We laughed the day before as well.

So yesterday’s laughter was nothing new.

And surprise, surprise, we had another laugh this morning.

The reason we laughed yesterday was down to the front page of the Australian Financial Review (AFR).

Yes, sometimes Australia’s premier business newspaper produces more laughs than the funny papers.

“Henry sees super profit taxes for all”, yelped the headline.

That’s what treasury secretary Ken Henry sees does he?

We’ve labelled Canberra’s top pen-pusher as Emperor Henry in the past due to his apparent craving for power.

But it looks like we need to give him a new nickname.

What about Mystic Ken?

Or Madame Henry, the world famous fortune-teller.

If the federal budget needs topping up perhaps Lindsay Tanner could sell tickets for a Mystic Ken palm reading, “I see you paying more tax… now hand over the cash before I set the boys on you!” [puffs hard on cigarette].

Of course that wasn’t all Mystic Ken had to say. It seems he’s had enough of free speech too and wants to clamp down on it. Unless you happen to agree with his point of view naturally.

As reported by The Age, Mystic Ken blurted:

“Whenever an idea is ventured in public by a person… there’s at least a handful of academics who will contest it… it is unbelievably frustrating, incredibly frustrating… there are occasions on which economists might, at least for a period, put down their weapons and join a consensus.”

You can see why we laughed so much.

I don’t know about you, but we always thought that a consensus was reached after discussions. A consensus is reached after everyone puts forward a point of view. Then there’s a bit of give and take, followed by agreement of some sorts.

A consensus doesn’t mean shutting up and just agreeing with the pen-pusher extraordinaire.

Besides, we don’t like the consensus approach. We’d never agree to anything unless it was full blown free market capitalism. No compromise.

Incidentally, if you click on this link, it will take you directly to the article in The Age. The article is now headlined, “Back the tax, Henry tells economists”. But that wasn’t the original headline, as you can see from the link. Originally it was, “Keep shtum Henry tells economists”.

Our resident German and editor of the Weekend Daily Reckoning, Nick Hubble tells us that, “Stum (pronounced shtum) is the German word for ’shut the hell up’.”

We think that pretty much sums up the Mystic Ken approach. Perhaps he thinks he’s created the Eleventh Commandment, ‘Thou shalt not speak.’

Our laughter this morning was due to another The Age article. This time quoting Reserve Bank of Australia (RBA) board member Warwick McKibbin.

It’s a lengthy quote but it’s worth repeating. Just for the fact that it’s coming from a mainstream economist who is in such an influential position:

“I also disagreed with the scale of the stimulus package… It wasn’t evidence-based policy; they panicked. The government rammed those decisions through the economy even though they were fraught with risk. No one was consulted about an alternative view and if you did say anything you were attacked by the Treasurer and the Prime Minister in public.”

He went on:

“The stimulus created a problem. The government overspent but they had enough in reserve. Then they decided that because of politics they had to get their spending back so they could claim they had fiscal surplus – for which there is no economic basis, by the way – so they come up with a really badly designed resource tax to try and get the position to look good three years from now, and in the middle of a sovereign risk crisis exposed the economy to a reassessment of sovereign risk.

“The review of the tax system should have been independent of the Treasury and then critiqued by it and other economic agencies.

“Treasury, as far as I can tell, has become an arm of political policy. Historically they have always been the ones who have said, ‘Wait a minute, this policy of subsidising green cars to try and save the constituents of a particular electorate is not a very sensible way to spend $8 billion.’ You just don’t see that now.”

Look, I don’t agree with everything McKibbin says, it’s just good to see even the mainstream economists giving the stimulus spending a bit of a poke.

But anyway, as we see it, the Mystic Ken tax-’em-to-death approach is just all part of the idea that Australia has a bullet proof economy. Nothing ever could possibly go wrong. No amount of government fiddling and meddling could ever stuff things up.

As long as all the bureaucrats stick together everything will be fine.

In fact, as they see it, the private sector with its stupid profits and dopey productivity would have ruined the Australian economy for everyone.

Much better to take the money from the private sector and individuals and spend it on school buildings.

Or spend billions on housing insulation.

And billions on inflating the property bubble.

That’s just the way it is.

Now Mystic Ken has had a fabulous thought. If the Resources Super Profits Tax is such a great idea, why not make all businesses pay it.

After all, it must be a good idea otherwise the government wouldn’t have come up with it.

Make every business which earns so-called super profits pay a super tax. Remembering that anything above the risk-free government bond rate of around 6% is now considered a super profit.

Incidentally, that got us thinking. We checked out the term deposit rates yesterday afternoon. Turns out, would you believe it, that it’s not only mining companies earning super profits…

It’s those bloomin’ scavenging pensioners too. Ooh, words can’t disguise how furious your editor is that some pensioners and even ordinary people out there are earning a super profit.

Get this, Dutch bank Rabobank is even aiding and abetting these individuals by offering 6-month term deposit rates of, wait for it, a super profitable 6.31%. If the government doesn’t come down hard and tax that super profit it’ll be a disgrace.

But if you think that’s bad, it gets worse.

Those greedy saving pensioners are earning anything up to a whacking great 7.3% on a term deposit with Rabobank. And what have they done to deserve that super profit?

Nothing.

Sure, they’ve worked thirty, forty or maybe even fifty years. And sure, maybe they’ve paid a whole bunch of taxes along the way.

And sure they’ve put their neck on the line, but heck, what are they doing now? Nothing. They’re sitting back and earning interest like, erm, interest earning do nothing-ers.

It’s time for the savers to be punished for saving. Those savings are really other people’s money.

I mean, where does that interest come from? It comes from exploiting those that go into debt just so these savers can lord it up at the bowls club or at the bingo. Has there ever been a greater sin than living in retirement off the proceeds of interest?

We think not. Tax it. No, don’t tax it. Super-tax it.

In fact, super-tax the whole darn economy.

Except housing of course, because we don’t want that bubble popping do we…

Can You Trust the Housing Data?

A Money Morning reader has sent us some interesting data on the reporting of median house prices in Western Australia.

Naturally enough neither the reader nor your editor would ever cast any aspersions on the data, however we feel we should point out some interesting anomalies.

The reader suggested we take a look at Kelmscott in Western Australia, which according to RPData saw a 1,621% increase in the median unit price in May.

Source: realestate.com.au

Although interestingly the median house price fell by 17% over the same period. So much for house prices never falling eh?

The reader suggested we look at other suburbs where there are similar anomalies. Such as Armadale, Canning Vale, and Parkwood.

Look, I’ll be honest, I don’t know much about the Kelmscott area. I’m sure it’s very nice. And according to our pals at Wikipedia, “Kelmscott is home of the first Red Rooster restaurant.” So it can’t be that bad.

And maybe $4.75 million really was the median unit price in May. Maybe there was only one unit sold and it was for that amount. Or maybe there were three units sold with one going for an even higher price. Who knows?

Of course, there’s always the chance that it’s just the property equivalent of a ‘fat finger’ error. Much like that which was supposed to have been the cause of the recent New York Stock Exchange ‘flash crash’ – although it has quietly been revealed to not have been a fat finger problem.

But what we will say is this. We’ve long been very suspicious of house price data, whether it’s median prices or any other method. Mainly because it’s so opaque, and because the housing market is so illiquid.

We know the stock market isn’t perfect, but at least when a stock is priced at $20 you know exactly what it’s worth. With housing that isn’t the case.

We’ll wait and see if RPData have anything to say on the matter.

Cheers.
Kris.

But before you get to that, this…

The Super Theft rolls on. A $10 billion Super Theft no less.

The front page of today’s Australian Financial Review (AFR) announces: “Labor to reap $10bn in lost super”.

It explains:

“The federal government is set to collect a $10 billion windfall from unclaimed superannuation as industry executives admit it is almost impossible to track down the owners of the lost accounts.”

Yeah, it’s impossible if you don’t try. Or if you don’t plan for it in advance.

The government is doing exactly as we predicted it would. Last year we revealed that the government was expropriating the super funds of temporary foreign workers. It was set to deliver the government an $800 million windfall.

That’s a lot of money. But clearly not enough.

At the time we warned:

“The next logical step is for the government to grab the superannuation balances of all working Australians. Don’t forget, the government is about to embark on a massive $200 billion spending spree and it’s got to pay for it somehow.”

While the government hasn’t gone the whole hog just yet, it’s edged its way closer.

You see, what will happen is that the $10 billion in unclaimed superannuation will be swept up by the Australian Taxation Office (ATO). In effect it will be taxed at a 100% tax rate.

What happens with it then? Is it stored in lost property next to umbrellas and overcoats?

No, it’s swept from the ATO into the federal government’s consolidated revenue where it can spend it. Naturally enough there will still be a book entry stating that $10 billion of superannuation is owed to around 3.8 million people, but the money won’t actually be there.

It won’t even be earning a miserly 5% interest. Of course the book entry will say the money is there. And the book entry will say it’s earning interest, but the reality is it won’t.

The money will be spirited away and spent.

What the government is banking on is that those 3.8 million people never get round to claiming back their lost property. If they do then the government will need to claw the money back from the taxpayer or through debt.

But look, if you’re a long time Money Morning reader this shouldn’t come as any surprise to you. As I say, it’s something we’ve warned of for some time.

We’ve pointed out that superannuation is really just another tax. That it isn’t really your money, it’s just made to look as though it’s yours.

And that viewpoint was confirmed in an article we read in the Herald Sun this week. The quote was from Stuart Forsyth, assistant commissioner at the ATO. He told the Herald Sun:

“Some people just seem to want the money. They think it’s theirs and they can have it now.”

Says it all really doesn’t it? It isn’t your money. It’s merely being held in your name in trust for future spending by the government.

$800 million last year. $10 billion this year. What’s next? There’s still $1 trillion left for the government to try and get its greasy hands on. Look out!

Anyway, onto the feedback from yesterday’s Money Morning…

We don’t need to delve into the Money Morning mailbag today, we can just pick a few off the top of the huge pile.

To start off I’ll give you the general gist of the responses. This letter from Bill pretty much sums up most of the responses we received. It’s short and to the point:

“You are an absolute idiot!”

However, Money Morning reader Ian put it much nicer. Or should that be nicerer:

“Which of the pantheon of gods inspired this vacuous piece of fluffy nonsense?”

Then there was this from Greg:

“As much I enjoy your forthright writing there are times when you venture into the realm of the absurd. In your article about “blameless BP” you not only entered the realm but you occupied the throne.”

King at last! Although we’d be happy to settle for a Lordship.

While Steve wrote:

“I could not possibly agree less. Disgraceful.”

And John wrote:

“The ocean belongs to the whales and dolphins. The oceans can’t be owned by any person any more than can a slave. To assume that humans rule over other intelligent life through manifest destiny is to retrospectively validate the previous centuries of slavery by the same reasoning.”

Er, owning a fish equals slavery! No it doesn’t. No more than owning a dog or a budgie equals slavery.

It always amuses us how many people take your editors views on liberty and free markets and then twist it around to accuse us of being a Nazi-lover and slavery advocate! The reality is the opposite.

It is the social engineers and power-trippers in government that advocate slavery. Only it’s a more palatable form of slavery because the masses don’t realise what it is. It’s slavery to the government. A government that forcibly takes around 50% of your money in various taxes. You work a full week for your employer but only get to keep half the money because the government takes the rest.

But anyway, there were plenty of other letters, but as usual, this is a family newsletter so we’ll keep it clean.

As it happens, John sent us a second email stating:

“BP is not responsible because it was implicitly assumed by everyone that the government could respond to an emergency and plug a leak. The government was the regulator. The government was happy to sell drilling leases and levy taxes and royalties.”

That’s our point.

However, we’ve got the feeling that this point has been lost.

The point is that due to government manipulation and meddling the result is exactly as Money Morning reader John explains, that “it was implicitly assumed by everyone that the government could respond to an emergency and plug a leak.”

Yeah, and governments have got such a good record of responding to emergencies.

The US government under George W “Gomer Pyle” Bush did such a terrific job of responding to Hurricane Katrina in New Orleans. A response that resulted in around 2,000 people dying.

If you’re from Victoria you’re probably aware about the fabulous response of the government to last year’s bush fires. A response that involved police commissioner Christine Nixon telling the commission into the fires that:

“I went home and then I went and had a meal with two friends, I left very capable people at the centre knowing that the (Emergency Services) minister was arriving. I went home, I watched the news, listened to the radio and checked the internet.”

What a heroic response. In other words she did exactly the same thing that five million other Victorians were doing that evening. You’d have thought that when you’re supposed to be in charge of something like preventing fires from killing people, you’d put in just a teeny bit of extra effort.

And what about the response of government to the economic meltdown in 2008 and 2009? How did they handle that? Like uneducated chimps they thought – “I know, if we print a lot of money and give it to all the crooks that caused this mess then that should solve everything.”

Moral hazard my friend, moral hazard.

The implicit guarantee that Freddie Mac, Fannie Mae, the US banks, the UK banks and, yes, the Australian banks were given encouraged excessive risk taking.

That I’m afraid is absolutely no different to the situation with BP.

And aside from the abuse in the emails we’ve received, nothing, not one email has been able to argue that the ultimate fault is BP’s.

Sure, the oil may be coming from their well. And the oil may be killing animals and washing up on beaches, but BP’s lax practices are merely the effect. The cause is the actions of governments and the lack of property rights.

Just as the banks were prepared to push the boundaries as far as possible in order to make a buck, so is the same for BP. In both cases they believed there would be a bail out.

In the case of the banks they knew they were too big to fail. The banks knew that the Federal Reserve and governments would create money from thin air to stop the whole financial market from crashing.

And in the case of BP, it has known all along that its liabilities would be capped at $75 million. It made a business judgement that it could take more risks knowing that the most it would pay is $75 million.

Unfortunately for BP it seems that the rules are going to be changed. The company has already committed USD$20 billion towards a clean-up fund. $20 billion that will doubtless be nowhere near enough once the government and its agencies start getting involved and overpaying the contractors.

In other words, BP rolled the dice on what it thought the maximum liability would be – USD$75 million. It turns out the dice didn’t fall its way. It turns out that oil companies don’t have as many cheerleaders in Congress as the banks do.

It turns out that pictures of cute rocks covered in oil is just too much for a US congressman to cope with. BP can’t be allowed to get away with it.

But let’s get another thing straight. Drilling for oil offshore is both risky and expensive. Money Morning reader Owen sent us a copy of the letter sent by Congress to BP CEO Tony Hayward.

Amongst other things in the letter it’s pointed out that:

“The Deepwater Horizon rig was expensive. Transocean charged BP approximately $500,000 per day to lease the rig, plus contractors’ fees. BP targeted drilling the well to take 51 days and cost approximately $96 million.”

It goes on:

“The Deepwater Horizon was supposed to be drilling at a new location as early as March 8, 2010. In fact, the Macondo well took considerably longer than planned to complete. By April 20, 2010, the day of the blowout, the rig was 43 days late for its next drilling location, which may have cost BP as much as $21 million in leasing fees alone. It also may have set the context for the series of decisions that BP made in the days and hours before the blowout.”

The Congressmen and women seem incredulous that BP should be thinking about the profitability of the well in making decisions about which processes to use.

That’s natural for a body of people who don’t need to concern themselves with profitability. They can just take money from the taxpayers or increase the national debt to pay for whatever they want.

BP and other private companies don’t have the same luxury. Private businesses need to think about making a profit. Because remember this, and this is important, if private businesses didn’t consider the profitability of their actions then the economy would be a mess.

In fact, if private enterprises didn’t think about or care about whether they were profitable or not there would be no private enterprise. There would be no economy as we know it. Businesses would be unable to survive.

Think about it, if there are no profits there is no enterprise. You’d be whisked back to subsistence living. You’d be back to the days which the environmentalists crave for – a pre-industrial economy where we’re all crawling around in the mud and picking lice from each other’s hair.

As I say, drilling for oil is risky stuff. In our opinion it’s more amazing that there aren’t more oil spills or oil rig explosions.

I mean, for goodness sake look at how deep these guys have to drill. Your editor is barely capable of drilling a hole in the wall to put up shelves let alone sending a drill two kilometres to the bottom of the sea and then another two kilometres through rock.

The last time we looked the longest drill bit Bunnings stocked was about 10 centimetres!

Look, oil companies make decisions based on profitability every day. They have to otherwise they’d go out of business. In 99.9% of cases this crusade for profitability results in oil spills not happening and oil rigs not exploding.

It’s the drive for profitability that encourages oil companies not to spill oil into the ocean. It encourages them to try and prevent an oil rig from blowing up.

For every barrel of oil that goes in the ocean that’s a barrel of oil it can’t sell. That means less revenue and less profit.

And most importantly to you, it’s the drive for profitability that ensures you’re able to drive your car to work, heat your home and that industry can power its machines.

But if you’ve got government interference that creates a moral hazard then you’re bound to see private enterprise taking advantage of it. They’d be crazy not to. Just like property investors can’t help themselves but take advantage of negative gearing.

Or share investors who take advantage of franking credits.

There’s no difference in that they are all instances of government interference and manipulation.

The only difference is that when the stock market bubble or housing bubble pops because of this interference, it doesn’t leave everyone covered in oil.

Make no mistake, it is the desire for profitability that keeps the economy ticking over. Any measures by government to stymie that is bad for you and bad for the economy. And it should be resisted at all costs.

It is government interference (including lack of private property rights) that is the ultimate causes of the problem, not the search for profits.

Cheers.

Kris

Today’s Australian Financial Review (AFR) mentions it but sees it as a positive.

Typical.

You’ve read and heard all the nonsense about the strength of the Australian economy. Just yesterday the ABC reports Kevin1807 as saying:

“Today we have revealed and released the national accounts. They point to a strong performance for the Australian economy. Australia’s GDP has grown by a solid 0.5 per cent in the March quarter. We are proud of the fact the Australian economy has emerged as the only major economy which has not gone into recession. Only two economies of the 30-plus economies across the OECD [Organisation for Economic Cooperation and Development] did not to go into recession.”

Hats off. No recession for Australia. A “strong performance for the Australian economy.”

If only it was true. Only it isn’t is it?

Actually, that’s a rhetorical question. I’m telling you it isn’t true. But before I get into that, a quick diversion [Reader's voice: your diversions are never quick!]

Emperor Ken Henry claimed in a Senate hearing last week – you can read it here – that the resources sector didn’t save the Australian economy from oblivion. Well, if it didn’t what did?

(By the way, he said something else in his comments which I’ll mention another day).

Unfortunately, His Excellency doesn’t reveal the details of what did save it. Only that it wasn’t the resources sector. So there.

So we rummaged around to find some clues from previous comments made by the Emperor. As we rummaged we stumbled across the Money Morning we wrote on August 18th last year.

In that article we quoted the Emperor saying:

“My thinking is simply that, in a world that pays more attention to fundamentals than herd-driven investor psychology, the Australian economy will be seen as possessing the best of the qualities – of governance and flexibility – of the developed world while also offering an abundance of real investment opportunities usually found only in the developing world. That is to say, the Australian economy may be seen as offering the best of both worlds.”

The gist of Emperor Henry’s argument is that it was governance (bureaucracy) and regulation that saved the Australian economy from a recession. In that article we argued that wasn’t the case.

Our belief then – and still – is that it was the Australian resources sector that saved the Australian economy. That Australia has a get-out-of-jail-free card thanks to China. But we will concede one thing. And that is the other thing that ’saved’ the economy was all the taxpayer funded bailouts.

The bailouts to the banks, the property sector and the retail sector.

In fact, from what we can see, the resources sector is the only sector that didn’t need an Australian taxpayer funded bailout to stop it from collapsing. Whereas the banks, property sector and retailers did.

However, I’m not saying that the resources sector didn’t go into the doldrums, because they did. You only have to look at the share prices through 2008 and early 2009 to see that.

But look at what’s happened since then. They’ve recovered. Now, granted, that’s been helped by external stimulus programmes in China and elsewhere, but the cost to the Australian taxpayer of ’saving’ the resources sector was virtually zero.

In contrast, the cost to the Australian taxpayer to save banking, property and retailing has been in the billions. And despite those billions all three are still on the precipice of a collapse.

That’s simply because the bailout billions have done nothing more than postpone the recession or depression. The taxpayer bailout didn’t really save anything, it has just ensured it will happen this year or next, rather than last year.

But as we looked at that article, we noticed something else we’d written. It was this:

“Henry’s claim that ‘governance’ is responsible for future Australian economic growth is a warning sign to prepare for the worst. Clearly it will embolden policy makers to become even more interventionist… The problem is the resources industry is perfect cover for meddling bureaucrats. The ‘guaranteed’ demand from China and the flow-on effect this has on the Australian economy enables bureaucrats to constantly raid the cupboards whether it’s through taxes or royalties. These taxes and royalties are then used on pet projects – roads, hospitals, schools, bribes, etc… This necessitates more spending to create bigger and better projects.”

See, we do get some things right! But look, you don’t need to be a fortune teller to have worked that out. It’s just plain old common sense. Take from the profitable and give to the unprofitable.

Anyway, let’s get back to where we started. The news is, Australia’s private sector is in recession. The proof is below. But how can that be true if as Kevin1807 says, Australia’s economy is strong?

We say “balderdash” and “bunkum” to Kevin1807s claim.

Take a look at the numbers from the Australian Bureau of Statistics (ABS) released yesterday:

You’ll see the number I’ve highlighted is the 0.7% contribution to the gross domestic product (GDP) by the public sector.

And if you look at the column to the left, you’ll see that’s a 39.5% increase in public sector fixed capital spending since March last year.

And for further evidence of how terrible things are for the private sector, the GDP numbers show non-dwelling construction is down 8% over the last year and machinery and equipment investment has only risen 0.2%.

In other words, the Australian private sector has actually contracted by 0.2% over the last quarter, and would have shrunk a whole lot more over the last year without the government spending away taxpayer dollars on wasteful projects such as buildings and housing insulation.

Of course the Keynesian economists and interventionists will say, “Aha! You see, this is exactly why the government had to step in. It had to save the economy because the private sector wasn’t up to the job.”

The truth is the opposite.

Let’s look at it this way. How has all the taxpayer dollars been spent? As I’ve mentioned it’s gone on school buildings, insulation schemes, make-work projects, and other pointless activities.

Now, you’ve seen the result of these things. Billions spent on housing insulation which no-one really needed. Billions spent on school gyms which no school really wanted.

How has it been financed? It’s been financed through debt and taxation. That means taxpayers have already paid for these projects or you will pay for them in future taxes.

How can it be logical to say that spending money on things you don’t need is a good idea? Again it’s the old issue of observing what isn’t seen.

And these GDP numbers show you what isn’t seen – if you get what I mean.

You can see the school buildings going up as you drive through any suburb in Australia. They’re real. You can see builders taking a smoko, er, I mean, building stuff. You can see the activity of people installing insulation, or repairs made to a road which seemed fine anyway.

But what about what you can’t see?

Stimulus spending money has to come from somewhere. It comes from either taxes or government borrowing. Either way, it comes from your pocket today or from your pocket in the near future.

That means less money for you. And it means less money for the private sector that also pays taxes.

So, while you can see the building and the working and the whatever-else it is the government is blowing money on, what you can’t see is what isn’t happening.

What you can’t see is the $100 you may have spent on a new shirt. $100 that you can’t spend because the government has decided to take it, combine it with $100 from ten million other taxpayers and spend it on a $1 billion do-something project.

But it’s not just you that’s punished by not being able to afford the new shirt. There’s the shirt seller who’s missed out on a potential $100 sale.

Or what about the $1,000 that you may have invested in shares? Well, you can’t do that either, because the government has kept that money by not cutting taxes, or will take the money by taking taxes in the future. The $1,000 you may have spent has been combined with the $1,000 of say another one million potential investors and has been spent on a $1 billion do-something-else project.

Not only have you missed the opportunity to invest $1,000 in something that may actually make money, but there’s also a small company – or a large company – that is unable to raise $1 billion to expand or start a business because instead the money has been blown on a few new school gyms.

In fact, that company may have only needed a quarter of that amount in order to provide ten times the benefit to the economy. But because the government has taken it and thrown it away, private enterprise misses out.

You see, the government spending money for the sake of spending money doesn’t actually help an economy. It harms the economy. In the long term it can actually destroy an economy.

You can see that clearly in the GDP numbers which show government spending going through the roof, while the private sector stagnates.

And also don’t forget that not only does the government spend your money but it overspends. I’m sure you’ve heard the stories of school buildings costing $1 million when an equivalent building in the private sector would cost $250,000.

That’s simply because of the lack of profit motive that we’ve written about before. Government agencies are given a budget and it’s their job to spend up to that budget. Contractors know that and will therefore quote top-dollar, plus add-ons which are approved after the contract is won.

And if they overspend, guess what, they tax or borrow more.

The problem for the Australian economy now is that with all the money and savings that have been wasted by the government, how can the private sector recover? Businesses have been unable to invest because they’ve been starved of capital.

Individuals have been encouraged to keep spending in order to save the economy, so they haven’t saved either.

In other words, the Australian economy will have to try and grow despite a higher tax and debt burden, and despite the consumer already being maxed out with over $1 trillion of household debt.

That means there are only two options left. Both of them bad. And perhaps you’ll suffer from both. That is, a continuation of government spending, or an increase in inflation.

Or both.

Both give the immediate impression of prosperity – new buildings, higher prices, higher asset values – while in reality the wealth of the nation is shrinking and suffocating under the burden of higher taxes, higher debt and of course, higher inflation.

Nothing good can come from government and bureaucratic meddling. The latest GDP numbers are to be mourned, not celebrated.

Cheers

Kris

The top story is on the continuing resources super profits tax debacle. The AFR says that according to… KPMG – the same KPMG that said how great the RSPT is – “The report backs the industry concerns that miners will find it hard to raise project funding under the government’s 40 per cent guarantee, leading to higher and more complex finance arrangements than Treasury has forecast.”

KPMG is referring to a report commissioned from it by the Minerals Council of Australia.

Which is funny because just three weeks ago we quoted from the KPMG Econtech report that was prepared for the government. It said:

“In the model, this implies a zero economic cost for the new RSPT, since it will simply be a transfer of a portion of the surplus (over and above the required return on capital) from these industries to the government sector.”

The word ‘duplicitous’ springs to mind. Along with a load of others that we can’t print in this family oriented newsletter.

In other words, when KPMG was getting a big fat hairy cheque from the government it was happy to claim the RSPT had a “zero economic cost”, yet when it’s getting a big fat hairy cheque from the mining industry it’s happy to claim that “miners will find it hard to raise project funding.”

Oh what a joy it must be to work for KPMG. Getting paid by both sides of the argument.

We know Alan Jones and John Laws got into strife for their cash for advertising comments on radio a few years back. And we recall a bunch of dodgy UK politicians getting into a scrape for taking cash in brown envelopes in return for asking questions in the House of Commons.

But to our way of thinking KPMG has done nothing different. It’s sold its so-called expertise and brand name in return for saying whatever its paymasters want it to say.

To put it bluntly KPMG has whored itself for a few quick dollars from the taxpayer and the mining sector.

Stand up and be proud KPMG.

But getting back to the point. The AFR lead story shows you what dopes politicians and bureaucrats are. How they’ve got no idea about running an economy or a business.

In their simpleton minds they see an industry that’s booming and so the natural inclination is to claim that Australians need to get a fair share of the action. So they try and tax the life out of it.

And if you’re in any doubt about the impact of the tax, forget about KPMGs useless and clearly money-tainted reports, because we don’t believe what’s in either of them. And we’ll clearly never believe another audit conducted by KPMG either.

What you need is to see are the words from the man who the AFR two weeks ago described as “one of the Henry review’s key consultants in the design of the resources super profits tax.”

We’re covering this in the weekly update that’s going out to Australian Small-Cap Investigator subscribers this afternoon. But here’s a sneak peak…

The consultant the AFR refers to is Professor John Freebairn from the University of Melbourne. In the interview with the AFR, Freebairn is quoted:

“The way the 40 per cent tax works is to tax any profits (after expenses and capital outlays) above the long-term bond rate of around 6 per cent. Any profits above the normal rate of return are share 60:40 with the government. Of the 60 left for the company that is then taxed at the corporate tax rate.”

He concludes his comment with, “The effective tax rate should be around 58 per cent.”

If you recall, BHP Billiton figured its effective tax rate on Australian operations would be 57%. That’s close enough.

Rather than be happy that the resources industry employs so many Australians, making them amongst the best paid in the country, the government decided it wanted more. It wanted more than just the 30% corporate tax take.

Simply because it needed to spend the money on meeting other short-term liabilities such as hopelessly inefficient and just plain hopeless public health, education and infrastructure projects.

That’s right, don’t fall for the old “we’re planning for the future” trick. To use Kevin1807s words, that’s just “balderdash” and “bunkum”.

Anyway, once the pollies have got their mitts on your cash what do they do with it? Well, they waste it of course.

And that brings us to the second item on the front page of the AFR today, “Toll road backers face $700m hole.”

The article is next to a picture apparently showing an empty Brisbane tollway during rush hour.

According to the report, “RiverCity [tollway] has delivered traffic numbers 65 per cent lower than its prospectus forecasts.”

While we don’t claim to know the full ins and outs of the RiverCity scheme, it appears to be another dopey public-private partnership that’s had a whole bunch of taxpayer dollars poured in to support it.

The point is, this is exactly the kind of useless or uneconomic infrastructure project that the government wants superannuation funds to waste members’ retirement savings on.

Projects such as RiverCity Motorways [ASX:RCY] and ConnectEast [ASX:CEU] provide you with a perfect example of how useless other government funded projects are.

Obviously it’s harder to judge the return on a new school building because it’s not tradeable on an open market. But don’t let anyone claim that adding a new gym to a school will even benefit the kids with their education.

From what we’ve seen of the schools we’ve driven past, most of these buildings are not only oversized and pointless, but in most cases have been built at the cost of losing a footy oval, basketball court, or general outside playing area.

As someone said the other day, “You’re looking at a generation of schoolkids who’ll have never been outside.”

So to see how pointless and wasteful public sector projects are, just use the RiverCity share price as a comparison. You can see that anything that’s publicly funded or just plain uneconomical will provide a rubbish return:

Or take a look at ConnectEast:

Now think about the billions of dollars thrown at other public infrastructure and you’ll get the idea. Lots of dollars in, nothing of any real benefit out.

Think of all those taxes you’re forced to pay each week. If you consider your taxes to be an investment in society or the future then think again. Because just like the RiverCity or ConnectEast share price, your tax dollars are just flushed down the toilet.

But don’t get me wrong, your editor lives in the bayside suburb of Frankston. Right where ConnectEast’s Eastlink tollway finishes. We’ve used Eastlink many times. It’s great. Mainly because so few people use it!

It cuts a good many minutes off a journey – depending on where we’re going of course.

But is it a good investment? If I had the means to pay for the whole thing a la Warren Buffet, would I buy the whole tollway as an investment? No chance.

The thing about infrastructure projects of this kind is that the assumptions made in advance about the project are a far cry from reality. A couple of weeks ago ConnectEast proudly announced that “Average Daily Trips (ADT) of 168,859 was 12.7% higher than in April 2009.”

That’s pretty good. But if you look at the chart of the share price again, you’ll see that investors aren’t so impressed. Probably because according to the product disclosure statement (PDS) released on 14th October 2004, ConnectEast printed the following table:

Click to enlarge

The average number of daily trips for April 2010 was about 90,000 less than the forecasts for 2008.

And if ConnectEast wants to meet its initial forecast for 2011, then it’s going to need an extra 130,000 trips on average per day for the next year to get anywhere near it:

Click to enlarge

That doesn’t seem likely.

As I say, it’s a classic example of government interference, deciding that a road needs to be built, investors being suckered in by over-enthusiastic private companies who are keen to promote the scheme because, well, that’s how they’ll get paid. And taxpayers being left to carry the can before and after it all goes wrong.

The point I’m trying to make – hopefully successfully – is that bureaucrats and politicians don’t know how to invest in order to make a return.

All they know is how to get the taxpayer to pay for big things that the taxpayer can see. The bigger the better. The return on the investment is irrelevant.

Yet these are the very same type of projects which the government and union groups are pushing for your retirement money to be spent on.

According to the last annual report from ConnectEast, the company made a loss of $531.6 million. Explain to me again how a loss-making venture will be good way of funding your retirement.

By contrast, most investors and retirees have invested billions of dollars more in investments that do make money – such as the resources sector. The sector where the government wants to take money from in order to splash it around elsewhere.

It’s all about taking money from that which is productive and profitable and giving it to that which isn’t. Or even subsidising that which isn’t productive because the government’s own rules and regulations prevent it from being so.

That, my friend is just how the so-called progressives or re-distributionists like it. Long may it NOT continue.

Cheers,

Kris.

He’s certainly got a lot of bad press. Especially for a fictional character.

Now, I’ll be honest, it’s been a while since we read A Christmas Carol, but you could argue that all Mr. Scrooge was trying to do was run a business.

Sure, he could have let Kermit the Frog, er, I mean, Bob Cratchett put another coal on the fire, and he could have given him a pay rise. But then again, maybe Bob Cratchett was just grateful he had a job.

We’ll have to assume employment prospects couldn’t have been that great at the time if Bob considered working for Mr. Scrooge as the best alternative. The worse alternative would be a stint in a workhouse we’ll guess.

The reason we bring this up is the headline on page 13 of today’s Australian Financial Review (AFR), “Czechs choose Scrooge.”

And then it has a photo of Czech president Vaclav Klaus. Who isn’t the Scrooge in question, but a glance at the headline and the photo could easily leave you with that impression.

In fact president Klaus wasn’t even up for election, it was a parliamentary rather than a presidential election being held by the Czechs.

Headlines are a tricky thing. We know that. Sometimes we get it right, and sometimes we get it wrong. Ideally the headline should offer something that encourages you to read the accompanying story.

And equally ideally, the headline should accurately reflect the story as well.

Anyway, we read through the article that the AFR had syndicated from Bloomberg. And then we searched online for the original Bloomberg article which the AFR article was adapted from, which you can read here. Although Bloomberg’s headline was, “Czech Deficit Cutters Plan Coalition Cabinet, Boosting Koruna.”

Funnily enough, the Czech article in the AFR is below another headlined, “Spain loses AAA credit rating.”

But if the Czechs chose Scrooge, surely the headline for the Spanish credit downgrade could have been a little more colourful. What about, “Spain punished for p***ing tax dollars up against the wall.” Or what about, “Spain loses rating after blowing dough.”

It seems as though the headline writers and indeed the majority of mainstream financial journalists just don’t understand the massive debt problem the Europeans have gotten themselves into.

While the AFR writes, “All three campaigned for reduced spending, indicating they may be able to form a cabinet committed to cutting a deficit that swelled to 5.9 per cent of gross domestic product last year, almost twice the EU limit.”

It forgot to point out that Spain has a deficit of 11.2% of GDP. To read that you’d need to read the article on Spain that I mentioned before. And if you want to see just how the Czechs stack up compared to the Eurozone countries, just take a look at this:

Seems to us that the Scrooge-like Czechs have decided to vote for a bunch of people who don’t want to send the taxpayer and country broke.

Although to be fair, there’s barely a politician we’ve got a positive thing to say anything about, so we wouldn’t be surprised if the new mob in the Czech Republic fell into the same old tax and spend trap.

Perhaps the Czech people have good memories. They probably remember what it was like to live under a regime that believed it had all the answers. A regime that left nothing up to the individual citizen and instead made all the spending and investing decisions for them.

Dare we say that the Czechs remember what it was like to have bureaucrats pulling levers and thinking they know how to micro-manage an economy.

Not that the old Czech government is innocent of being spendthrift. The online version of the Bloomberg article points out, “The Czech Republic’s debt will rise to about 40 per cent of gross domestic product this year, from 18 per cent in 2008.”

That seems bad enough to us, but almost nothing when compared to many of the Eurozone countries:

Perhaps they’re keen to avoid debt reaching the 53.2% level of Spain, or the 73.2% of Germany, or even the 115.1% level of Greece.

It seems they are. According to Bloomberg, “In rejecting parties that promised to increase welfare spending, voters sent ‘a very clear message’ to politicians that they want ‘a stable fiscal path,’ Simon Quijano-Evans, head of emerging-market research at Credit Agricole Chevreux in Vienna, said in a note to clients.”

It’s a contrast to the mainstream thinking in the West. Perhaps that’s because the West still has the misplaced view that government knows best. That welfare spending is essential to ensure the overall wealth of an economy and society.

That’s why you’ll have seen the ridiculous arguments supporting the new mining super tax. The case is made that it’s essential that profitable mining companies pay for welfare and other government spending. Because it’s right that everyone pays their fair share.

We look at it differently. We believe that initiative and endeavour should be rewarded, not punished. And we certainly don’t believe that initiative and endeavour should result in you being fined (taxation) for having taken the risks.

The way we look at it is like this – but the end result is the same.

In some economies you have governments going heavily into debt now to pay for bureaucratic spending, requiring its citizens to repay the debt in the future through higher taxes.

While in other economies you have governments imposing higher taxes now to pay for bureaucratic spending and will require its citizens to become indebted at a later date as productivity and entrepreneurial activity are extinguished through excessive taxation.

The former would include the Europeans and the US, the latter would include Australia.

As I say, the end result is the same. Both involve hapless bureaucrats spending money which isn’t theirs on projects which no-one really needs. And furthermore coercively controlling the lives of its citizens at its own whim.

And none of it provides any benefit to anyone. Take the following as an example of coercive government incompetence, cruelty and wasteful spending. This headline from ABC News last week really says it all, “Government to get tough with jobless.”

The article says, “More than 350,000 job seekers will be targeted as the Federal Government toughens the rules for obtaining unemployment benefits. From July, those that do not turn up for regular interviews with Centrelink will risk losing the dole.”

As you know, we’re no fan of welfare. But it comes to something when a government punishes the very people that its own rules cause to be unemployed.

Yep, that’s right, it’s one of our favourite subjects, the minimum wage. The government implements an arbitrary minimum wage level that means tens or hundreds of thousands of people are prevented from getting a job.

Because it’s against the law for an employer to pay even 1 cent below the minimum wage, many people become unemployable. Their level of skill makes it uneconomic for a business to employ them and therefore the business will seek alternative solutions, such as exporting the jobs overseas.

Not content with having forced these people out of work and onto welfare, the government is then determined to punish them a second time. This time for not having a job.

But get this, it’s comments quoted from Human Services minister Chris Bowen:

“This is about making sure that they are … doing their bit to get a job and that we are doing everything we can do to assist them get a job. It’s about mutual obligation. It’s about them doing their bit and us doing our bit. The interviews in the past for many years have been largely, frankly, a ‘tick and flick’ exercise. In the past they’ve been one-minute interviews with about 30 seconds focused on compliance, which is not capable of allowing Centrelink to come to a considered view of the individual’s efforts. These will be interviews that are five times as long and with a very substantial proportion devoted to compliance measures and making sure that the person is looking for work and actively seeking work and checking to ensure that what they’ve told us is correct.”

Talk about victimisation. Whether you like it or not, the fact is simple, without a meddling, coercive and victimising government and bureaucracy, odds are that each one of those 350,000 people would be gainfully employed.

It may not be their perfect or ideal job, and it may pay less than they’d like, but they would have a job.

Scrooge may not be the most popular fictional guy in town, but it should be remembered that at the end of the story, Scrooge does give the Cratchett family something they actually need, a slap-up feed, oh, and a job for Bob.

Meanwhile in the old days the government shoved the poor in the workhouse to do such enlightening work as stone-breaking, corn-grinding, and bone-crushing. Today they may not physically put them in the workhouse, but is it less cruel to forbid someone to work at a wage they’re willing to accept and then force them to beg and plead from the same government that put them in that position?

Cheers,

Kris.

You can read the full transcript from the Senate Committee here. As you read it, just remember that these numbskulls are the people who take 30% or 40% of your salary and then spend it on your behalf.

You’ll just love the exchange about “Lego”. And I do mean the building blocks. For a while we did think it was some sort of acronym for a government agency, but no, they’re discussing Lego building blocks. Enjoy!

But what you would appear to have in Senator Conroy is a man craving for control and power over what you do and how you do it.

We’ve previously labelled Emperor Ken Henry as Australia’s most dangerous public servant, but we think that award should now be handed over to Senator Conroy.

And today the Australian Financial Review (AFR) has a former director of the Australian Federal Police (AFP) saying that Google should be probed (ooer!) to see whether it’s broken phone tapping laws.

It’s another example of the coercive sector threatening and bullying the private sector.

Anyway, speaking of crazy, let’s take a look at the crazy stock market…

If you look at the chart below you can see the market is currently trading around the midpoint of the range between June last year and the recent peak:

This midpoint is a key level for our Slipstream Trader Murray Dawes. I won’t pretend to know much about all this technical analysis malarkey, but I will say that Murray’s proprietary system is pretty easy to grasp.

In fact, it’s so easy that even your knucklehead editor is able to recognise key inflection points when looking at charts.

Obviously I can’t give away all his secrets as that’s for paid-up subscribers only, but I have to say that based on the trades he’s knocked out to subscribers over the last six weeks, he’s hardly put a foot wrong.

He’s like a man possessed at the moment. I’m almost tempted to say he’s a trading maniac!

Just this morning as your editor was quietly tapping away on the keyboard, Maniac Murray storms into the office announcing that he’s “Going long this morning. The Dow stared into the abyss last night and pulled back. This market could take off in the short-term.”

But perhaps the most extraordinary thing we’ve seen in a long time happened on 7th May. Again your editor was quietly tapping away at the keyboard, while the birds were singing outside the office window [Publisher's note: Don't you mean, while the drunks on Fitzroy St were shouting!]

After short-selling the market from early April and picking up a big chunk of profits for subscribers, Maniac Murray did something I didn’t expect, but perhaps should have.

He jumped into the market, telling subscribers to buy Fortescue Metals [ASX: FMG] and Rio Tinto [ASX: RIO] at the opening price. Here’s what he wrote:

“The market is going to gap down hard this morning. Rather than take profits on the current short positions, I want to remain short those positions but go long some other positions against them looking to capture the short squeeze that must be around the corner. Many [other investors] will be stopped out of positions on the open and I would expect to see us [the market] down steeply on the open.

“I wouldn’t be surprised to see the markets stage a rally over the day after being so oversold and we may get the chance to move to phase two on the trades today. Otherwise I think we could do so in the next few days.

“The stocks that I think are worth buying on the open are XXX, RIO, FMG and XXX.

“This way we will have a spread on in XXX and XXX and in XXX, XXX and XXX. It will lower our risk and we should be able to trade out of the long position at a profit and keep the shorts or else cut the long and let the shorts run.

“Within panic there is good opportunity. It’s time to step up to the plate and catch the falling knife.”

In CIA style I’ve redacted the names of the positions Murray still has open.

A week later and Slipstream Trader subscribers picked up a 5% and 9% gain on RIO and FMG respectively. That’s pretty good returns.

But just remember, it was also a trade with big risks. As Murray wrote, “It’s time to step up to the plate and catch the falling knife.” Ignore the mixed metaphor, but you get what he means.

If you want big gains you’ve got to take big risks. For some traders buying into the market on the open on 7th May would have been one risk too many. But for others it was a risk they were prepared to take.

The point is, when you’re in business, whether it’s as a share trader, property developer or even say, a mining company, you don’t know for certain what the payoff will be until after the event.

All you can do in advance is to weigh up the balance of probabilities, stick your neck out and take a punt. Murray does that with Slipstream Trader. He looks at the charts and then makes a judgement about which way the market or a stock will go.

And then he weighs up what the dollar risk will be. The potential profit and the potential loss.

So after the event those returns on Fortescue and Rio Tinto are spectacular. A 9% gain in just one week on a big blue-chip stock is something any trader would like on a weekly basis.

You could almost call it a super profit. It’s certainly a much bigger return that you’d get from holding a government bond over the same timeframe.

I bring up Murray’s trading activities because in a roundabout way it brings us back to a topic we’ve written quite a bit about recently, the Resource Super Profits Tax.

Traders are putting their dollars on the line in order to improve their wealth. And likewise resources investors are putting their dollars on the line to improve their wealth.

We still believe the tax is a disgrace, whatever a bunch of economists writing an open letter have to say on the subject.

Incidentally, one of the signatories to the letter is John Freebairn who we quoted in Money Morning a couple of weeks ago. He’s the Ritchie Chair of Economics at the University of Melbourne.

In an article for the Australian Financial Review (AFR), he wrote:

“The RSPT could be much higher, close to 100 per cent without deterring the investment.”

Hmm, tax profits at 100% and investors will still invest. Really? Would you invest if you knew the tax man would take the full whack?

But we guess that’s why academics do academic things and businessmen and women do business things.

I find it abhorrent that private companies should stick their investor’s money on the line year after year, waiting and hoping for a big payoff, only for a coercive and thieving government to take a slice of the action.

The justification that taxpayers fund the losses through companies making tax deductions is no excuse. Instead it bolsters the argument that redistributive or progressive taxation is immoral.

It forces individuals to pay for the risks and or returns of others. Whether that’s in the mining sector or negative gearing from property investment. But it also encourages distortions in the market such as the reliance on welfare.

We’ve no doubt that most people who receive welfare benefits either don’t really need it, or would rather not receive it. But they have no choice. Either the government is taxing them too much and then paying some of it back in welfare payments, or the government is restricting their ability to make their own living – for instance minimum wage rules, or excessive regulations.

An example of how crooked the so-called progressive taxation system is comes from USA Today, “Private pay shrinks to historic lows as gov’t payouts rise”.

You can read the full article here.

Take a look at the chart below:

It shows how private sector wages in the US have fallen from 47.6% in 2000, to just 41.9% today.

In contrast, government benefits have soared by nearly 50%, from 12.1% to 17.9% over the same period. And the blame can’t just be pinned on the recession/depression either. There’s clearly a trend, and doubtless the trend extends even further back.

Seriously, you don’t need to be a Rhodes’ Scholar to figure out that if only $4 out of every $10 earned is from actual productive earnings then something is seriously wrong.

Like the RSPT it’s an example individuals being forced by government into relying on the risks made, and capital invested by others.

You have to wonder how long such an approach can last. What is the lowest point to which private sector wages can fall before it causes the implosion of an economy?

At what point do those who are earning the income and paying the taxes and supporting everyone else suddenly decide they’ve had enough? That they aren’t going to do it anymore.

We don’t know the answer to that. But what we do know is that if governments continue to take away from that which is productive and give it to that which isn’t productive, it will lead to unimaginable consequences.

You can see that in Greece and Spain at the moment. Although it’s interesting to see who is complaining the most, not the productive workforce, but rather the public sector workforce.

Those that have been taking the money for years are upset that the gravy train could be over. And they aren’t happy about it.

Here the miners are speaking up, saying they don’t want to hand over more of their profits, and not surprisingly the government and mainstream economists are beating them back saying that it’s the right thing to do.

But the fact remains that there’s not much difference between the public sector workers in Greece bludging from the private sector, and the public sector in Australia bludging from the resources sector and other private businesses.

The ultimate outcome is that government intervention and redistribution of wealth will only ever succeed in stymieing innovation and enterprise.

And considering it is innovation and private enterprise that makes economies successful, any policies which cause money to flow from the private sector to the coercive sector is a very bad thing indeed.

Cheers,

Kris.

“Super profit tax calls industry’s bluff”

And on the front page the AFR leads with:

“Henry ramps up pressure on miners”

With the subheading, “Claims tax will boost growth.”

To back up the arguments the AFR reproduced a chart and pie chart which I’m pointing at with a red pen while Diggers & Drillers editor Dr. Alex Cowie cleverly took a photo with his fancy iPhone:

In a wonderful piece of casual/causal flummery, the chart on the left shows how oil exports went ballistic after the petroleum resource rent tax was introduced.

Thanks to that piece of, erm, evidence, treasury secretary, emperor Ken Henry believes:

“It is the strong and clearly stated view of Treasury that the resource super profit tax [RSPT] will grow the mining sector and the economy.”

The two pie charts to the right provide more, [hehem], proof that the mining companies are ripping off ordinary Australians.

In case you can’t see it clearly, the pie chart shows how the government swiped an average of 55% of mining profits between 1999-2004, but merely 27% in 2009. Obviously something must be done to redress this heinous crime of profitability.

Fancy making a profit eh? Mining companies should take a leaf out of the government’s book and not make a profit. That’s how it’s done.

But do you see the problem with these claims by the Treasury? I’ll explain in a moment. Before I do, there’s other comments made by the deputy drones at the Reserve Bank of Australia (RBA).

As reported in Tuesday’s AFR, deputy drone Ric Battellino said:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

Then there’s the comment from deputy drone Phillip Lowe, sorry, Dr. Phillip Lowe:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Perhaps we’ve gone over the top on the quotes this morning, but I’ve included them all for a reason. Because they have one thing in common…

The overwhelming belief by the bureaucracy that it can manipulate an economy at will. That it can decide which resources companies will prevail and which won’t. It’s megalomaniacal bureaucratic interfering at its worst.

Anyway, let’s work through these kindergarten-grade arguments put forward by the bureaucrats who seem to be long on qualifications but short on logic.

First up, let’s look at the case that the super profits tax will be great because it will only cream off extra tax from the big profitable companies, but at the same time “smaller and more marginal projects would become more viable.”

This must be true because it’s all according to “modelling” undertaken by KPMG Econtech.

Now, as you’re probably aware, the recent record of “modelling” by the financial industry whizz-kids hasn’t been too good. Remember all those models that said a subprime property crisis wouldn’t spread to other investments?

But don’t take my word for it, just type “KPMG auditing scandal” into your favourite search engine and you’ll get a bunch of records returned. We picked out this one from the Irish Independent: “Were the bank auditors conflicted?”

According to the article, “Irish Nationwide, which last week revealed a loss of €2.5bn for 2009, was also a customer of KPMG… AIB paid KPMG a whopping €11m over nine years for services outside its audit…”

KPMG aren’t the only ones, PricewaterhouseCoopers and Ernst & Young get dishonourable mentions too.

Let’s put it this way, just as the auditors felt compelled to give their banking clients the news they wanted, KPMG has given the Treasury the news it wanted – something to justify the imposition of a new tax.

I mean, how likely is it that KPMG would return a report saying the Super Profits Tax will be bad for the industry?

Not very likely considering KPMG is paid a fee by the government in return for providing the report. You couldn’t imagine KPMG getting asked back again if it proposed something against the government’s intentions.

But look, as with all modelling it can only produce a result based on the parameters it’s given. And just wait until you read what those parameters are. You’ll be flabbergasted…

Take this assumption made by KPMG in its report to the government:

“In the model, this implies a zero economic cost for the new RSPT, since it will simply be a transfer of a portion of the surplus (over and above the required return on capital) from these industries to the government sector.”

Got that? A “transfer of a portion of the surplus from these industries to the government sector.” That’s mindboggling in itself. We do like how they’ve used the word ’surplus’ rather than profit.

What chumps.

Anyway, it goes on:

“In KPMG Econtech’s MM900 model, the RSPT has an excess burden of zero. This outcome rests on the modelling assumption that the RSPT only taxes the economic rents earned from immobile factors, in this case mineral reserves. If only these rents are taxed, then the investment decisions of mining companies will not be distorted. Since the tax base in the RSPT will not shrink in response to the tax, activity in the mining industry will not be distorted, and there will be no economic costs associated with the RSPT in MM900.”

It sums up with:

“The incidence of the RSPT is also a result of the immobile nature of the natural resources on which it is levied. Since there is no change in the supply of mineral resources, their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

Phew! I don’t know about you, but I’m out of breath after that…

OK, now I’ll try to paraphrase that junk into plain English. In other words, what our friends at KPMG Econtech are saying is that – because the government is just creaming off profits then it won’t impact either the cost of the resource in the ground, nor will it put miners off from exploring because the tax will come from the profits.

Correct me if I’m wrong but I’d say that’s the gist of it.

It goes without saying that the “brains” behind KPMG Econtech are clearly professional academics or professional number crunchers or wet-behind-the-ears university graduates with no idea about the concept of risk versus return.

It appears to your editor that the fatal flaw in the KPMG Econtech modelling is that because the model doesn’t see the Super Profits Tax as a cost it assumes that the Super Profits Tax has “zero economic cost.”

What a ridiculous claim.

Think of it this way. Let’s say mining plant equipment company Caterpillar changed its terms for providing big trucks to the mining sector. Let’s say that instead of miners buying or leasing the equipment Caterpillar decided to take 5% of the mining company profits instead, and that this 5% would lead to an increase in the money paid by the miner to Caterpillar.

Now, under that circumstance, would you say that there was now a “zero economic cost” to the mining company for plant and equipment? Would you now say that the mining company was now getting its mining equipment for free because the “cost” was only coming from profits?

Anyone claiming that would be mad.

To claim that something isn’t a cost because it comes from after-profits rather than before-profits is accounting chicanery of the highest order.

It’s no wonder the Irish banking system went to the wall, if this is the kind of auditing those banks were subjected to – “Yeah, don’t worry about those collateralised debt obligations, our modelling says they’re fine!”

As I’ve pointed out before, the bureaucracy and now clearly the auditors, have no concept of profits. And they’ve no concept of the difference a lower anticipated profit has on the willingness of an investor to invest.

I mean, if we tipped a stock in Australian Small-Cap Investigator that was super-high risk but which only offered the prospect of a 9% return would you back it? Probably not. But if it offered a high risk potential of a 286% return then maybe you would.

Then again, maybe you wouldn’t. Maybe you’d want an even bigger potential return.

The point is, the risk to Australian mining companies hasn’t changed one jot. But what has changed is the potential return. In other words, same risk but lower return. Seriously, we’re talking Investing 101 here. It’s not some abstract concept we’re trying to get to the bottom of.

You don’t need a Certificate IV in accounting from Chisholm TAFE to work out that if the potential return is lower, investors will reconsider making the investment.

But it doesn’t end there, KPMG makes another terrible blunder. And it’s this. It assumes that because the minerals are immobile it will have no change on the supply. What?! How does that work. Ah yes, that’s right, “their pre-tax price will not change. Instead, the after-tax return that owners of the resources are able to receive falls by the full amount of the tax in MM900.”

I’ll be straight up with you, this is perhaps the most ludicrous statement we’ve ever seen. It’s claiming that because the Super Profits Tax is being taken out of profits then it will not impact the investment decisions of miners.

Not only that, but according to the pen-pushers and tax-stealers in the Treasury, increasing taxes will not only be a zero cost to the mining industry, but it will actually increase growth… Hahahahahahahaha, stop it guys, seriously.

The evidence? The chart faithfully reproduced by the AFR which shows the CASUAL relationship between the introduction of the petroleum resource rent tax and the increase in oil exports.

For Treasury to claim that the introduction of a tax will actually increase production is absurd. But if it is true then maybe the Treasury should reconsider the tax increase on cigarettes. After all, going by their logic increasing the taxes will increase the supply of cigarettes and most likely increase the number of cigarettes smoked!

Nuff said. Clowns.

Finally there’s the statements from Tweedle-Battellino and Tweedle-Lowe. If you thought the comments from KPMG Econtech and Ken Henry were ridiculous then the comments from the RBA drones really do take the cake.

Their statements that:

“[F]rom the viewpoint of the whole Australian economy, the best thing that could happen is for one of the big projects to fall over.”

And:

“It is obviously not in the individual resource company’s interest, or advantageous to the economy as a whole, if all that investment tries to take place at once. What we need is a gradual and sustained increase in investment over time for the economy to benefit.”

Have you ever come across anything so weird as for a bureaucrat to wish that Australia’s most productive industry suffers the collapse of a big mining project. Is he serious?

We’re talking about something that provides a genuine benefit to the economy. We’re not talking about the Ponzi banks and housing sector that are a drag on the economy. We’re talking about an industry that is the sole reason for the Australian economy not collapsing in 2009.

But then again, these are the same guys who are keen to argue that the property market isn’t in a bubble.

Ah, but now the penny’s dropped. Actually their thinking on the resources sector and the housing market is exactly the same now we think about it.

In both cases they want to see “a gradual and sustained increase in investment over time for the economy to benefit.”

In other words, just as the RBA is keen to keep house prices sky high in order to try to avoid a bursting of the property bubble, it is equally keen to see commodity exploration fall so that prices remain high.

It goes to show you how much the Australian economy relies on the resources sector for economic growth. The obvious fear is that if too many miners extract too much of the natural resources it could push commodity prices lower and therefore have a negative impact on the value Australian exports.

Or, to put it another way, a potential commodity price crash.

You can hardly blame them for being worried. After all, the RBA and the bureaucracy have succeeded in driving all other productive industries offshore or into oblivion.

It figures it can manipulate the resources bubble by increasing taxes and therefore putting a brake on supply.

Talk about playing with fire.

The trouble is that rather than protecting the resources industry, these tax-grabbing measures are more likely to destroy the industry than save it. While it’s true that these resources aren’t movable it’s also true that they are available elsewhere.

Look, I’m not saying that the entire resources sector will collapse, but what I am saying is that in many cases – as we’ve seen already – the Super Profits Tax will be the difference between whether a company explores here or whether it targets projects in countries with a less burdensome taxation regime.

But as usual, what it all really comes down to is the fact that a handful of power-hungry bureaucrats believe that they can manipulate an economy to suit their purpose. That by pushing and pulling levers they can get the economy to move exactly as they planned.

Soon enough they’ll work out it’s not possible. In the short term these things can give the impression of working, but in the long term all it does is increase the distortions in an economy and create a huge mess with massive unexpected (for them) consequences.

It’s proof that bureaucrats and number-crunchers don’t have a clue about how an economy functions.

Cheers,
Kris.

But before we get on to today’s Money Morning, a brief announcement…

The guys and gals at the Melbourne Adam Smith Club have been crazy enough to invite your editor to be the guest speaker at their May dinner function.

You can download an invitation to the event by clicking here. So, if you’re in Melbourne and you’ve got $45 to spend on a curry dinner and listening to your editor waffling on for half an hour or so then feel free to sign up for it.

We’ll look forward to seeing you there.

But for today, this…

“Greece on the edge of abyss as riots turn deadly”

So says today’s The Age newspaper. Perhaps now the mainstream commentators and finance professionals might start taking things seriously.

For weeks we’ve seen “experts” telling us that Greece will be an isolated event. That it could have an impact elsewhere in Europe, but it shouldn’t have any bearing on the US or Australia (Australia’s different you see).

Then at the start of this week talk of contagion started to do the rounds. But again, maybe Europe and the UK will go pear-shaped, but that’s all. We’ll be fine. Our lovely banks don’t have any Greek exposure.

But now today we’ve got “abyss” being used.

That’s hardly surprising considering the deep mess Greece and the European Union is in. And quite frankly it’s something that should be taken seriously.

We’re not talking about common-all-garden riots here. We’re not talking about World Economic Forum style riots with a few bags of flour being thrown and the odd urine water bomb splashing across the old bill.

It’s not the type of riot where the participants turn up for a bit of copper baiting and argy-bargy, fully expecting to return to their day job in the call centre on Monday morning. From what we can see it’s yer proper lootin’ and a killin’ civil unrest.

But we’ll see. You never know, it could all blow over before you know it. However, we’d want pretty decent odds if we were going to place a bet on it.

So who’s to blame for the Greek mess? Are the Greeks behaving like spoilt brats? Do they deserve the punishment that’s being dealt to them? Haven’t they received all the benefits of government largesse?

It won’t surprise you to learn that we firmly place the blame on the government. Sure, the Greek public aren’t completely innocent, thinking they could have something for nothing. But when it comes down to it, the prime reason for the current mess is the politicians and their insatiable appetite for power.

I’m afraid it’s the nature of the political beast. And it’s why we believe in a minimalist government.

The more powers that politicians are granted, the more they’ll want. The more they get to control things, the more they’ll want to control other things.

Eventually it reaches a tipping point. The government ends up having its fingers in so many pies its actions have the biggest impact on the fortunes of the economy. You can see that in Greece, and you can see that in, er, Australia…

Just look at what the Fairy Ruddfather has done to the markets this week. The impact has only been this big due to the excessive influence of government.

And it adds further evidence to support our claim that Australia does not operate a truly free market. In a free market with limited government, the government would not have this kind of power and could therefore not make these decisions.

As we’ve pointed out all along, it is the excesses of government that is the overwhelming negative influence on the economy, not free enterprise.

The front page of today’s Australian Financial Review (AFR) has political hack Laura Tingle leading with:

“The war of words over the resource super profits tax has overshadowed how the Henry review has presented the government with a new fiscal policy lever to control the economy. The lever is a new tax which, as a macro-economic policy, could reweight the way the economy works.”

To free-marketeers that kind of statement is enough to make you drop your copy of The Wealth of Nations into your bowl of cornflakes of a morning.

We love the last part especially; it “could reweight the way the economy works.”

See what I mean about the obsession for hapless bureaucrats and politicians to control things? They just can’t help themselves.

The idea that the Resource Super Profits Tax is a new lever to control the economy is just plain madness. But again, it’s the overconfidence of bureaucrats who believe they saved the Australian economy from disaster.

We’d love to hear from Ms. Tingle her explanation of how economies work. Our guess is that she believes it involves politicians and bureaucrats pulling and pushing levers like an old signalman.

Clearly Ms. Tingle and other government and tax lovers have some bizarre idea that economies can be directed at the whim of bureaucrats just as a child can control a toy train set.

In fact, in a Money Morning exclusive, below is a photo we secretly took this morning of a government bureaucrat in action – not surprisingly he’s sitting down on the job (probably an occupational health and safety thing):

Obviously the lever that’s been pulled right forward is the Australian housing market! “Full steam ahead Gordon…”

Anyway, the Keynesian hordes are still blindly pushing on with their crazy ideas. Not content with getting the global economy into the current mess they are determined to press ahead with even crazier ideas.

Page 71 of today’s AFR has John Freebairn writing:

“The RSPT could be much higher, close to 100 per cent without deterring the investment.”

What is he going on about? Can he seriously suggest that if you impose a 99% tax on something that investors will still pile in?

Apparently Mr. Freebairn holds the Ritchie Chair in Economics at the University of Melbourne. Based on his attitude to taxes we can only assume it must be the Ritchie Benaud chair, because whatever this Ritchie is, he or she can’t have anything to do with economics.

But at least he’s man enough to admit to the charge we levelled earlier this week. That the Super Profits Tax was nothing more than a backdoor to nationalisation:

“The RSPT plus corporate income tax collected will rise with booms, when capacity to pay is greater, and fall in slumps, when capacity to pay is reduced. In effect, government, on behalf of the citizens who own the basic resources, becomes a shareholder in the mining industry.”

The mistake the prof (if he is a prof) makes is that there will be boom times to begin with.

Who in their right mind will invest capital when they know the government is snatching a load of the profits, and where there’s no guarantee the government won’t take a bigger cut when it feels like it.

Companies and entrepreneurs will only invest capital if they believe the return will justify the reward.

All businessmen and women embark on a business in the full belief they have the nous to make money from it (unless it’s property investing of course, where the idea is to lose as much money as possible). Now, that isn’t to say that all will make money. Some will fail spectacularly. But the point is, they have the belief from day one that in the long run they can earn a buck from the venture.

And obviously some business ventures have more risk than others.

It’s pretty unarguable that opening a little coffee shop on Fitzroy Street here in St Kilda requires less capital investment, less risk and lower returns than someone exploring for gold or iron ore in the Australian outback.

But according to Mr. Freebairn, the return on a coffee shop in Fitzroy Street and a gold mine in Western Australia would be virtually the same, if as he suggests, miners’ Super Profits were taxed at “close to 100 per cent”.

Anyone with an ounce of grey matter can tell you that if the returns are the same or similar, it’s only natural that an investor will opt for the investment with the lowest risk of failure.

But aside from all this, there’s potentially an even bigger concern on the horizon. And that’s the impact government meddling will have on your retirement savings. But that reader, we’ll have to leave for tomorrow…

Cheers,
Kris.

We have to admit to laughing out very loud indeed after listening to the Fairy Ruddfather’s interview on Perth radio yesterday. But more on that in a moment…

First, the Australian mainstream press can only be described as pathetic.

We’re quite serious when we say they should all just resign.

The mainstream response to the government’s tax review was amateur-hour. Now, I’ll be honest, I’ve got no idea what goes on in these media ‘lock-up’ events. Our guess is that the press are given advance copies of the report, probably a Powerpoint presentation, and the opportunity to ask a few questions.

Oh, and a choice of tea or coffee and a few Arnott’s biscuits.

Then they get to write the news and send it back to their editors as soon as the embargo is lifted.

In other words they’ve had a lot of time to filter through all the info. But if that’s the case, how come they completely ignored the fact that this new Super Profits tax isn’t really a tax on Super Profits at all?

And how come it took your editor less than an hour yesterday morning to realise that the Resource Super Profits Tax was a fraud. That it was nothing like the tax on big profits the leaks from last week and yesterday’s reporting would have you believe.

The worst offender has to be the so-called premium business newspaper, the Australian Financial Review (AFR). If Standard & Poor’s gave ratings on the media it would surely downgrade the AFR from business newspaper to comic book.

No wonder the mainstream news media is going down the toilet so fast if that’s an example of their crappy workmanship.

And today’s effort from the AFR isn’t much better. In ten pages of further review it doesn’t mention the Super Tax fraud once. The only place you’ll find an admission of what the Super Tax really is is if you read the Editorial on page 70:

“[T]he RSPT has been mis-sold as a super profits tax. It’s really just another tax on profits.”

Which is uncannily similar to what we wrote in yesterday’s Money Morning:

“There’s nothing in that worked example about normal profits and super profits. It’s just a tax on profits.”

Maybe the AFR editor subscribes to Money Morning! Who knows.

But anyway, the fact is there’s nothing special or super about the tax apart from the fact that it’s a brazen attempt to rob investors of capital they’ve put at risk, and a brazen way of partially nationalising Australia’s resources sector through the backdoor.

Remember, if BHP Billiton is correct in its estimates, the Australian government will hold the equivalent of a 57% stake in the big miner’s Australian operations.

It makes you wonder how much effort BHP will go to to generate profits from this part of the business if it knows 57% will be expropriated by the Fairy Ruddfather and his parasitic chums.

But before I go on, click here and make sure you listen to the Fairy Ruddfather’s lame interview on Perth radio. Just be warned… it’s embarrassing. Actually I’ll rephrase that, it’s embarrassingly funny.

Anyway, make up your own mind. Take a listen and I’ll still be here when you’re finished…

We loved this quote from him:

“If for example they were investing their funds in um, long term bond markets. In other words what would constitute a reasonable rate of return on an investment.”

He’s serious as well. What the Fairy Ruddfather is saying is that if highly speculative mining companies earn profits that are in excess of the risk-free interest rate (Government bonds) then this is deemed to be a Super Profit and should therefore attract a higher tax rate.

We’re speechless.

Only a pen-pushing coercive sector bureaucrat could come up with such an idea. Based on this theory, we’re guessing that 90% of all profitable Australian companies would be earning Super Profits.

What’s stopping the government from expanding the scope of the Super Profits tax to those businesses as well?

But let me put it simply. Here’s a worked example of how the Super Profits tax would work…

Let’s say a mining company starts up with $8 million of capital. Which it invests in searching for raw materials.

Then let’s say the mining firm generates $10 million of revenue.

Now let’s minus $9 million of operating costs. That gives a gross profit of $1 million.

Then under this new Super Profit tax the mining company gets to earn a “normal” rate of return which is set at the10 year government bond rate. For example, 6%. 6% of $8 million (the starting capital) is $480,000.

So, the mining company’s net profit, is $1 million, less the $480,000 deduction which leaves a Super Profit of $520,000. This is taxed at 40%.

What a joke.

In our example, the mining company makes a 10% gross profit and this is deemed to be in Super Profit territory.

Have you ever come across a bigger bunch of fools in your life than the chumps that came up with this idea? I know we haven’t. It’s clear that these sad little socialists don’t care much for profits. As Chalpat Sonti in WA Today writes:

“It’s been around since the days of Karl Marx, but Kevin Rudd’s explanation of what constitutes the key part of his tax reforms might have more people reaching for Das Kapital.”

But going back to the Fairy Ruddfather’s interview, what’s most obvious is his struggle to explain what a profit is, let alone a Super Profit. Then again, that’s not surprising.

You see, we’re not surprised a coercive sector servant doesn’t know what a profit is. Because profits don’t exist in the coercive sector. That’s because there’s no need to make a profit.

When you’re in the coercive sector you’re given a budget. It’s then expected that you spend all of that money.

If there’s any left over, well that’s not good enough, clearly you’re not serving the ‘communidy’ properly.

Coercive sector departments don’t generate revenues or profits. They’re given your taxpayer dollars which they then spend. And having spent his entire adult life sponging [Reader's voice: Don't you mean working?] in the coervice sector, it’s not surprising he doesn’t know the definition of a profit.

By using the risk-free government bond rate as the benchmark, it’s clear they’ve fallen for their own spin, believing that government is just like a business. Therefore, in their minds the interest on a government bond is comparable to the profits made by a private business.

Seriously, I can barely contain the laughter as I write…

What these numbskulls are trying to say is that businesses – especially mining businesses – should only make reasonable profits. With a reasonable profit being the equivalent (ha, ha, ha) of the interest rate on a 10 year government bond. Anything in excess of that is – apparently – a Super Profit.

As an aside, if this isn’t another opportunity for the government and central bank to manipulate interest rates I don’t know what is. The higher the interest rate, the greater the ‘normal’ profit resource companies can make, and the lower the Super Tax liability.

On the other hand, the lower the interest rate, the less the resource company can deduct and therefore the higher the Super Tax liability.

Anyway, it makes you wonder why you’d bother with the hassle of running a mining business in the Western Australian desert if you know there will be an extra penalty if you make more than a 6% return on your capital.

Why not just shut up shop and buy some lovely government bonds instead. It’s certainly less risky!

The whole reason for taking big risks such as convincing investors to give you millions of dollars, and then paying geologists to find certain types of rock, and then paying other guys to dig the stuff up, and then maybe even building a railway to cart the stuff away, and perhaps even funding port facilities… is that you hope to give your investors a big return.

Investors aren’t after a “normal” return on a mining investment. Who in their right mind would invest in a speculative mining stock just on the off-chance they’ll make 6%?

They’d need their head examining.

The incentive to invest in these risky stocks is that the company could make a big wad of cash. And if it does then you’ll share in the bumper payday.

But if the parasitic government is coming in and swiping nearly 60% of the gains, it makes the whole rationale for the investment a lot less attractive.

It’s clear the Fairy Ruddfather and his coercive sector cronies can’t grasp the idea of making profits. Or rather, they don’t like profits. In their mind no one should make a profit, instead profits should be redistributed to the government.

At the beginning of this article we suggested all mainstream journalists should resign based on their pathetic coverage of the Super Profits Tax. We’ll make one exception, and that’s for Chalpat Sonti of WA Today who we mentioned above.

At least Chalpat made the effort to give a scathing report of the Fairy Ruddfather’s radio performance.

I mean, seriously, with all those resources (excuse the pun) behind them, the mainstream press just couldn’t be bothered reading past the government summary document. Instead, it was left to your editor and a Perth radio host to pick apart the fraud that’s going under the name of the Resource Super Profits Tax.

The Super Tax policy is a clear example of how government forcibly takes money from the productive part of the economy in order to give it to the unproductive part of the economy – namely, itself.

There’s no better example of that than the recent Comsec ‘State of the States’ economic report – apologies for not referencing the Money Morning reader that sent us a copy, it’s just that we can’t find your original email!

Anyway, here’s the chart that paints the picture of how lopsided the Australian economy has become:

Isn’t that an interesting picture? The territory that wouldn’t exist if it wasn’t for the presence of the national bureaucracy was the fastest growing state or territory in the December quarter.

We seriously wonder where the pillaging of private wealth will end.

In our opinion, the Resource Super Profits Tax is nothing more than a sneaky attempt by the government to increase taxes while demonising and punishing Australia’s most productive and valuable industry – the resources sector.

As we write this morning, the government ‘owned’ BHP Billiton [ASX: BHP] is down another 1.4% in early trade. Meanwhile the money creating banks are travelling upwards quite nicely.

It’s funny isn’t it? One industry spends billions of dollars to recover useful and tangible resources. The other spends nothing to create money from thin air in order to ensure the continued expansion of credit, the property bubble, and the terminal indebtedness of the Australian population.

And the mainstream insists on telling us Australian banks are something to be proud of. That’s an even bigger joke than the Fairy Ruddfather’s radio performance.

Cheers,
Kris.

As you should know by now, we’re not afraid to dish up a big serving of criticism based on the nonsense we see from the mainstream press and mainstream financial advisers.

However, one of the criticisms we get from some readers is, “Well, what should I do about it smarty pants?”

It’s a fair question. It’s all very well to carp from the sidelines, but at some point, as a business, we’ve got to put our cards on the table. So that’s exactly what we’ve done.

Before you read any further, I want you to spend a few moments reading a special report put together by my colleague and editor of The Daily Reckoning, Dan Denning.

The report is titled, “Exit the Dragon.“ Quite frankly, Dan couldn’t have timed this report any better. The outcome of the government’s response to the Emperor Henry tax review tells you that Australia has all its eggs firmly in the China basket.

And in my view that’s an appropriate reference to the Chinese economy, because it won’t be long before the Chinese economy is revealed as a basket-case economy – supported by Western credit, excessive government spending, manipulation, and corruption.

If you want to know how to prepare your investment portfolio for the 21st Century’s biggest economic collapse you’ve got to read what Dan has to say.

So, click here for Dan’s “Exit the Dragon“ special report. I believe it’s the most important financial report you’ll read this year!

….

Now, back to business…

Direct from Fitzroy Street, St Kilda, this morning we bring you this special edition of Money Morning. We’re hot off the press just 21.5 hours after the release of Emperor Ken Henry’s Tax Review.

On Friday we lost count of the number of emails we received from media outlets and special interest groups telling us they’d send out their response to Emperor Henry’s review within minutes of the government releasing it.

We could hardly wait.

But personally, we don’t know why they bothered. They could have rocked up to work this morning, as your editor did, give everything a quick scan, and then come to the conclusion that Australia’s resources sector is one step away from nationalisation.

As we pointed out on Friday, there would be the apparent good news for the little Aussie battlers…

“Bonus for low-paid and older workers” reveals one of the sub heads on the front page of today’s Australian Financial Review (AFR).

Other sub heads tell readers that “Simplified tax returns on way” and “Miners slugged 40pc tax”.

But don’t bother reading the mainstream press. All you’ll get from them is the pathetic line that, “the government missed on opportunity”, or as Tony Harris in the AFR puts it, “1000-page exercise in wasted opportunity”.

What would you expect from the limp-wristed mainstream press? An industry which is firmly in the category of “the government must do something.”

Anyway, we’ve taken a look at the government’s response to Emperor Henry’s report. Although we’ll be honest and say we haven’t read the whole thing yet – which is understandable considering we only bothered to take a peek about two hours ago.

But we thought our first task should be to make some sense out of the Resource Super Profits Tax (RSPT). The details are contained in this report.

All we can say is that the government has done an excellent job in the spin-doctoring department. Both in terms of the name of the tax and the information it leaked about it beforehand.

And guess what? The mainstream press has fallen into line, unquestionably picking up the jargon and spinning the misinformation fed to it by the government.

Let’s take the name of the tax itself – Resource Super Profits Tax. What does that say to you? Well, it arguably gives the impression that this is a tax on “super profits” – whatever that is.

That it’s not a tax on “normal profits” just on “super profits.” As we pointed out last week, there’s no such thing as a normal profit. And there’s certainly no such thing as a super profit. There are just profits. That’s all.

The yarn being spun last week by the press, based on leaked information was that excessive profits would be taxed more than so-called normal profits.

The reality is completely different. Based on our reading of the report, the Resource Super Profits Tax is a, erm, profit tax. It taxes profits. Just like any other company tax.

You can see that from the worked example in the table below that I’ve copied from the report:

There’s nothing in that worked example about normal profits and super profits. It’s just a tax on profits.

The only difference is an indexation allowance at Item 3.

And according to BHP Billiton:

“The imposition of this new tax would result in an increase in the total effective tax rate on the Group’s profits earned from its Australian operations from around 43 per cent currently to around 57 per cent from 2013.”

In effect, the Australian government is nationalising 57% of BHP Billiton’s Australian operations without any compensation.

It’s the next step towards nationalisation. If you think we’re going over the top here, let me ask you what the difference is between the government taxing 57% of profits, and the government taking a 57% stake in the business and receiving the profits as a dividend?

Of course there is one difference, and that is, in the case of a 57% tax rate the government is getting a majority stake for free.

Even Venezuela’s Hugo Chavez would stop to think before doing that.

As I mentioned last week, the notion that Australians own stuff in the ground in the middle of Western Australia, prior to it being discovered and dug-up is ridiculous.

The idea that a non-investor in Malvern, Surry Hills or Geelong should own a minority stake in a patch of dirt near Kalgoorlie is too stupid for words.

And the idea that Australia’s mining companies and investors should put their balls on the line for billions of dollars with no guarantee of success and then have to hand over 57% of the profits to the government is criminal.

But even if BHP Billiton is at the high end of the scale, even 50% or 40% is too much to hand over when the explorer and the investors have taken on 100% of the risk.

It’s inarguable.

At least when Venezuela’s Hugo Chavez nationalises companies he’s up front about it. And what’s more, he’ll hand over cash in return for the stake.

According to our friends at the Encyclopaedia of Wikipedia:

“The nation’s largest private electricity producer, 82-percent owned by US-based AES Corp, was obtained by paying $740 million to AES for its share – fair compensation according to financial analysts cited by Reuters. In 2008, cement production was largely nationalised, with Venezuelan-located plants belonging to Mexico’s Cemex, switzerland’s Holcim, and France’s Lafarge being bought by the government. Compensations of $552 million for Holcim and $267 million for Lafarge were agreed upon, with both of those companies agreeing to stay on as minority partners and retaining 10 to 15 percent shares… In 2007 the main telephone company, CANTV, was nationalised by buying US-based Verizon Communications’ 28.5 percent share for $572 million – again, fair compensation according to analysts cited by Reuters.”

By the way, here’s a link to one of the Reuter’s articles detailing the nationalisations.

So, in the instance of Lafarge, Venezuela paid the company $267 million for a majority stake in the businesses. And Lafarge stayed on to help operate the business and presumably take a cut in any profits.

Yet here, investors in BHP Billiton don’t get a brass farthing from the government, it simply introduces an ad hoc bunch of taxes that will rip away 57% of shareholder’s profits from the Australian operations.

Oh yeah, I know, the government will go on about tax credits and rebates and all sorts of other things. But that’s like a thief saying, “I know I stole $100 from you, here’s $5 back and we’ll call it quits.”

You wouldn’t accept that argument from a drugged-up petty crook, so why would you accept it from a drugged-up coercive government?

Western governments are embarrassing themselves by following the same discredited socialist policies that the Eastern Europeans and Soviets tried before their economies imploded.

But that’s where the government spin goes into overdrive. Because this tax windfall – remember it’s really a tax not a super profits tax – will be spent on infrastructure projects for the states.

If that doesn’t send alarm bells ringing then I don’t know what will. Given the complete disaster of government infrastructure projects so far, you can be assured it will end in disaster too. Swamped with favours for mates, corruption and a monumental waste of profits that would otherwise have gone to real investors.

Make sure you’re under no illusion. This is a tax like any other tax. It penalises initiative and entrepreneurial risk taking in order to line the coffers of a parasitic government bureaucracy.

You see, the government has not only put all its eggs in the China basket, believing the resources boom will last forever, but it’s now so confident of it that it thinks it can give the basket a big old shake without breaking anything.

Oh, and by the way, don’t be fooled by the cut in the company tax rate for other businesses. That’s little more than an attempt to offset some of the cost for increasing the superannuation guarantee to 12%.

Incidentally, that move in itself proves what we’ve argued all along that superannuation is just another tax.

But anyway, the fact that the government is only moving now, six years after the resources boom began, should be as clear a sign as any that the China economic boom will soon become a China economic bust.

Cheers.
Kris.