburgh to summon self-driving cars from their phones, crossing an important milestone that no automotive or technology company has yet achieved. Google, widely regarded as the leader in the field, has been testing its fleet for several years, and Tesla Motors offers Autopilot, essentially a souped-up cruise control that drives the car on the highway. Earlier this week, Ford announced plans for an autonomous ride-sharing service. But none of these companies has yet brought a self-driving car-sharing service to market.

Uber’s Pittsburgh fleet, which will be supervised by humans in the driver’s seat for the time being, consists of specially modified Volvo XC90 sport-utility vehicles outfitted with dozens of sensors that use cameras, lasers, radar, and GPS receivers. Volvo Cars has so far delivered a handful of vehicles out of a total of 100 due by the end of the year. The two companies signed a pact earlier this year to spend $300 million to develop a fully autonomous car that will be ready for the road by 2021.

Ah, now we can see the point.

Taxi-style services, buses, and perhaps even trucks. That makes sense. Considering that, in most taxis you get into, the driver either asks you for directions or uses a sat-nav system, making the driver almost redundant anyway.

So why bother with them? We would quite happily expel the taxi driver from the car…allowing us to travel in peace.

However, it’s not as though things are plain sailing for Uber right now. The company, which has been the darling of the so-called ‘sharing economy’, is involved in a legal stoush in California.

The Financial Times reports:

Uber’s attempt to pay up to $100m to settle a long-running dispute with drivers over whether they are employees or independent contractors has failed, after a Californian judge ruled that the settlement was inadequate.

Uber had agreed to pay the plaintiffs, who were drivers in California and Massachusetts for the ride-hailing app, $84m, with an extra $16m if the company goes public. The settlement would be split between 385,000 drivers based on how much they drove for Uber. Those who drove more than 25,000 miles would have been due $8,000, the drivers’ lawyer Shannon Liss-Riordan said in April.

We knew the romance around the ‘sharing economy’ wouldn’t last forever.

Uber and other ‘sharing’ businesses have had a neat run of it. They’ve nicely positioned themselves as cuddly and consumer-friendly disruptive industries.

But now, the ‘sharing’ economy could be taking a new turn. And it’s a turn that, if Uber’s tests in Pittsburgh are anything to go by, the drivers should make the most of while they can.

Of all people, the Uber-atti should know that technology and innovation moves fast. If you don’t keep up, you’ll miss out.

The taxi industry has realised that. It’s why they’ve needed the gift of monopoly and regulation from governments to make it hard for competing businesses.

But if there’s one thing that a disruptive technology company knows how to do, it’s how to be a disruptive technology company.

For all the talk of a ‘sharing economy’, it’s worth pointing out that Uber isn’t really a ride-sharing business at all. More accurately, it’s a technology services company.

It uses its app in order to make it easy for people to get a ride to take them from point A to point B. At the moment, the easiest method of moving someone from A to B is by car. Hence, the ride-sharing phenomenon.

But there’s nothing about the business that says it has to be a car. Once Uber and others have developed a reliable and safe autonomous driving system, it wouldn’t take much effort to diversify.

Autonomous taxis would be great for longer distance drives. But what about shorter distances? Perhaps an autonomous three-wheeled vehicle or ‘pod’. That could be handy to take you from one end of Collins Street to the other. Or even from our Albert Park office into the CBD.

We have no idea whether Uber drivers should be employees or contractors. We’ll just remind them that as quickly as technology can open new job opportunities for people, even newer technology can take it away even quicker.

The end of ride-sharing? It could be just around the corner.


Kris Sayce,
Publisher, Money Morning

From the Port Phillip Publishing Library

Special Report: Central banks are losing control. Their efforts to prop up asset markets are failing. We’re now entering the endgame. What will the endgame look like? What are the short and long term investment implications? And how can you navigate this period of hyper central banking intervention…and emerge from the other side with a healthy portfolio? Vern Gowdie is one of the few minds in Australia with clear answers to these questions…[more]

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