Sorry for the late delivery of Money Morning today.  We had a few errands to run this morning and so we started much later than usual…

West Texas Intermediate Crude briefly joined its cousin – Brent Crude – above USD$100 last night.

It didn’t last.  Even so, WTI closed US trading above USD$96.  And Brent closed above USD$110.

Unlike other commodities, oil is rising because of supply fears.

In recent weeks other commodities rallied due to central bank money-printing.

But whereas stock prices for companies dealing in those commodities ran-up hard – we’re thinking copper, rare earths, potash and uranium stocks – Aussie oil stocks have, erm, done nothing.

In fact, if you look at a one-week chart of the S&P/ASX 200 Energy Index you’ll see what I mean:

Source: CMC Markets Stockbroking

Over the past week the global oil price has soared.  But Aussie energy stocks have gone down.

Why?  I’ll be honest. I just don’t know.

Our Slipstream Trader, technical analyst, Murray Dawes thinks it could be the result of the risk trade.

Investors are weighing up which is the better bet, oil stocks or safer assets such as cash.  At the moment cash is winning.

The more I think about it, the more I reckon Muzza is on to something.  When other commodities were rallying it was because punters saw a growing economy.  A growing economy means a bigger demand for resources, and that means more demand for rare earths, copper, uranium, etc…

So supply and demand did play a part, aside from central bank money-printing giving things a boost.

But the rallying oil price isn’t quite the same.  The oil price is higher because of the fear of a supply crunch.  Oil prices aren’t higher because they think the economy is booming.

Oil prices are up because if Libya descends into war and revolution it will have a knock-on effect to other countries in the Middle East.  And possibly Europe too.  Don’t forget Italy is one of Libya’s biggest trading partners.

And that could create a supply problem.

In other words, the potential gains from buying oil stocks are outweighed by the fear of another worldwide recession.  And if that happens, the demand for oil and the oil price would likely fall anyway.  And, the last thing you’d want to own in that case is oil stocks… or any stocks at all.

So, punters are saying they’d prefer to be in cash rather than take a punt on the oil price which could fall just as quickly as it climbed.

That kind of makes sense to us.  But then, it doesn’t explain why major US oil stocks climbed higher overnight.  We’ll keep thinking about this one and see if we can make sense of it.

But that’s for another day, today we noticed this:

“The Gillard government will sacrifice at least $100 billion over the next decade as a result of the tax compromise it negotiated with the big miners…”

So says the front page of today’s Australian Financial Review (AFR).

It never amuses us how the mainstream numpties get their elbows about ankles with that one.

A tax cut is always portrayed as a “cost” to government.

I’m sure you’ve seen it worded that way, “Income tax cut to cost government $2 billion”, or “mining tax to cost government $1 billion”, or “tax cuts to eat into government revenue”, blah, blah, blah.

Of course, that way of looking at it is complete nonsense.

Tax cuts aren’t a “cost” to the government.  Taxes are a “cost” to businesses and individuals.

Tax cuts mean less money going to the crooks in Canberra and more money staying with private enterprise and you.  Whereas taxes means more money going to the Canberra crooks and less in your pocket.

You, I and everyone else should cheer the massive profits made by the resources sector.  Because in a normal, free market economy it would provide a boost to the economy as a whole.

It would be – dare we say it – a stimulus.

But it would be a real stimulus.  Not a phony stolen stimulus.  Stolen because the government has robbed you of your hard-earned in order to line the pockets of its chosen buddies.

In this month’s Australian Small-Cap Investigator we told the story of a heroic entrepreneur.  Someone who risked their life and their capital to become a multimillionaire.

Yet their self-serving interest to become rich resulted in the biggest boost to the Australian economy the country has ever seen.

Selfishness breeds prosperity for all.  And that’s a fact.

In contrast, so-called progressive policies, the likes championed by Gillard, Rudd and Obama breed wealth for their buddies – bankers and other favourites – while everyone else is forced to pay for those policies.

Now, although the Australian economy isn’t what we could call a normal, free market economy, the pollies and mainstream goons should at least show some gratitude to the mining sector.

Simply because BHP Billiton’s [ASX: BHP] $10.5 billion half-year profit has the potential to add up to $90 billion in spending to the Australian economy.

How so?  I’ll get to that in a moment.

But before I do, I will point something out.  Just so you’re completely clear what I’m saying.

In a free market economy, BHP’s profits would filter through to the rest of the economy.  It would be a voluntary redistribution of wealth.  BHP would deposit the cash profits at a bank, or maybe buy corporate securities or buy other businesses.

Not forgetting the voluntary redistribution of wealth that comes from paying wages and suppliers for services.

So when BHP deposits the profits in a bank account the bank could lend it out to other firms or individuals.  And BHP would earn interest on the deposit.  If it bought corporate securities then it would invest the money directly in another business, again earning interest on the investment.

Or, it could just buy a company or assets outright, such as it has with the Chesapeake Energy shale assets in the US.

The important part of this is that it wouldn’t create an asset bubble because there wouldn’t be a pyramiding of newly created money.  It would be the same money.  The money BHP makes in profits would be the same money borrowed by a business in Sydney… or an individual in Adelaide.

That’s how a free banking system would work.  $10.5 billion in the door as savings, and up to $10.5 billion out the other side as borrowings.

For the duration of the loan, BHP wouldn’t have access to those funds – a bit like a term deposit.  Only, in effect it would be BHP lending the money to the bank as an intermediary and the banking lending the same money out to a borrower.

Now, you could argue that BHP has only been able to make $10.5 billion in profits thanks to central bank money creation and bank credit.  And that would be true.  No arguments from us there.  But we’ll stick with that number just to simplify the comparison with what really happens to BHP’s profits.

Anyway, of course, free banking doesn’t exist in Australia.  As you know from reading Money Morning, what we have instead is fractional reserve banking, where banks leverage up deposits to ten-times or more the deposited amount.

While still leading depositors to believe they can withdraw all their cash on demand.

So while the mainstream drones and pollies froth at the mouth because private enterprise has the temerity to seek profits, they should be grateful for the fact that private sector profits are helping to inflate the boom created by the central bankers and politicians.

The fact is, it’s not the mining companies that are the crooks.  It’s the fault of government and banks for helping create a lopsided and distorted Australian economy.

An economy that lives on bubbles.  Whether it’s mining bubbles or housing bubbles, it doesn’t matter.

Sure, the Australian government and Reserve Bank of Australia (RBA) may not be to blame for creating the mining bubble – that award goes to the US Federal Reserve, the People’s Bank of China, and the US and Chinese governments.

But the Australian government and RBA are responsible for the consequences of the bubble.  This is the housing bubble, and the uneven Australian economy.

You see, depending on how much of that $10.5 billion BHP Billiton repatriates to Australia, it could boost credit spending in the Australian economy by up to $90 billion!

And what’s more, make the economy even more uneven and stoke more asset bubbles.

Simply because the money deposited into the Australian banking system is used by the banks to create money from thin air, which it lends to borrowers.  In the case of the Commonwealth Bank [ASX: CBA], over 50% of those loans go toward propping up the housing sector.

The numbers are similar for the other banks.

So you end up with one asset bubble supporting another asset bubble.

For instance, say $1 billion of BHP’s profits ends up at the CBA.  The CBA will lend $900 million – 50% of it to home buyers.  If a home buyer buys a home from someone who is also a CBA customer then they’ll deposit that cash back in the CBA, which the bank will then use at capital to lend more money… and so the pyramiding continues.

All the time the depositors believe they have full access to their savings.  In reality if all savers tried to withdraw their savings on demand – as they are entitled to – there would be a bank run and the banks would collapse.

Simply because at any one time the banks only have around 4 cents in cash for every $1 on deposit!  Check out any of the banks’ annual reports if you don’t believe me.

Eventually, BHP’s $10.5 billion profit has resulted in a credit expansion to boost the housing bubble – and anything else bought with credit – by another $90 billion.

There’s a stimulus for you.  We’d have thought the pollies would be happy with that.

That’s how asset bubbles are formed.  And right now Australia has two of the biggest asset bubbles going.

Everything looks fine as long as it lasts.  But the housing sector is already hanging by a thread.  And based on what we’ve seen of the housing market, even BHP’s massive profits may not be enough to stop this bubble from popping and causing chaos.

That’s what happens with pyramid and Ponzi schemes.  They outgrow themselves.  They reach a critical point at which the growth is unsustainable.

So if things look bad now, when the easy money from the resources sector stops flowing through to the banks, just as one bubble boosted the other, so will the popping of the resources bubble finally kill off the housing sector…

And because of the uneven economy it’ll have big and bad consequences for the rest of the Australian economy too.

Regards,

Kris Sayce
for Money Morning Australia

A correction to our Money Weekend article.

The government’s Financial Claims Scheme covers bank deposits up to $1 million.

According to our pals at the Australian Prudential Regulation Authority (APRA):

“The Commonwealth Government has issued a guarantee of deposits at ADIs up to $1 million per depositor in any one ADI.  The guarantee will remain until 12 October 2011…

“After 12 October 2011, the current Government guarantee on deposits will be removed.  However, the FCS will continue to apply to deposits under the scheme for amounts up to a new limit to be determined by the Government.”

The APRA document is undated.  Our guess is the new guarantee will be much lower than $1 million.  More likely it will be something around $250,000.  It’s only a guess.  So don’t quote us on it.

Today’s Australian Financial Review (AFR) announces:

“Insurance shake-up looms”

The article explains:

“The move comes amid growing concern over insurance companies refusing to compensate policyholders for recent flood damage as thousands of Brisbane residents turned out over the weekend to clean up the inundated city.

“Premier Anna Bligh said there were thousands of people who believed that they had flood cover but who were discovering they were covered for the ‘wrong’ type of flood.  ‘It is very hard to believe we can’t get a better system,’ she said.”

“A better system” means enforced insurance for all.  And probably enforced flood insurance too.

It means government knows best – again.  It means government and bureaucrats trampling over the market and deciding the market has gotten it wrong.

What will this mean for you?  It means higher insurance premiums.

Home insurance is set to follow health insurance.  The Australian government meddled there too.  The result is a huge increase in costs and premiums.

With non-compulsory insurance, companies have to make sure they don’t price themselves out of the market.  But when a product or service is compulsory there’s no fear of that.  They can charge as much as they like.

There’s no incentive to keep prices low.

Let me show you what I mean…

We always enjoy the Health Payments Index that appears in the papers.  The latest tells you the Federal Government had approved an average premium increase of 5.78%.  Whereas health insurers claim benefit payments had increased by 9.1%.

You can see how payments have increased in the chart below:

Source: Australian Health Insurance Association

As you’d expect, the Australian Health Insurance Association (AHIA) wants bigger health insurance rises.

Since compulsory health insurance came in, payments to healthcare providers have increased by 201.9%.  From $3 billion to over $9 billion.

Don’t forget, insurance companies aren’t charities.  If benefits increase then so do premiums… there’s no free lunch.

As you can see on the chart above, until 2000, the rise in payments was flat.  But since Lifetime Health Cover made health insurance compulsory for many, benefit payments have soared.

And the idea that private health cover would help the public sector and reduce costs didn’t happen either.  In 1998 the Federal Government spent about $25 billion on health.

In 2010 the Federal Government spent over $50 billion.

Whenever governments get involved, suppliers know they have a sure buyer.  For the technology companies, doctors and other suppliers it’s a certain income stream… a gravy train… a licence to print money.

Of course, Lifetime Health Cover did lead to an increase in people insured.  You can see that on the chart below:

Source: Australian Health Insurance Association

But despite the triple-digit increase in benefit payments, the number insured has increased by just… 59.4%.

In 1998 the average payment per insured person was $409.95.  By last September it was $776.31 per insured person.  An increase of 89% per person.

And just like in the public sector, healthcare providers know that people are insured.  So there’s no need to keep prices low.  The healthcare providers charge as much as they want because they know they’ll get paid.

The fact is, private health insurance is just another tax.  Any payment forced on a private individual is a tax.  It doesn’t matter whether payment are made to government or a business.

Think of it this way.  If it was compulsory for all Australians to buy a small-cap investment newsletter do you think I’d only charge $99 you for the first year?  Of course not, I’d set the price many times higher than that… simply because it would be compulsory for you to buy it… so what you gonna do about it!

Unfortunately for me (and in my opinion, unfortunately for you… [wink]), small-cap newsletters aren’t a compulsory purchase for you!

But that’s not all.  Today’s AFR headlines page 38 with:

“Reinsurance giant to lift premiums”

Oh what a surprise.  Actually, it’s not a surprise to you.  Because we told you that would happen in the January 8 issue of Money Weekend, “Why Australians Will Pay for Queensland’s Floods”.

In that article we countered the argument of the ‘free-lunchers.’  Those that claimed foreigners would pay for the floods because insurance companies reinsured offshore.

Today’s AFR article confirms what we told you:

“The world’s largest reinsurer has said it will push through price increases on the reinsurance policies sought by local insurance companies in response to the severe flooding in Queensland and more frequent natural catastrophes in Australia.”

The article continues.  It quotes Munich Re general manager, Stefan Golling:

“Considering the accumulation of natural catastrophe events in Australia, I expect reinsurance prices to go up and the retentions that insurers keep on such events will increase as well.”

Funny that.  A week ago we wrote:

“If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

“That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance or on the reinsurance policies.  And that means passing on higher premiums to policyholders.”

In contrast, the mainstream was all excited about the boost the floods would give the Australian economy.  The Age quoted KPMG chief executive Michael Andrew:

“This [the Queensland floods] will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia.  Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

… And a lot of money flows out of Australia thanks to higher reinsurance costs.

Just when government and central bank policies are increasing consumer costs, it seems governments will add an extra cost by fiddling with the insurance industry.

You can see what happened to private health insurance premiums and payments when compulsion was introduced.  Expect the same to happen to housing insurance if state and federal governments stick their big noses in.

Look out, more cost of living increases are on the way.

Regards,

Kris Sayce
For Money Morning Australia

You can’t help but love him… Michael Pascoe of the Fairfax papers.

In today’s effort he comes up with two beauties:

“And now, with all but the hard-core climate change denialists accepting that extreme weather will become more common, there’s no excuse at all. Streets and houses that flooded in 1974 are flooding again now and will flood again.”

And…

“As for the economics of it, yes, there are terrible numbers being bandied around, but while there’s damage and destruction and loss, there’s also massive stimulus in the rebuilding. The economy is as strong as the determination of the people. It’ll be all right.”

We’ve already exposed this economic flood stimulus as – to use the Fairy Ruddfather’s phrase – bunkum.

There is no stimulus.

But Pascoe isn’t the only one spinning this yarn.  Westpac economist Matthew Hassan and St George economist Justin Smirk writing over at Business Spectator provide more detail:

“There would be also the boost to economic activity due to cleaning and rebuilding activity. A rough rule of thumb is that the rebuilding effect is about ½ the size of the output loss. We estimate a 0.1 per cent contribution to GDP.”

At least they admit that the net position is no stimulus to the economy.  The net position is a cost.  That is, it doesn’t stimulate the economy.

For example, point to the stimulus in this photo… if you can:

Source: The Age

No, I can’t see a stimulus either.  I can see a whacking great big clean-up bill though… I can see that a bunch of people will be without a car for a few weeks… I can see that Queensland Railways will need to replace and inspect a whole lot of train rails.

This idea of economic stimulus from natural disaster is ridiculous.

Money Morning reader Graham sent us an email a week ago.  He was responding to our comment in Friday’s Money Morning about how HSBC chief economist Paul Bloxham had claimed the floods would result in a boost to the economy.

Graham wrote:

“Just like the 250 homes rebuilt, out of the 2000+ homes destroyed on black Saturday? Now two years on! I’m one of those still trying to rebuild and get my family back home in Kinglake, and I’ve seen many families fall apart or go under as a result! The only way I can get my family back home is to rebuild my home, myself, nail by nail… Forget the household durable goods! ALL the ‘under insurance’ money goes into rebuilding a roof over your head first…”

We also wrote about the stimulus nonsense in Money Weekend.  You can read that article here.

The way mainstream logic works, the next thing we’ll hear from them is that people dying in the floods is good because it’ll create more jobs for gravediggers!

I mean, seriously.  There’s something wrong with these people.

Not only that, but many readers wrote in to point out that flooding isn’t covered by most insurance policies.

The Australian Securities and Exchange Commission’s (ASIC) website points out:

“Because flood cover is not offered in most house and contents insurance policies, people may find out too late that they are not covered for the losses caused by a flood.”

Oops!  There goes the argument that foreign insurance firms will pay for the flood damage.  Not that we bought that argument anyway.

And the front page of today’s Australian Financial Review (AFR) – just this moment dropped on our desk by Australian Wealth Gameplan editor, Dan Denning – notes:

“More than half of all insured homes in Queensland are not covered for flood damage, and insurers have ruled out making voluntary payments to compensate policyholders.”

Which is fair enough.  If policyholders take the risk that their home won’t flood, it’s hardly fair to ask the insurance firms to cough up for the damage after the fact.

So who’ll pay?  The individuals themselves, or charties, or equally likely the taxpayer.  Now, you may be fine with that.  But let’s not kid ourselves with the pathetic argument that the floods will provide a boost to the economy.

And we’ll guess that in the town of Toowoomba, much fewer than half the households will have flood insurance.  Considering there’s no major river that flows through the town, and having looked at Google Maps we’re struggling to even find the creeks that supposedly exist.

Oh, and the fact that it’s 691 metres above sea level would also make you think flooding isn’t likely.

But it didn’t take long for the Climate Changers to point the finger.  Again, Pascoe wrote:

“And now, with all but the hard-core climate change denialists accepting that extreme weather will become more common, there’s no excuse at all. Streets and houses that flooded in 1974 are flooding again now and will flood again.”

Mr. Pascoe may care to remember that the world existed before 1974.  But listen to him and the other climate changers and you’d think all these floods are a recent event.  That it’s all down to what we’ve done to the planet since the early 1970s.

Fair dues though.  He’s not the only one.  Reuters quotes Matthew England of the Climate Change Research Centre at the University of New South Wales:

“I think people will end up concluding that at least some of the intensity of the monsoon in Queensland can be attributed to climate change.

“The waters off Australia are the warmest ever measured and those waters provide moisture to the atmosphere for the Queensland and northern Australia monsoon.”

David Jones, head of climate monitoring and prediction at the Australian Bureau of Meteorology in Melbourne chips in:

“The first thing we can say with La Nina and El Nino is it is now happening in a hotter world.

“So the El Nino droughts would be expected to be exacerbated and also La Nina floods because rainfall would be exacerbated.”

The Reuters reporter notes that Mr. Jones added – but without directly quoting him – that “it would be some years before any climate change impact on both phenomena might become clear.”

Very convenient.  Say it’s caused by climate change but then push the proof out to some time in the future.

But if all these terrible humans have caused the climate to change and monsoons to increase and floods to worsen… how do we explain the following chart:

Source: Bureau of Meteorology

It’s from the Bureau of Meteorology (BoM) and shows “Known Floods in the Brisbane & Bremer River Basin”.

You can click here to see the chart for yourself.  This particular chart records levels at the City gauge.

A second chart records levels at the Ipswich gauge:

Source: Bureau of Meteorology

I don’t know about you, but can we really say that flooding on the Brisbane River is a new occurrence?

I wouldn’t have thought so.  In fact there were more “major” floods in the Nineteenth century than in the following centuries.

So the idea that the floods are proof of climate change and that we must do something about it now before it gets worse, is just plain nonsense.

As we’ve pointed out before, your editor has no clue whether climate change is genuine or not.  We simply don’t have the brain power to figure it out.

But what we do know is that floods happen.  They happen regularly.  In fact we’ve had a lot of rain down in Melbourne too – although not as bad as in Queensland.

And what we also know is that it’s disingenuous for the climate changers – and non-climate changers – to pick individual weather events and claim it’s proof that climate change does or doesn’t exist.

As far as we can see the Queensland floods provide about as much proof of climate change as they do about disasters being good for an economy… in other words, none.

Regards,

Kris Sayce
For Money Morning Australia

“I think not owning gold is a form of insanity, it may even show unhealthy masochistic tendencies, which might need medical attention.”­ – Robin Griffiths, Cazenove Capital

How we wish we’d said that.

You can watch the video clip here.

Sometimes we have a tendency not to say what we really think.

I know that seems odd considering some of the things we write. So let’s just come out and say it. To avoid confusion… for the love of God, buy gold.

If you insure your car against a crash, and you insure your house against fire, why wouldn’t you insure your money against devaluation?

It’s a no-brainer to me.

How much “insurance” you take out is up to you – 5%, 10%, 20% or more. Make up your own mind. It depends how much insurance you want.

And how you do it is again up to you. Physical gold, gold certificates from the Perth Mint, or even buying the Gold exchange traded fund on the ASX. These are all viable options.

It’s just a matter of whether you think the global economy is about to go elbow-up tomorrow – in that case buy physical gold now – or whether you think it won’t happen for another couple of years. In that case you could just buy the gold certificates or ETF to quickly get an exposure. And then buy the physical stuff later on.

Whatever you do, you want to do something about it.

Commodity prices are on the up. And the Aussie dollar – at least in the short term – is on the way down.

Gold, rare earths and veggies higher

Today’s Australian Financial Review (AFR) tells readers:

Ginger is up 145% since September.

Broccoli is up 222%.

Pumpkins are up 93%.

And cauliflowers are up 192%.

Not forgetting a 198% increase in tomato prices in two weeks.

We’re sure some of these changes are seasonal price adjustments. But if the price changes from September to December 2010 are anything to go by, they’ll be nothing compared to the price increases you can expect this year.

Although we’re surprised the mainstream press is even reporting this. They’ve always told you fuel and food are volatile items and should be ignored when looking at price inflation.

You and I know better.

Add in a surging oil price and the picture for the consumer looks even worse. Brent Crude is trading at USD$97.51 a barrel, and West Texas Intermediate at USD$91.11 a barrel.

But don’t think the oil price rise will stop there. According to a recent article in the Wall Street Journal:

“Rare Earths Shortage Becoming Problem For Refiners”

If you don’t know the story, rare earths are a bunch of crazy little elements usually found squatting beneath the main part of the Periodic Table:

Source: Corrosionsource.com

The funny thing is, despite their name, rare earths aren’t that rare at all. In fact, they are quite abundant in the earth’s crust.

As an example, rare earth Cerium has a presence of 60 parts per million (ppm) in the earth’s crust. That’s compared to 55ppm for Copper and 75ppm for Nickel.

The difference is that rare earths aren’t usually found in large enough quantities in one place. That means it’s just not economical to mine most deposits of rare earths… not at the current price anyway.

So, what do rare earths have to do with crude oil?

Fuel crisis back on

Simply this, as the WSJ article points out:

“Rare earths, elements that go into high-tech batteries, television sets and military technology, are also used in the catalyst component of refiners’ gasoline-making fluid catalytic cracking units, or FCCU’s. Although rare earths account for only up to 4% of catalysts used in these units, their recent price increase has added as much as an extra 25% to catalyst costs, according to the National Petrochemical and Refiners Association.”

And the problem could get worse.

China controls about 95% of the world supply of rare earths. And it’s doing its darnedest to restrict it.

This has seen the price of rare earths take off over the past year.

To show you what I mean, take a look at the rare earths prices according to Lynas Corp [ASX: LYC] - a former Australian Small-Cap Investigator stock pick until we sold out for a 200% gain last October:

Source: Lynas Corp

Note the price increase in the dark blue row across the bottom.

In the last four months, the price of rare earths has doubled.

Since 2007 the price has increased by 510%. You can see why the Lynas share price and other rare earth stocks piled on big gains late last year.

But for now we’re out of the stock… and all other rare earth stocks.

Sure, there’s a chance these things could go higher – much higher – but at the current price and after such a huge rally, I’m happy to have locked in the gains for my readers. Right now I’m assessing the market from the sidelines.

Besides, given China’s dominance of these elements there’s the risk China will relax its export quotas and flood the market with more rare earth’s than manufacturers can eat.

The point is, everywhere you look price pressures are high. Consumers are being force-fed higher costs. Whether it’s higher interest rates from banks, higher prices from retailers, or higher commodity prices due to natural disasters, the story is the same.

And on top of that you’ve got government and central bank manipulation.

Kids creating money from nothing

This last cause is the most evil of the lot.

All the others you can say, well, that’s markets and nature folks. You can call it supply and demand. You even can say its businesses making profits… good luck to them.

But with the central bankers it’s different. That’s purely about saving their bacon and trying to postpone the inevitable – the Great Depression MkII… perhaps we can start calling it GD2.

And if you want to see the culprits in action, just pick up a copy of today’s Australian Financial Review and turn to pages 18 and 19. There you’ll see a syndicated article from the New York Times. Or better still, just click here and read the original article for free.

It’s the sorry tale of the “inflationistas” in action.

The article dramatically states:

“On one recent Tuesday morning, what Mr. Frost and his five young colleagues did over a 45-minute period might have unsettled even a seasoned Wall Street hand: they bought $7.8 billion of Treasuries.”

Just like that. Easy isn’t it?

Here’s how it works:

“On one recent morning, trade one was Tiffany Wilding, 26. While she reviewed the stream of offers and then the prices finally accepted by the algorithm, trader two, Blake Gwinn, 29, double-checked her decisions and trader three, James White, 29, made a duplicate of everything in case the computers crashed.

“All the while, Mr. Frost stood behind his colleagues, ready to intervene – and even cancel the Fed’s purchases – at any sign of trouble.”

It almost sounds childlike. Young kids playing with their computers while the teacher looks on.

Good old Tiffany, Blake and James. Creating billions of dollars and then spending it. Pushing more dollars into the economy to boost prices and cripple the wealth of individuals… most individuals anyway… except the bankers. They get their greasy hands on the cash first and can spend it before prices move higher.

This handy graphic from the New York Times helps explain everything. We especially like the following quote:

“The Federal Reserve creates money and credits it to its own account.”

Source: New York Times

And so the inflationary spiral continues.

Australian food riots?

It’s why you’re seeing soft commodity prices reaching multi-year highs. And it’s why you’re seeing headlines in the mainstream press such as:

“Food crisis fears as global prices hit record high”

Unfortunately, most in the mainstream are too dumb to put one and one together. They see the Fed creating billions of dollars’ worth of new money, and they see food shortages in the third world.

But they fail to connect the dots. As far as they’re concerned they’re unrelated events. I assure you, they aren’t.

And if the floods in Queensland continue to impact not only agriculture, but the mining sector too, then it’s possible – just possible – that food shortages and even higher prices will reach these shores too.

We’ll have more to say on this. If you’re content to sit on your hands and let government, central bankers and bankers grind your wealth into the ground then do nothing.

But if you prefer the idea of living a comfortable lifestyle. And if you think it makes sense – as I do – to insure your wealth against the inflationary actions of Ben Bernanke, Tiffany, Blake and James, then I suggest you do something about it.

One of those things is to buy gold.

If you’re sane you’ll do it.

If you’re insane or a masochist then you won’t – just make sure you know where to get some good medication, because boy will you need it.

Regards,

Kris Sayce
For Money Morning Australia

“You don’t want to take rights away from people… Every now and again you feel those rights are being abused and you say, ‘Do we take rights away or do we just put up with the abuse?’  My response to it varies day to day.”

That’s the Australian Financial Review (AFR) quoting Australian Tax Office (ATO) commissioner, Michael D’Ascenzo.

And the answer is simple. If you don’t want to “take rights away from people”, don’t.

What’s the ATO commish grumbling about?

It seems he’s not happy for people to exercise their right to, erm, challenge ATO tax decisions.  The AFR calls these challenges “spurious.”

In another article in the AFR the commish complains says this about taxpayer reaction to delayed tax refunds last year:

“I don’t think they were listening.  You could argue we could have sent the message better, but I just don’t think when people don’t want to hear… it still wouldn’t have got through.”

Arrogance?  Or just plain dumb.  I’ll let you decide.

In honour of the ATO’s “good work”, last year the Australian mint released a 20 cent coin.  It was to commemorate the 100 year anniversary of the ATO.

Money Morning reader Eve brought our attention to it thanks to an email she’d received:

The wording on the coin states, “Working for all Australians.” The comment in the email offers an alternative: “It should read… ‘Bleeding all Australians’.”

Meanwhile, on the other side of the world, the New York Times wrote:

“The new House Speaker, Representative John A. Boehner [Ed note: pronounced 'Bayner' apparently!] of Ohio, denounced the attack in an early Sunday appearance in West Chester, his hometown, and said it was a reminder that public service ‘comes with a risk.’”

Ah, the heroic public servant.  Working amongst a hail of bullets.

There you have an example of two types of violence.

One that involves an individual shooting a public servant…

And another that involves public servants taking private property from individuals by force.  And they have the nerve to grumble when taxpayers complain about it!

Make no mistake; violence against anyone in a free society is unacceptable – unless it’s in self-defence.  But it should go both ways.

One politician taking a bullet to the head makes front page news as an attack on democracy and freedom.  Yet when the nation state perpetrates an act of violence against millions of its citizens by forcing them to hand over private property, it’s a sign of democracy and freedom.

How does that work?

As we figure it, it’s all part of this idea that governments and public servants know best.  They know what’s best for you – and don’t you forget it.

This could be why the Reserve Bank of Australia (RBA) decided to sell two-thirds of its gold in 1996 and 1997… just before gold hit a 15-year low… and just before it began 10-year bull run that saw the price triple:

The RBA’s Top Trade of 1996

Source: goldprice.org

Even so, for a couple of years the RBA goons must have thought they were trading geniuses… as the gold price sunk below AUD$400 an ounce.

The thinking behind the gold selling spree is revealed in this document on the RBA website. You can click here to read it… [Note: you may need to click the link twice... for some reason it doesn't work the first time you click!]

Some of the choice comments in the report include:

“Gold can no longer be regarded as something ‘special’…, it should be managed as just another component of official reserve assets.”

“Central banks traditionally hold gold because of its ability to be used in the event of a crisis in the international financial system; it is the only reserve asset that is not a claim on some other government, international institution or bank.  However, over the past two or three decades, the world has experienced a number of economic ‘crises’, but gold played no part in coping with them.  The continuing development of the international financial system means that the economic or financial circumstances which would require us to call upon our gold holdings for economic reasons look increasingly remote.”

After a number of arguments about why gold supply can keep pace with gold demand, the RBA notes:

“All this suggests that it would be optimistic to expect sizeable increases in the price of gold in the near term.  As such, there is likely to continue to be a significant opportunity cost in holding gold.”

In other words, the RBA thought it could make more money selling gold and buying something else.

Finally:

“How much gold should be sold is a matter of judgment.  It is possible to mount a case for selling it all, but short of this there is scope to sell about half the gold and still have reasonable holdings by world standards.”

Looks like the RBA got over excited and sold two-thirds of it.

But that’s OK, because the RBA claims:

“We have very large reserves of gold in the ground and the question arises as to why we would want to hold much in central bank vaults.”

Golden Hamburgers

Of course, it’s a nonsense idea that gold in the ground is worth the same as gold in a vault.  If that’s true you could argue a cow in a field is the same as a hamburger in a bun.

I don’t need to tell you that isn’t the case.

Gold has value because it’s hard to find and potentially expensive to recover.  That, my friend, is why it’s the ultimate unit of money.  That’s why it’s been coveted and stored and used as a medium of exchange for thousands of years.

If gold in a vault is the same as gold in the ground then the gold in the vault wouldn’t be worth as much.  Why?

Because if you could easily dig for your own gold rather than buying it from someone who has used their capital and resource to recover it then why wouldn’t you?  You could then sell it on the market at full value and clean up.

But gold is hard to recover.  And it’s scarce.  The capital and labour required to recover gold is huge.  And even after investing in the capital there’s no guarantee you’ll even find any gold – let alone recover it.

So for the RBA to say gold in the ground is the same as gold in vaults is just plain ridiculous.  Gold, like all other resources is worth nothing until it has been recovered.

I can tell you that from the experience of analysing small-cap mining stocks.  And I’m sure Diggers & Drillers editor Dr. Alex Cowie would agree.  A prospective gold mine only gains value based on whether the gold is recoverable.

If the gold isn’t recoverable then no investor will invest in it.  The greater the chance of recovery, investors will place a greater value on it.

If resources in the ground were worth the same as resources in a vault then mining companies would never go bust.  It’s the risk of the resource not being recovered that provides the investor with the opportunity to make money.

This is proof pen-pushers at the RBA are no better than anyone else at predicting the future direction of markets.

Yet time and again RBA officials mesmerise people with predictions for financial markets.  The support of the banking sector.  And it’s belief in the Aussie housing market.

RBA Gets it Wrong Again

But how’s the track record looking?

The RBA thought it a good idea to sell gold just before a ten-year bull run.

It thought the banking sector was strong, even though the RBA admits it had no idea what two of Australia’s banks were doing behind closed doors.

And like most other central banks and the mainstream, the RBA also failed to predict the financial crash in 2008.

Now, its last hope is to pin its flag to the Australian housing market.

But after talking down the chances of a crash – and refusing to admit housing has been fuelled by a credit bubble – the RBA must be feeling uneasy at this news:

“44% jump in property listings point to price falls in 2011”

Oh dear!  There goes the housing shortage.

Time and again, the RBA has been proven wrong about the economy and shown to be ignorant of what’s happening behind its back.  Yet these guys have the most influence over the Australian economy.

So maybe the Australian economy is a ‘Miracle Economy’ after all.  As far as we can see, it’s a miracle it hasn’t collapsed already with these goons pulling the levers.

But don’t expect their luck – if you can call it that – to hold up much longer.

Odds are it’s going to be a choppy year ahead for the Australian and global markets.

Regards,

Kris Sayce
For Money Morning Australia

“How did we get so rich” asks today’s Australian Financial Review (AFR). We think the AFR was asking a question.

Although the lack of a question mark suggests otherwise.

Anyway, who are we to pick bones on someone else’s grammar? We couldn’t even get our headline right the other day.

The story on page 32 of the AFR lists the proof of why Australians are rich.

Such as Australians only bought twenty-two Maserati’s in 2000. Yet this year they’ve bought 120.

In 1993 the average home size was 195m/sq. Today it’s 250m/sq.

In 2000 Australians knocked back 1.4 million bottles of champagne (sparkly wine we’d guess, not the kosher stuff), whereas in 2010 Aussies have chugged 2.9 million bottles.

And on the examples go.

The opening paragraph describes Australia’s richness perfectly:

“The very idea of paying $170 for a steak would appear absurd to most people. It is, by any standard, gluttonous in the extreme.

“But on almost any day at the Chophouse in Sydney, an enthusiastic carnivore works through a 1.7 kg cut of meat known as the Tomahawk.”

But you’d think… you’d really think in a story about how rich we are there would be a tiny mention about how indebted we are too.

You’d think that wouldn’t you? Not in this case.

Journo Angus Grigg decides it’s only worth looking at one side of the household balance sheet.

So, while all this richness is very impressive, let me take you through a slideshow of something equally impressive.

We’re not usually a big fan of just throwing you a few charts. Any old muggins can do that. You don’t need a PhD in Chartology from the University of Wisconsin to whack some numbers in a spread sheet and create a chart in Excel.

But this time we will. Simply because it’s the quickest way to get the point across. First, Australia’s net foreign liabilities since 1988.

Currently standing at just under $800 billion. More than double the level of ten years ago:

Source: RBA

Next Lending and Credit Aggregates. The red line is lending by non-banking financial institutions (NBFIs). The blue line is bank lending. And the green line is the total of the two.

The current total is just under $1.8 trillion. About a 200% increase in ten years:

Source: RBA

The following chart is Bank Assets. Remember an asset for a bank is someone else’s debt. It’s currently around $2.5 trillion. Roughly a 230% increase in ten years:

Source: RBA

This next chart shows the debt to disposable income ratio. This shows you household debt is 160% of household income. Almost double ten years ago:

Source: RBA

On this chart you’ll see the percentage of disposable income allocated to interest rate payments. The red line is housing interest payments. The blue line is the total inclusive of non-housing interest payments:

Source: RBA

You’ll note on the chart above how disposable income going towards interest payments has doubled in the last ten years.

Another interesting chart is the increase in the M3 money supply:

Source: RBA

The money supply has doubled in ten years.

Quite frankly, when I’m analysing stocks for Australian Small-Cap Investigator I look at both sides of the balance sheet. And I look at both sides of the profit and loss statement too.

Although to be fair, most of the stocks I look at don’t have much in the way of income, it’s mostly expenses… but that’s what makes small-caps so exciting. Anyway…

The point is you can’t say someone is rich just by looking at their assets and consumption levels. Any fourth-grader would know that. You need to see the other side. You need to see the debt levels.

As we’ve written before, the wealth created during the last thirty years isn’t real, it’s fake. It’s wealth created at the expense of others.

Whereas real wealth creation involves everyone winning. That’s the beauty of free market enterprise. Each side of the bargain is a winner.

Real wealth is when an entrepreneur or a businessperson identifies an opportunity to improve something. Or to create something from scratch.

The invention of personal computers and the motor car are perfect examples.

Those two things have created real wealth and prosperity. The inventor and seller of motor cars made profits, and the buyers of motor cars were able to travel easier. People can now travel further more quickly.

They can work and visit places they otherwise couldn’t have. Both have added to real wealth.

And importantly, both sides are winners.

But when money is created from nothing by banks it only gives the impression of wealth. Sure, people can buy a house quicker than previously thanks to easy credit, but they’ve now been saddled with massive debts as well.

Has the house buyer really won in that circumstance? Paying 50% or 60% of their disposable income on mortgage repayments.

We don’t think so.

You see, our pals in government and in the banking sector distort the market. Their collusion means you’re left with a small number of winners – government, bureaucrats, bankers and those who benefited from the credit expansion – and a large number of losers – everyone else.

Rather than both sides winning, you’ve got a redistribution of wealth. Redistributed from the suckers forced into borrowing more and more money, and into the pockets of those that benefit from money printing – those named above.

And unfortunately for the suckers they’ll soon discover that the “wealth” created over the last twenty years wasn’t real wealth. They’ll discover it was funny-money wealth. Where money is created from nothing to buy assets.

Assets which soar higher thanks to the money inflation. Only the asset price hasn’t increased in real terms. Not when you factor in the increased supply of money being used to buy the assets.

Of course, sitting at the top of the tree, benefiting most from the redistribution of wealth are the bankers. Fair play to Sir Ralph Norris for pocketing $15 million. Nice work if you can get it.

But he’s not a hero. He’s not some business genius. Face it, banking isn’t entrepreneurial.

You don’t need to be Henry Ford or Bill Gates to create money from thin air. All you need is permission from the government and central bank to do it.

Once the money is created they just need to hand it out to willing suckers who are prepared to take it from them… in return for becoming indebted for the rest of their lives.

One winner. And one loser. The bank is the winner. The borrower is the loser.

But look, we don’t begrudge anyone making a tidy sum of cash. But we do begrudge someone making millions of dollars when they hold a privileged position supported by government and underwritten by the taxpayer.

The fact is, Australia’s four banking CEOs are now in effect the highest paid public servants in Australia.

The way we look at it, last week the Australian banking system was nationalised in all but name.

Our pals at the Australian Prudential Regulation Authority (APRA) and the Reserve Bank of Australia (RBA) released a joint statement titled, “Australian Implementation of Global Liquidity Standards“.

In a nutshell, because Australia doesn’t have much government debt, it’s difficult for Australia’s banks to meet the Basel capital requirements. The requirements are for banks to hold a certain amount of government bonds on the books.

But because Australian taxpayers are in the fortunate position of not being loaded up with excessive government debt, APRA and the RBA had to come up with a plan to get around this.

What did they do?

That’s right, they decided to stiff the taxpayer anyway.

Australian banks will pay a fee to the RBA in return for the RBA providing liquidity to the banks. To put it simply, the banks are taking out an insurance policy with the RBA.

But because the RBA couldn’t possibly meet all the obligations of a failed bank… the policy is ultimately underwritten by you, the taxpayer.

If a bank needs more liquidity the RBA will provide it. By using taxpayer dollars directly or by creating money from thin air to inflate the money supply and give that to the banks.

Either way, the taxpayer loses out.

Now, I was going to write that this means banking profits have been privatised while losses are nationalised.

But on reflection we’re not so sure that’s really true – even though we may have mistakenly written that before. It’s true that losses are being nationalised. No doubt about that.

But to say profits are privatised assumes that banks operate in a true private sector. The fact is they don’t.

Banking profits aren’t really profits at all. Banking profits are really a gift from the government and the central bank.

It’s just like any other government subsidised industry. The company gets to report a profit in its financial statements, but the reality is that without government support a subsidised industry wouldn’t make those profits.

Because if it was profitable it wouldn’t need the subsidy.

Therefore, any profit made is actually a gift given to it by the government. The government provides the business with a false market. It either prevents competition or forces consumers to buy a product, or it gives the businesses special privileges not available to other businesses.

A perfect example is the private health insurance sector.

These companies are only profitable because the Australian government forces a percentage of the population to buy private health cover. If you don’t buy health insurance then you have to pay the Medicare Levy Surcharge.

Incidentally, we notice a constitutional challenge has been made in the US courts opposing a similar programme in the US to force consumers to buy healthcare. We’d like to think someone would launch a constitutional challenge in Australia’s courts on forced private health insurance.

We won’t claim to be a constitutional expert, but we doubt that there’s anything in the Australian constitution that gives the Federal government the power to force you to buy something and then punish you with higher taxes if you don’t.

Anyway, getting back to the point, any profits private health insurance companies make above what they would make without the compulsion is simply a gift from government – paid for by the taxpayer.

The same goes for the banks. Banks can only make the big profits because they are given a privilege that no other business is given – the ability to legally create their own assets from thin air.

It takes very little work for a bank to create a million dollar asset on their books. All it needs to do is entice someone to take out a loan and hey presto, the asset is there. No capital expense required. Very little labour needed either.

In contrast, think how you create assets. You probably have to work eight hours a day. Then you have to cover all your living costs. What’s left is what you can put towards investing in an asset.

In other words, for you to create or buy an asset it takes a lot of your labour and a lot of your capital.

Most other businesses are the same.

But not banks. They have a unique privilege gifted to them by government. That’s why when you think about it, not even the profits are really privatised.

It’s a fascist deal constructed between government and bankers to redistribute wealth from the taxpayer and consumer into the hands of the bankers, bureaucrats and politicians.

That my friend, is the “strong” Australian banking sector for you. If you were in any doubt before, do you still reckon it’s something to be proud of?

Regards,

Kris Sayce
For Money Morning Australia

Before I get stuck in to today’s Money Morning a quick note on our publishing schedule over the holidays…

This week will continue as normal… as you’d expect. Next week, from 27th December until 31st December each day you’ll get something a bit different.

The editors of the five subscription based newsletters we publish have been asked five questions. Each day next week you’ll get to see what those questions are and how the editors’ answered them.

I probably won’t publish anything on Saturday 1st January and Monday 3rd January. So hopefully you’ll be able to survive without us for a couple of days!

Oh, and assistant editor Shae Smith leaves Money Morning this weekend to head off on maternity leave for a few months. With any luck she’ll be back mid-next year.

And finally, more stonewalling from the chaps at the Australian Securities Exchange (ASX). As you’ll recall, we’ve wanted to know why the ASX hasn’t asked National Australia Bank [ASX: NAB] or Westpac [ASX: WBC] for an explanation on the lack of disclosure about the secret US Federal Reserve loans.

Seeing as its public relations team is now ignoring your editor, we thought we’d send an email to CEO Robert Elstone, CFO Ramy Aziz, and some other bloke called Eric Mayne – we’re not sure what he does.

In typical robot style we received the following response from Ramy Aziz:

“Corporate Relations have already advised you that ASX is aware of the issues you raised but it does not discuss specific supervisory matters.”

We half expected the email to continue with, “Danger Will Robinson, danger!”

But it didn’t.

So, after all our efforts, to date we’re no nearer getting an answer than we were three weeks ago. All we’ve got left to look forward to is the freedom of information request to the RBA.

Anyway, we’ll keep plugging away. If the ASX, RBA and APRA think we’ve been annoying so far, they’ve got no idea how annoying we can be… unless they subscribe to Money Morning of course, then they’d have a pretty good idea.

On with today’s Money Annoying…

The Emperor is Dead… May He Remain So

“Great man… blah, blah… a wonderful servant… yawn, yawn… a gift to the nation… blab, blab… let’s make him Emperor… Oh, he already was… let’s make him a Saint instead. Hurrah!”

Yesterday treasury secretary Ken Henry announced his retirement. He’s to be replaced by another career bureaucratic drone… whose name we’ve already forgotten.

Cue the snivelling tributes:

“I consider myself very fortunate to have been treasurer during his tenure as secretary,” said Wayne Swan.

Swan went further. According to The Age:

“Treasurer Wayne Swan said Dr Henry’s performance during the global financial crisis and his central role in tax reform had made him arguably the finest Australian public servant since HC ”Nugget” Coombs.”

Oh, there’s a fine man to be compared to, and “finest Australian public servant…” [Shudder!]. But more on Coombs later…

Our old pal, Prime Minister Julia Gillard said of Emperor Henry:

“More generally, Dr Henry has made a major contribution to the well-being of Australians and the prosperity of the nation during his more than 25 years at Treasury, during 10 of which he has been secretary.

“He has become one of the greatest of all Treasury secretaries.”

The front page of today’s Australian Financial Review (AFR) captions a photo of the Emperor with the comment:

“Ken Henry, who is stepping down, was said to be frustrated his resources tax was so little understood.”

Ah diddums… vay didunt wike your resources tax, poor thing.

I could go on… no I couldn’t. Is there anything more sickening than public servants patting themselves on the back? Yes, there’s the private sector patting public servants on the back.

We labelled Ken Henry as the Emperor due to his extraordinary power. His power to influence and control government was second to only the fabled ‘Nugget’ Coombs… in our view that’s nothing to be proud of.

Evidence of his power and the power of the bloke to take his place is seen in the brown-nosing from the vested interests who are keen to maintain their favour with the public service.

But quite how the King of Bureaucrats managed to make a “contribution to the well-being of Australians and the prosperity of the nation” is unclear.

I mean, let’s take a look at the man’s major achievements.

The kind folks at Wikipedia have served everything on a plate for us. And spared us a whole bunch of work. Here’s Emperor Ken’s top three top [ahem] achievements:

• Bank deposit guarantee scheme
• Stimulus package
• Resource Super Profits Tax

What a guy. What a performance. What a…

That’s his roll of honour. His major achievements have been to recommend the government forcibly take money from one group of people and give it to another group of people.

Wow, they should bottle that kind of entrepreneurialism, it’s priceless.

But as far as we’re concerned there’s no difference to the violent behaviour of forcibly stealing an individual’s income through taxes, than the violent behaviour of these ticket inspectors caught on tape.

Both are violently manhandling the public to demand payment. In fact, now we think of it, Henry and his gang are worse than the ticket inspectors. At least you’ve got the choice of whether to use a train or not.

If you use a train, buy a ticket. Even though through tax theft you’ve already paid for your ticket anyway. But never mind.

With government the philosophy is, give us your money now and we’ll claim we’re providing you with something in return… whether you want it or not… and whether the government is providing it or not.

Imagine the attitude towards taxation if tax officials knocked people over on the street to swipe the cash in their wallet. Our guess is most would find that behaviour unacceptable. Yet because the tax office swipes the money before it even gets to your wallet, the majority of the population sheepishly accepts it.

They even praise it. And only a public servant – only ever a receiver of tax, never a payer of tax – could ever have said:

“Taxes are what we pay for civilised society.”

The quote is from Oliver Wendell Holmes, Jr., US Supreme Court Justice.

We couldn’t disagree more. There’s nothing civilised about theft. Theft is theft whether it’s done by a private individual or by a coercive government.

Taxation is just an excuse to fund a government. Because without taxation there would be no government. Or certainly not the massively grotesque centralised government’s plaguing the world today:

“The power of taxing people and their property is essential to the very existence of government.” – James Madison, 4th US President.

But back to Henry. We were amused by the comment that he’s “the finest Australian public servant since HC ‘Nugget’ Coombs”.

In the world of the public service that’s undoubtedly an honour. To the rest of the population it should be seen as a dirty insult.

Who is or was HC ‘Nugget’ Coombs?

He was the first governor of the Reserve Bank of Australia (RBA). But he’s dead now.

He claim to fame is that he appears to be the mould for later generations of megalomaniacal, power-crazed public servants.

If this is a man to idolise for his achievements you may as well idolise Jack the Ripper for his services to the sharp knife industry, and Bernie Madoff for his services to the finance industry.

But read Coombs’ obituary and you’re left with an impression of a brave saintly man. A man who only thought about doing well for Australia:

“As a young rural teacher from Teachers Training College he began his university studies by correspondence…

“In 1934 Nugget was awarded a doctorate at the London School of Economics for his thesis on central banking, The Dominions’ Exchanges…

“The student [Coombs] who used to dine with Keynes on the other side of Piccadilly from Green Park now regularly met the Keynesian economists from the Commonwealth Bank and the Bank of New South Wales in Repin’s coffee shops…

“During and after the War Nugget was engaged in the Keynesian Crusade… It involved various organisations and places – FAO, GATT, IMF and World Bank…

“In Australia Nugget arranged many meetings for Whitlam with Torres Strait Islanders and Aborigines… He drafted the words with which Whitlam ceremoniously poured some soil into Vincent Lingiari’s hands.

“He argued passionately for the welfare of Aborigines and for their right to be different…”

He also had a “splendid art collection [which] was exhibited at the Reserve Bank in Martin Place in 1992.”

An art collection funded by the tax payer. How else would Saint Nugget have paid for his art collection if it wasn’t for the taxes paid by private individuals? Taxes that paid Saint Nugget’s wages.

The original ‘Champagne Socialist’ perhaps.

The danger of characters like Coombs is they wrap themselves in the image of being do-gooders for society. That all they want to do is help people. Help the poor. Help indigenous Australians… oh, and tax the rich.

While at the same time feathering their nest at the expense of the taxpayer.

So while Coombs does sound like a noble man. And while you could be forgiven for thinking he was a saintly man. The reality is that Coombs was no different to any other power-crazed public sector servant.

That is the belief that they and government knows best. That they and government know best how to spend your income.

The end result is that the problems the public servant laments are problems actually caused by the government’s interference.

For instance, in Coombs’ book The Return of Scarcity he writes:

“Tax concessions to upper and corporate incomes are often reflected in conspicuous extravagance or in bidding up the price of existing properties, rather than in higher levels of productive investment.”

We wouldn’t argue with that. The Australian obsession of investing in ever-increasing house prices is an example of unproductive investment.

But what Nugget ignored was that its government which creates tax breaks. Tax breaks provide a reward to one group of people at the expense of another group. Tax breaks and incentives which encourage unproductive investment and discourage productive investment.

You only have to look at the lop-sided shape of the Australian economy to see that – a burgeoning resources and services sector… and, well, that’s about it.

A banking sector which relies on the resources sector in order to increase credit. A consumer which relies on the banks and the resources sector in order to borrow money to feed the services sector. And a services sector which relies on the consumer and the banks and the resources sector in order to sell its services and goods.

In a tax-free economy, there are no taxes and there are no tax breaks. You earn your money and shock-horror, you get to keep it. And save it and spend it as you see fit.

But that’s not the way central planners like things. They like to meddle. They like to plan an economy. Such as Coombs’ solution for Australia.

If you read The Return of Scarcity you can see the birth of compulsory superannuation, and the origin of the Resource Super Profits Tax. For the latter we no doubt have the source of Emperor Henry’s thoughts on taxing resources.

Coombs wrote in 1990:

“[A] special capital asset replacement royalty or resources tax on the export of exhaustible resources should be imposed, and the proceeds allocated to a special fund for investment in sustainable enterprises. A rebate of this royalty or tax could be granted for payments by the corporation concerned into a trust fund under its own control, for investment in Australia for sustainable production, or grants to an approved institution for the conduct of scientific and technological research.”

The interventionist may think that sounds reasonable. After all, shouldn’t businesses be encouraged to re-invest in Australia?

Again, the problem is that the interference of government makes it difficult for businesses to invest and re-invest in Australia. Because again it relies on businesses investing in the industries the government approves of – mostly in clean service industries.

Those it approves of will be granted a tax break. Those it doesn’t will be punished by not having a tax break.

Besides, governments much prefer having control over the cash themselves. Hence why over 40 cents of every dollar earned in Australia goes to government.

But as you’d expect with any interventionist they reveal their ultimate goal. Coombs also wrote:

“Where necessary re-establish, the public ownership of the natural resources of the continent, its minerals, forests, seas, soils, vegetation and wildlife;

“Vest title in these resources in an authority independent of corporate and political control;

“Empower that authority to grant licences for the use of these resources only on terms which will ensure their conservations, regeneration and sustainable development…”

Nugget must have worn a huge pair of rose-tinted glasses to think that an economy can function with the state ownership of property. Do we really need to list the economies where that’s been tried and failed? Thought not.

And the very idea that an “independent” authority could be free of corporate and political control, while at the same time having the monopoly power to grant licences to corporations is childlike thinking at its best… or worst.

Any authority which is created by government is by its nature influenced by it. Just as any authority set up to regulate the private sector will always be influenced by the most powerful corporations it regulates.

Our dealings with the RBA, ASX and APRA over the non-disclosure by NAB and Westpac are perfect examples of this.

The arm-in-arm actions taken by the government and the RBA during the global financial meltdown is more proof of the influence government has over a supposedly independent body.

The interventionist and central planner are the enemies of freedom. And if HC ‘Nugget’ Coombs is the finest example of an Australian public servant, then he’s also the finest example of the coercive government interference with freedom.

But when it comes down to it, ‘Nugget’ Coombs only has himself to blame for what he saw as the unfair distribution of wealth.

As governor of the Reserve Bank of Australia (RBA) Coombs laid the groundwork for all the central bankers that followed. A central banking system that has resulted in the gradual devaluation of money.

A central banking system that has created the inequalities in wealth that Coombs complains about.

A central banking system that has helped politicise money by allowing governments to borrow at will in the name of the taxpayer, and a central banking system that abetted the government by allowing the taxpayer to be placed on the hook for trillions of dollars of bank liabilities.

It’s fair to say that in our opinion neither Emperor Henry nor Saint Nugget are people to be praised. They are central planners who should be despised.

Regards,

Kris Sayce
For Money Morning Australia

More annoying banter from your editor to the ASX:

“So when can we expect the ASX to make an announcement on this?

“I’m sorry, but this is a no-brainer. As I say, the ASX’s own website states: Timely disclosure must be made of information which may affect security values or influence investment decisions, and information in which security holders, investors and ASX have a legitimate interest.

“It’s no excuse to say that there wasn’t any price action therefore the ASX can’t investigate. You can’t know if the news will impact the price until after the news has been released. Under ASX rules the news must be released under the reasonable person test. If a reasonable person expects that it could impact the share price then the news must be released. There’s little doubt that if this information had been made public at the time it would have impacted the price and therefore it should have been made public. Or is the ASX’s view that it’s OK to keep some information secret because it may adversely impact the share price?

“The ASX is doing itself a major disservice by not immediately asking NAB and Westpac to explain their actions. More importantly, the ASX is doing investors a major disservice. We can only wonder what other information the ASX is conspiring to keep secret from investors!”

It’s no wonder your editor receives so few invitations to dinner parties. Considering how annoying we can be!

And thanks to Money Morning reader Dean for bringing our attention to this story, “Law Firm to Launch Class Action Against Aust Miner Oz Minerals”

According to the news report:

“Slater & Gordon practice group leader Van Moulis alleged OZ Minerals failed to release important financial information between February 29, 2008 and December 1.

“‘The market relies on being fully informed and with OZ Minerals, we believe, shareholders were sadly let down,’ Mr Moulis claimed in a statement

“Investors have alleged OZ Minerals breached its continuous disclosure obligations and understated its liabilities by about A$300 million.”

It makes you wonder if short-sellers in Australia’s banks could launch a class action against NAB and Westpac for non-disclosure of the Fed secret loans. I mean, there’s little doubt that if investors had been aware of these loans it would have had a further negative effect on the share price.

Short-sellers could have made a killing if NAB and Westpac had fully disclosed the secret loans.

In fact, non-disclosure of the loans could have resulted in many short-sellers losing a lot of money as bank share prices rallied. As investors were led to believe Australia’s banks were strong and secure.

As I’ve said before, I’m no legal eagle, but we’re sure investor protection goes both ways. If OZ Minerals can be sued for non-disclosure of negative information, why shouldn’t NAB and Westpac?

In both cases investors have been harmed. We’re struggling to see the difference. Perhaps if you’re a lawyer you could drop us a line to let us know.

On that subject we notice Reserve Bank of Australia (RBA) assistant governor Guy Debelle has made a half-baked attempt to justify the bailouts.

As you’d expect, he doesn’t mention NAB and Westpac specifically. In a speech to the 23rd Australasian Finance and Banking Conference, Mr. Debelle said:

“The RBA participated in the swap line [with the US Federal Reserve] to help distribute US dollars into this time zone… It did not reflect any issue with the Australian banking system’s own need for US dollars. The funds provided under the swap line were cheaper than the extremely wide market price at the time. As a result, Australian based banks availed themselves of this and in a number of cases on-lent the funds to banks in other jurisdictions.”

What utter nonsense.

You’d think an RBA assistant governor would understand how these things work.

On any given day a bank may need to roll over millions or billions of dollars’ worth of debt. If – as was the case in 2008 and 2009 – credit markets seize up, the bank still has to repay the loan. In normal circumstances it would simply take out a new loan to pay for it. But at that time it was much harder.

Mr. Debelle’s own chart proves that:

In a nutshell, it shows that debt became more expensive. It became more expensive for two reasons – first was the risk premium demanded by investors. And second was the drop in the supply of debt buyers.

It’s for these two reasons why the Aussie banks had to crawl to the US Federal Reserve and the RBA for emergency funding.

This whole idea that the Aussie banks were sitting back and licking their lips at getting hold of some cheap funding in order to earn a few dollars profit is just ridiculous. But, it’s the kind of excuse that the mainstream press will fall for.

Just remember what thin capital margins the banks run on. Failure to roll-over even a small amount of funding means that the banks’ capital levels slump.

The article of page 45 of today’s Australian Financial Review (AFR) shows you that. The margins are so tight that according to the AFR:

“If ANZ was forced to lift its risk weighting [on some corporate debt] from 65 per cent to 100 per cent, it would need to find enough capital to support an additional $50 billion of loans.”

In other words, according to analysis from Axiome Equities, ANZ is claiming certain assets on its books are less risky than they really are… just so the bank can hold less capital on its books.

Incidentally, we like the closing paragraph at the end of the article, “A spokesman for APRA declined to comment citing provisions under the APRA Act.”

That would be the Section 56 secrecy provisions of course. Since when was secrecy an investor’s best friend? We’ll ask ASX that question the next time we pester them…

Anyway, yesterday it was Commonwealth Bank of Australia’s [ASX: CBA] turn to have a [ahem!] so-called computer glitch.

Don’t panic, the bank said. Everything is under control. Today’s AFR quotes from the CBA media release, “At most, up to 5 per cent of CBA accounts were impacted.”

Well that’s alright then.

Computer glitch indeed. The fact is, it’s another sign of the systemic failure of the modern banking system. And even scarier is the fact that so few people are aware of it. In no small part thanks to the incompetent mainstream press.

As you know, they’ve been almost deathly silent on the National Australian Bank [ASX: NAB] and Westpac [ASX: WBC] Federal Reserve Bailouts. Aside from a half-baked article in the Fairfax papers – although bizarrely, not in the Australian Financial Review which didn’t cover it at all – and an even more bizarre attack on your editor by the same organisation’s CBD column.

Why the CBD column didn’t report the actual bailout instead of ridiculing your editor is something only it knows.

So ignorant (and we mean that kindly, not meanly) are most people about the secret loans that we noticed this comment by MrBungle in the comments section of an article in yesterday’s The Age about the Commonwealth Bank “glitch”:

“‘Are people aware that during the global financial crisis that two of our major banks borrowed $5b from the US Federal Reserve and the RBA borrowed $53b from the US Federal Reserve?’

“Ok, now that I’ve stopped laughing (after about 10 minutes) I’ll ask you this George…

Point me to some evidence of this mate, otherwise you’re obviously not wearing your tin-foil hat tightly enough…

“That is, they’ve got at you ! ;-D Seriously tho, a link to evidence of this would be appreciated…”

MrBungle – if that’s his real name – was having a pop at another reader who had mentioned the secret loans.

It gives you some insight into how uninformed the majority of the population is. Most people have been trained to believe everything they read in the mainstream press. And they’ve been trained to believe that the current banking system is normal.

That it’s the result of progress in banking. And that today’s system is obviously so much better than how things used to be because, well, it’s modern and we know better than all those clowns who used to carry gold and silver around in their pockets.

But take a look at the other news stories to fill page 45 of today’s AFR:

“ANZ slated for ‘inadequate’ capital holdings”

“CommBank abused franking credits, says ATO”

“Mortgages not retired”

The last story states, “Almost half of Australians won’t pay off their mortgages before they retire…”

So much for the dream of retiring at fifty and then playing golf non-stop for forty years.

And then look at this story from The Age:

“Property chiefs warn on units glut”

Don’t tell me there’s an oversupply of housing already. What happened to the “chronic housing shortage” the property spruikers have been banging on about for years?

I tell you what happened to it… it never existed.

It was just a beat-up by the vested interests. It was one of the many fraudulent excuses they used to cajole young and old into paying ever greater amounts for houses.

But as we’ve been writing for the past two years, the numbers never really stacked up.

Take these numbers as a perfect example of the joke that is the so-called housing shortage. According to the Australian Bureau of Statistics (ABS) in 1998 there were 7,015,200 occupied private dwellings.

At the same time, according to the World Bank, Australia had a population of 18,700,000.

That gives you an average of 2.66 people per private occupied dwelling.

Fast forward a few years to 2010, the ABS reckons there are 8,395,000 occupied private dwellings. And the ABS population clock claims there are 22,557,247 people living in Australia.

Now, remember that Australia has a “chronic housing shortage.” That there has been a massive underbuild of housing, especially over the past five years. All that said, what’s the average number of people per private occupied dwelling?

It’s, erm… 2.68.

We’re no statistician, but we’re pretty sure that at two decimal points your statistical chaps would call that a rounding error. The fact is, the number of people per dwelling hasn’t changed in twelve years.

Where’s the shortage of housing?

Yet somehow, despite that startling revelation, the mainstream press has been hoodwinked into believing the property spruiking spin – that Australia has a chronic housing shortage. When in reality it has nothing of the sort.

In fact, if we believe the property developers quoted in The Age, we’ve got the opposite of a shortage. We’ve got a glut.

But look, we’ll take The Age article with a grain of salt. It’s based on what two property developers are saying. They are clearly not impartial observers and likely have some reason for pointing out the lack of a shortage.

Besides, you don’t need to listen to them anyway. The numbers speak for themselves.

More shocking is the fact that more people are approaching retirement and old age still mired in debt.

And other numbers from the ABS show you what a difference it can make to an economy. And why it’s no surprise retailers are feeling the pinch. According to the ABS, in 2008 the mean weekly housing costs for a person without a mortgage was just $33.

That’s right, $33.

But for a person with a mortgage, the mean weekly housing costs were $384.

If more people are stitched up with a mortgage for longer, there’s no doubt that it means more money spent on servicing mortgages, and less money going towards savings or consumption.

And not only that, but thanks to the suckering in of first home buyers in recent years, they’ll have even less disposable income than if they’d remained in a rental property.

Occupiers of rental housing only have a mean weekly housing cost of $267 in 2008. That’s significantly less than the person with a mortgage.

As we see it, the poor sales and profits figures from retailers in recent months are set to continue into 2011. And the idea that Australia’s miracle economy will continue to prosper is likely to flounder in a sea of massive personal debt.

Oh, and as for the idea that Australia’s savings rate has increased. Take that with a grain of salt too… the ABS certainly does. The mainstream has lauded the 10.1% national savings rate as being a sign of lower debt.

This is what the ABS has to say about it’s own statistic:

“Household saving in not measured directly. It is calculated as a residual item by deducting Household final consumption expenditure from Household net disposable income. As the difference between the two aggregates is relatively small, caution should be exercised in interpreting the Household saving ratio in recent years, because major components of household income and expenditure may be subject to significant revisions.”

We’re wary about ABS data at the best of times. But when they tell us to be cautious about it themselves then that’s exactly what we do.

Cheers.

Kris Sayce
For Money Morning Australia

The Secret Bank Loans saga continues. Your editor has lodged a Freedom of Information (FoI) request with the Reserve Bank of Australia (RBA).

From what we’ve been told, the RBA has thirty days to process our request.

In a nutshell we asked for all internal and external communications from and to the RBA about National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

I’ll keep you posted on what happens next.

In the meantime, to amuse ourselves, we’ve trawled the RBA website to see what the Bank had to say about the health of the Australian banking sector during 2008 and 2009.

The best quote we could find was this from assistant governor Malcolm Edey in March 2009:

“I should stress, by the way, that Australian banks have been much more prudent than their overseas counterparts, and they have remained in sound condition throughout the crisis period.”

Yeah, at that time NAB had just borrowed it’s third amount of USD$1.5 billion from the Fed.

But still, the mainstream press fell for Edey’s claim hook, line and sinker at the time. We now know of course, thanks to the US Federal Reserve that Australia’s banks weren’t in a “sound condition throughout the crisis period” at all.

We know that because NAB and Westpac borrowed over USD$5 billion between them, and the RBA itself borrowed USD$53.5 billion from the Fed which it presumably used to bail out the local banks.

That aside, it seems our email to the Australian Securities Exchange (ASX) got stuck in the Interweb pipes somewhere – oh for a $40 billion national broadband network! – so we gave them a call this morning and have resent the email.

We’ve been told by the ASX, “Our Corporate Relations department acknowledges receipt of your expressions of concerns and will revert to you shortly regarding the progress of your query.”

Blimey, we’d just be happy if they replied. We’re not sure the RBA needs to “revert” to us as they weren’t us to begin with. But never mind. Who are we to comment on grammar? We been known to make the odd mistake.

Anyway, our level of expectation is pretty low. We honestly don’t believe the ASX is going to pull-up either bank on the lack of disclosure. And we can’t imagine the ASX will admit to having known about and suppressed information on the secret loans at the time.

Which would be pretty amazing considering how quick the ASX is to jump on most other companies if there’s even a whiff of non-disclosure.

We’ve even received a couple of emails from ex-CEO’s telling us how the ASX hounded them to disclose information to the market. And we see speeding tickets all the time, especially to small-cap stocks, asking the companies if there’s anything that should be made known to the market.

That two big banks can get off scot-free for not disclosing a USD$5 billion bailout from a foreign central bank would be amazing.

All we know is that it’s time for someone to do some independent forensic accounting on the banks. And seeing as no-one in the mainstream is prepared to do it, it looks like your editor will have to devote some of our spare time to the task – providing it doesn’t take away important research time for Australian Small-Cap Investigator of course.

I’ll keep you posted on how all this goes. In the meantime, what about those markets…

Money Morning reader Marko drew our attention to a lovely bit of mainstream mumbo-jumbo. It was in Glen Mumford’s Market Monitor column in yesterday’s Australian Financial Review (AFR).

We’ll confess to not having read it, but according to Marko, Mumford wrote:

“Sometimes it’s bad news, not good, that turns a market higher. So when I saw the US unemployment rate had unexpectedly jumped to 9.8 percent, I lifted my year-end estimates for the global indices…

“I see this as great ‘bad’ news for investors.”

We’re far from being surprised at the topsy-turvy logic of mainstream commentators. They go from one ridiculous statement to the next.

It’s funny how your editor is labelled a lunatic and nutter for questioning the mainstream view on the housing bubble, on the non-existent housing shortage, and on the fragility of Aussie banks, yet a mainstream commentator gets to write nonsense such as the stuff written by Mr. Mumford and it’s seen as sober economic analysis.

Analysis where good news is great and bad news is… at least good… but sometimes great as well.

It’s this kind of warped thinking that should keep you on high alert with this market. As I’ve said for some time, don’t be suckered into having too big an exposure to the stock market.

Sure, there’s a chance we could see the market rally through the New Year – the Santa Claus rally cliché – but it shouldn’t be banked on. And even if it does happen it won’t guarantee that markets will keep rising.

The past two years are proof of that. The market rallied through the end of the year, but then sunk like a stone afterwards:

Source: CMC Markets Stockbroking

Of course, in 2009 the market did pick up again as it soared over 50% in six months. But one year later from the November 2009 peak and ten months after the last Santa Claus Rally, the market is trading lower. Buy and hold investors who bought in expecting Santa Claus to weave his beardy magic have been sorely disappointed.

But back to Mr. Mumford’s comments. Look, he’s not the only one to take that line. They’re all at it. When there’s good economic news the commentators say that’s good for the market.

And when there’s bad economic news they say that’s also good for the market. But why? How can bad news be good news? And how can it be possible for stock markets to rise in both cases?

It’s simple, the mainstream numpties have lost their minds. They’ve lost all idea about how an economy works and how wealth is created.

They now seriously believe that if an economy can’t grow of its own accord then central bankers can make it grow – by printing money.

That’s what it comes down to. The markets now see any bad news as an excuse for the US Federal Reserve to turn to the printing presses. Because in their mind, more money means more spending and more spending means higher asset prices and greater wealth.

Sure, I’ll admit that part of that argument could be true. That asset prices could see a massive price spurt – in fact we’re playing for that possibility with our Australian Small-Cap Investigator tips. But where we differ from them is our view that they won’t get the outcome they think they’ll get.

There’s no guarantee that it’ll lead to more spending – in fact we hope it doesn’t. And even if it does have an impact on asset and commodity prices, chances are it will only be temporary. And it most certainly won’t result in greater wealth – or not for most people anyway. The bankers and bureaucrats will do fine – as always in a corrupt system – but most everyone else will lose out.

But we’re prepared to take a punt that stock prices will move higher. Although we wouldn’t bet our house on it. And you shouldn’t either. We certainly wouldn’t be over-exposed to the stock market as most mainstream advisers would recommend.

In fact, personally we’ve got less than 20% of our liquid assets in shares. And we’re quite comfortable with that thank-you-very-much… but we’re also ready to dump even that small amount if we think the market is set to head south.

The reason for that is how the stock market is being manipulated right now.

As you know, the US Federal Reserve has a policy of quantitative easing (QE), even though it doesn’t like calling it that.

In simple terms, what the Fed is doing is creating new money by keying in a few numbers into its balance sheet. Once it does that it buys US government bonds on the bond market.

The theory is that this newly created money will be used by investors to buy assets including shares and other commodities. Plus, because the Fed is acting as a guaranteed buyer of government bonds, investors are happy to buy new issues of bonds direct from the US Treasury.

That in turn guarantees that the US government will be able to raise the money it needs to finance its spending programmes.

But what started out as infrequent buying by the Fed has turned into something more frequent. In fact, the Fed is now buying US government bonds every day.

Aside from the Thanksgiving Day holiday and the days either side of it, the Fed has bought US government bonds every day since 12th November.

Since that date the Fed has bought roughly USD$95 billion of US government bonds. Estimates were that the Fed would buy around USD$100 billion per month until next June.

That would be enough to cover the USD$600 billion set aside for QE2, plus extra to continue the so-called reinvestment in government bonds of funds realised from the maturation of residential mortgage-backed securities.

It’s surely no coincidence that since then the market has rallied higher from what our technical analyst, Slipstream Trader Murray Dawes says is a crucial level on the S&P500 index at 1,174:

Source: Google Finance

And that’s the thing. Aside from the Fed creating electronic money from thin air in order to buy government bonds and help prop up the stock market, we see little evidence of any other reason to buy stocks – not unless you’re prepared to take a few high risk and short term swings at the market that is. Although fair play to him, Diggers & Drillers editor Dr. Alex Cowie has played the recent commodity boom like a peach, bagging a number of big winners for his readers.

But I still say it’s not the market to just buy at any old price. And on that score the Stock Doc and I agree.

As I’ve written before, there’s now chatter on the markets about the Fed looking at doing a QE3. In other words, extending the bond buying programme and creating even more new money from thin air.

But at what point does this become old hat for investors. At some point the Fed’s buying will reach a stage where it needs to create ever greater amounts in order for it to achieve the same effect as before. That’s when the buying goes exponential and investors soon realise the game is up and look for the exits… just like with any other bubble.

Of course, the problem – again, as with all bubbles – is knowing when the peak has hit. We’ve picked it for the top of the housing market, but picking the top of the bond and money printing bubble (or maybe we’ll call it a “central bank bubble”) could be a whole lot harder.

The simple message is, if you intend on buying stocks do it with extreme caution. And don’t fall for the idea that both good and bad news is good news for stock prices. Plenty of mainstream investors will find out the hard way when the central bank bubble pops.

For our part we note the Perth Mint now accepts online orders for gold and silver bullion… we know what we’ll be doing as soon as we’ve written our weekly update to Australian Small-Cap Investigator subscribers.

Cheers.

Kris Sayce
For Money Morning Australia

You’ll recall on Friday your editor bashed out emails to the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and the Australian Securities Exchange (ASX).

We wanted to know when they knew about National Australia Bank [ASX: NAB] and Westpac [ASX: WBC] taking emergency loans from the US Federal Reserve.

After all, you’d think it would be something all three regulators would be keen to know.

And ASX listing rule 3.1 states:

“3.1 Once an entity is or becomes aware of any information concerning it that a reasonable person would expect to have a material effect on the price or value of the entity’s securities, the entity must immediately tell ASX that information.”

It seems pretty clear cut doesn’t it?

Only an unreasonable person would think that a major bank receiving a liquidity injection from a foreign central bank is not newsworthy.

Think about it this way.  If a small listed mining company has liquidity problems, and they need to raise more cash or increase a loan facility with a bank, the directors of that company know they immediately need to halt trading in the shares and release a statement to the market.

So why the special treatment for the banks?

I mean, when the NAB announced a $3 billion share placement on 10th November 2008 the company immediately requested a trading halt.

Yet when the NAB borrowed $1.5 billion from the US Fed just a few days before on 6th November there was nothing but the sound of crickets.

You can see that from the ASX announcements below.  The red arrow indicates where the NAB disclosure should be:

Source: Australian Securities Exchange

Of course, as with anything, there’s always a get-out clause.  Although even in this circumstance we can’t see that all three criteria apply that would allow the NAB not to disclose the secret loans.

ASX Listing Rule 3.1A states:

“3.1A Listing rule 3.1 does not apply to particular information while all of the following are satisfied.

“3.1A.1 A reasonable person would not expect the information to be disclosed.

“3.1A.2 The information is confidential and ASX has not formed the view that the information has ceased to be confidential.

“3.1A.3 One or more of the following applies: It would be a breach of a law to disclose the information; The information concerns an incomplete proposal or negotiation; The information comprises matters of supposition or is insufficiently definite to warrant disclosure; The information is generated for the internal management purposes of the entity; The information is a trade secret.”

Look, your editor is no expert at deciphering legal talk.  But as far as we can figure in order for the information to not be disclosed to the market it has to satisfy 3.1A.1, 3.1A.2 plus one reason from 3.1A.3.

Even before you get into the more complex reasons, 3.1A.1 is unsurpassable.  A reasonable person would expect the information to be disclosed.

But it’s amazing how the mainstream press continues to be silent on this bombshell of a story.  Perhaps they take the same view as some of the readers who have contacted us to say the fact NAB and Westpac took money from the Fed isn’t surprising at all.

That credit markets had seized up and they were merely taking cash to tide them over.  A bit like a payday loan we suppose.

The other argument is that well, every other bank was doing it so what’s the big deal?  And Aussie banks came through the financial meltdown unscathed.

Believe me, it’s a big deal.  When your main business is looking after money for people and you’re faced with a situation where if you can’t get an emergency loan then you won’t be able to honour requests for depositors to withdraw their cash, that’s a big deal.

And that’s exactly what happened.  Because banks are so leveraged, their balance sheet is hugely impacted even by small falls in asset prices or by increases in cash withdrawals.

For example, we’re curious to know why NAB’s ‘cash and liquid assets‘ position fell from $20 billion at the end of December 2008 to just $10.7 billion at the end of January 2009.

Is it just a coincidence that it covers the same period when NAB needed emergency loans from the US Federal Reserve?  And possibly emergency loans from the Reserve Bank of Australia?

That’s right, as the Australian Financial Review (AFR) reported on Friday:

“The RBA has not disclosed which Australian banks took the money.”

We’ll have a guess… Each of the Four Pillars, and probably the smaller players too.  You don’t need to be a central bank insider to figure that one out

The truth is, I don’t know.  Maybe it’s a coincidence that NAB’s cash position halved.  But there doesn’t appear to be any precedent for it in previous years apart from the December 2004 to January 2005 period which was the year following the NAB currency trading debacle.

All I know is, there’s more to the story than has currently been revealed.  Whether the full extent will ever be revealed of what the banks, central banks and government did during period is unknown.

But we were amused to read Westpac CEO Gail Kelly’s submission to the “Senate Economics Committee Inquiry into Competition within the Australian banking sector”.

Ms. Kelly’s submission was released on the same day the Federal Reserve revealed how Westpac had borrowed over USD$1 billion from the Fed in 2007 and 2008.

The submission sticks two fingers up at the truth by opening with:

“Australia has a strong, reliable and resilient banking system, with all of its participants contributing to that strength in their own way.”

So strong that two of the banks needed over USD$5 billion of emergency loans from 2007 to 2009, and other unnamed banks needed some of the USD$53 billion the RBA borrowed from the Fed on their behalf.  But anyway, Ms. Kelly continues…

“In fact our banking system truly showed its worth through the crisis.  The crisis remind the nation, and the world, how important it is to have a safe and strong banking system.”

So safe and strong that two of the banks needed over USD$5 billion of emergency loans from 2007 to 2009, and other unnamed banks needed some of the USD$53 billion the RBA borrowed from the Fed on their behalf.  And on she goes…

“As the crisis unfolded, Australian banks moved to reduce their reliance on wholesale funding (both domestic and offshore), not just because the crisis had made that funding scarcer and more expensive, but also to achieve a better balance between wholesale funding and customer deposits in the overall bank funding mix.”

That’s right, Westpac reduced “their reliance on wholesale funding” by sidestepping the wholesaler and going straight to the manufacturer – the US Federal Reserve.

What the release of data from the Federal Reserve reveals is that the Australian banking sector didn’t avoid the worse of the financial meltdown at all.  In fact it participated in exactly the same way as most other banks around the world…

It took taxpayer dollars and received central bank bail outs.  That’s something we’ve pointed out all along.  Although even we hadn’t figured on the fact that Aussie banks had gone cap-in-hand to the Federal Reserve, both directly and indirectly.

We’ll keep following up on this, as our guess is there are many more bombshells to come.  As for how we’ve gotten on so far with responses from APRA, the RBA and ASX, read on…

The first reply came from the RBA saying:

“The Bank does not comment on commercial institutions’ business dealings or transactions.”

And that was it.  Nothing more.

The RBA simply doesn’t comment.

Perhaps that’s because the RBA knows much more than it’s letting on.  Such as the revelation that the RBA itself borrowed USD$53 billion from the US Federal Reserve.  That surely makes it a taxpayer issue rather than a commercial issue.

As for the other agencies, nothing yet.  But we’re sure they’re working on it!

And I’ll keep you posted as more info comes to hand.

Cheers.

Kris Sayce
For Money Morning Australia