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

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

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

What’s the ATO commish grumbling about?

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

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

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

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

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

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

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

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

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

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

There you have an example of two types of violence.

One that involves an individual shooting a public servant…

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

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

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

How does that work?

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

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

The RBA’s Top Trade of 1996

Source: goldprice.org

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

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

Some of the choice comments in the report include:

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

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

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

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

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

Finally:

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

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

But that’s OK, because the RBA claims:

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

Golden Hamburgers

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

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

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

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

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

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

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

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

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

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

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

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

RBA Gets it Wrong Again

But how’s the track record looking?

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

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

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

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

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

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

Oh dear!  There goes the housing shortage.

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

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

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

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

Regards,

Kris Sayce
For Money Morning Australia

I thought about tackling property (again), but I’ve only just emptied the Money Morning mailbag from yesterday and so didn’t want to create more work for myself by opening that can of worms.

Then I remembered I went out to dinner recently for my birthday [Ed note: That's the seventh time you've mentioned it today and it's not even lunchtime!]. During the course of the evening, work became a brief discussion.

“So Shae, what’s happening in the world of finance?” one of our dinner companions asked.

“It’s pretty interesting at the moment, I mean, the world’s financial system could fall apart if this Greece bailout gets any more out of hand. It’s pretty exciting times.” I said munching on my pad Thai.

“If Australia survived the Asian Financial Crisis, then we’ll survive this. After all, the Asian crisis happened in our back yard. Greece is on the other side of the world,” was the reply.

Er, what? So geography is what will prevent Australia’s financial system from falling apart?

Let’s just say we changed topic. It fell into the ‘too hard to explain’ category of conversation. And besides, it was my birthday. [Ed note: That's the 8th time].

But, I thought I’d use that idea. Now there’s the reader that lived through it, and then there’s the reader that most likely only knows about the Asian Financial Crisis through Wikipedia. You know, as something that happened in the ‘old days’.

What exactly is so different this time?

Firstly, let’s not underestimate it, the Asian Financial Crisis was a huge threat to the Australian economy. Aside from the initial currency devaluation, market confidence was shaken with fear that investors would be stuck holding bad debt.

You see, the high interest rates in countries like Thailand and Indonesia attracted investors from overseas and naturally a large amount of those funds went into the highly speculative property sector. Not long after the financial market collapsed the over inflated property sector blew up too.

As the crisis grew, the IMF decided to step in and offer a USD $40 billion bailout to keep the economies moving along. But the funds came with extremely strict measures. The Asian banking system was torn apart and the new system had to meet the IMF rules in order to obtain the cash hand out.

At the time there was a strong fear of financial contagion, which is much like there is now. However compared to now, you could really only describe the Asian crisis as just upsetting the Australian market. Because right now the market is having an extreme reaction to anything that happens overseas.

So what makes this crisis so much worse for Australia? I mean, after all, didn’t we survive the Lehman brother collapse, the subprime crisis and the worst of the GFC.

Look, Australia did get past all those crises but we did so using borrowed tax payer money. The politicians dragged the country into more debt hoping China and their mineral hungry economy would bring us out the other side. All in the name of ’surviving’ the crisis.

But yet again the over-spending and over-lending have caught up with us again, and we’re facing another financial crisis. And again, the only solution offered is more debt.

Instead of the IMF stepping in to hand out cash to a failing economy, this time it’s the IMF and the European Central Bank.

It’s obvious why the Euro Zone members have stepped in to save their currency. The bailout has nothing to do with saving Greece from government financial mismanagement.

So why when Australia’s and the world’s debt levels are higher than ever before is more money being handed over? More debt surely won’t fix the problem.

While there were many critics of how the IMF ‘fixed’ the Asian Financial Crisis, the IMF congratulated themselves on a job well done. As far as they were concerned, they ’saved’ Asia from its own financial crisis, when really they left a massive whole in Asian economies.

Because of the restrictions that went with the hand out, hundreds of thousands of white collar workers in countries like Thailand literally had to go back to the villages they came from. Massive unemployment swept through the country and many private businesses went under as access to capital became near impossible under the new lending regulations.

But now, unlike then, the entire world is being rattled and at the heart of it is the banking system.

Maybe we’ll finally realise we can’t continue to build a financial system on debt as a way to make money.

As I said last night at dinner, it’s an exciting time to be in finance. The world’s financial system is being shaken at the roots. We’re learning some pretty hard lessons that had to be learned. You can’t keep pumping air in to a balloon without expecting it to pop.

It’s the same thing with a global economy. You can’t keep flooding it with debt and expecting that will save it.

Things look pretty bad now, but the worst could be yet to come.

That’s it for me here, now for a look at yesterday’s market action…

60 Second Market Wrap

It was a pretty flat trading day for the market yesterday. The S&P/ASX 200 closed up 3 points to 4,470.70. The move from Germany to ban naked short selling caught the Aussie market by surprise and has opened in the red this morning.

The Dow Jones Industrial Average dropped 114 points overnight to close at 10,510.95. The US market was shaken when the Euro reached a four year low against the US dollar.

Germany’s temporary ban on naked short and naked credit default swap includes the short selling of 10 banks shares. It was this move that led Michael O’Rourke, a strategist at BTIG LLC, to say, “It makes it look as if the Germans are worried about something behind the scenes that the market’s not aware of. It almost looked panicked, which further undermines confidence in the markets.”

The FTSE was up 44 points to close at 5,307.34. The Consumer Price Index (CPI) came in at 3.7%, which was much higher than anticipated. The high CPI number is treated as a general indicators for inflation, however the Bank of England (BoE) governor Mervyn King said that he expects the inflation to be temporary and return to normal next year.

The Nikkei dropped again overnight, losing 146 points, ending the session at 10,096.25.

The price of spot gold in Australian dollars is trading at $1,433.06 while in US Dollars it is trading at $1,222.33. The price of silver in Aussie dollars is $22.07 and in US Dollars it is $18.80.

The Aussie dollar versus the US dollar is USD$0.8519 and against the Japanese Yen JPY79.04.

Crude Oil closed at USD$68.37.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

The Reserve Bank of Zimbabwe? Check.

The United States Federal Reserve? Check.

The Bank of England? Check.

The European Central Bank? Check.

The Reserve Bank of Australia? [Silence].

Not yet, reader. Will its time come to openly and brazenly print money?

We know it and the retail banks do it behind closed doors. But it hasn’t yet announced a multi-billion dollar plan to monetise debt obligations. Of course, so far it hasn’t had to because thanks to the “we’re different” mentality, Australians have continued to make sure private sector debt continues to rise.

For instance, according to the Reserve Bank of Australia (RBA), as of March 2010 residential loans by banks stood at $935.2 billion.

That’s compared to a paltry $634 billion when the economy last peaked in October 2007.

In other words, household debt obligations have increased by about 50% over the last two-and-a-half years. An increase which has occurred almost without stopping for breath.

Who needs a central bank bail-out when it’s easier to just convince the population into believing “Australia is different.”

But anyway, back to the European Central Bank and its EUR40 billion bailout… [murmur, murmur] HOW MUCH?!

[Hehem] Right, well, what I should have said is, the European Central Bank and its USD$1 trillion bailout plan. Or to put it another way, $1.1 trillion – more than the annual output of the Australian economy.

Where did the trillion come from? We’re sure this all started off as a EUR40 minor problem. I mean, that was the reason behind the mainstream’s argument about Greece being irrelevant.

OK, we did note over the last couple of weeks that the number had ratcheted up quietly to EUR130 billion. That’s a pretty big number by itself.

But then, whammo! At 3.15am in Frankfurt, the ECB announced to the world – but not to the Europeans because they were all asleep [Shhhh!] – that it was using its “nuclear option” of monetising the debt in order to fight the “wolfpack.”

Yep, that’s right, the free market gets the blame for problems ultimately caused by… that’s right, the politicians, bureaucrats and central bankers. Even though the free market – or ‘wolfpack’ as they call it – had nothing to do with it.

But what are the chances of the ECB’s money printing plans working any better than the money printing strategy of the Fed, the Bank of England and the Reserve Bank of Zimbabwe?

No chance, we’d say.

In fact, it rather reminds us of Mission Gainsborough…

General Melchett: Field Marshall Haig has formulated a brilliant new tactical plan to ensure final victory in the field.

General Melchett: E-e-exactly! And that is what is so brilliant about it. It will catch the watchful Hun totally off-guard, doing precisely what we’ve done eighteen times before is exactly the last thing they’ll expect us to do this time…

And the Watchful Huns in the markets certainly were caught unawares. Hence the French CAC40 climbing 9% and the Spanish market surging 14%.

The market obviously wasn’t entirely convinced that the ECB would be so stupid to just print a bunch of new cash in order to pay off debts. I mean, it’s obviously the kind of crass thing the Americans would do… but not the Europeans.

And the British with their Anglo-Saxon ways are just as bawdy as the Yanks. But surely the sophisticated French, the sensible Germans, and the, erm, er, Belgians would have a more balanced plan of attack.

It appears not.

In fact, based on the numbers bandied around over the last few weeks it seems to have been more like a central bank version of Deal or No Deal rather than the thoughtful deliberation of supposedly intelligent men.

We can only think that they’ve been frantically opening briefcases with numbers inside. As the ‘Bank’ spun the numbers and offered the magic trillion, the finance ministers leapt with joy, “Voila! Nous etre rich!”

And so today the European printing presses whirr into action.

But wasn’t it nice of them to do all this in the early hours of the European morning. What dedicated public servants they are. And obviously it was so urgent, that they had to release the news before Fritz in Cologne, Francois in Lyon and Giuseppe in Milan had woken from their slumber – “Don’t wake them, they need the sleep, they’ll have to work twice as hard to pay this off! Ha, ha, ha…”

Or maybe they were more eager to rubber-stamp it before Stavros and Effi in Athens had woken up. You remember what happened last time they got mad!

It still startles us how our Keynesian friends can’t grasp how illogical it is to just print money. Look at the number again, it’s the equivalent of $1.1 trillion or greater than the entire yearly output of the Australian economy.

Think of it this way. It will take the European Central Bank about, ooh, a tenth of a second to create the billions of Euros needed.

Yet it will take 10.9 million Australians working an average of 35 hours per week for 52 weeks to produce the same output.

Got that? One-tenth of a second versus one year.

One-tenth of a second versus a combined 19.8 billion hours or 71.4 trillion seconds [Ed note: we just wanted to keep going until we notched up a trillion].

The obvious question is why bother going through all that effort if when push comes to shove the central bankers will just print the money anyway?

Naturally, the reason you have to go through all that effort is because you know there’s something illogical and not right about a bank just creating money from thin air.

You don’t need to be a Doktor der Wirtschaftswissenschaften from the Ludwig-Maximilian-Universität München to work out that even as a short-term measure printing money doesn’t actually solve the initial problem.

All it does is shift the problem. It wipes debt from one bunch of people and plops it onto another bunch.

Because guess what, instead of the Greeks having to come up with a way of repaying their debts or just defaulting, the ECB is just handing over the Euros in exchange for Greek government bonds.

In return, the ECB and European taxpayers get a bunch of crappy Greek debt that no-one else wanted. Well, they would take it on, but only at an 18% interest rate. In fact, so little did anyone want it that the ECB actually has to create the money to buy it.

The issue now is what happens to the billions that will be handed out to the Greeks, Portuguese, and anyone else that needs it? The answer is that the national governments will feed the cash out to their favoured industries and pet projects.

Some will gain by the increased money supply – those that get the new money first, but others will lose out. And because the new money is in effect unearned income, like a handout, it will be wasted and squandered in exactly the same way as any other type of handout.

Not forgetting the moral hazard of having bailed them out once, is it really likely the ECB will tell them to get stuffed if they ask for more? And what about other governments? It can only be a matter of time before they play the “where’s our free money” card.

As we’ve pointed out several times, the most honourable action would have been for the Greeks and other European tin-pot governments to just default on the debt obligations.

There would still be losers of course, we’re not claiming that there wouldn’t. But at least the losers would have been investors. Investors who should always enter into an investment with the risk that they’ll lose money.

Instead, at 3.15am Frankfurt time, the European Central Bank decided it was much more important that they and their political paymasters kept their jobs. The result being that the average German, French and Italian – and every other European – will pay via the devaluation of their savings and their wages.

All just to ensure the governments are saved, central bankers are saved, and bond investors receive back 100 cents on the Euro for their crappy Greek bond investment.

What are the odds that in a year’s time we’ll hear that Goldman Sachs or JP Morgan made a motza from buying cheap Greek debt two weeks ago and then selling it to the ECB this week?

We can see the headline now, “Evil Bankers Profited as Greece Burned.”

The free market will be blamed again, and capitalism will be accused of being out of control. Of course, what the bankers and politicians will conveniently forget is that without the money printing those profits – if they exist, and we’re sure they do – wouldn’t have happened.

The odds on that story making it to the front pages are pretty good we’ll guess.

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.

But there is something I wanted to mention today…

It’s been a while since we caught up with any of our old broker pals – probably because we’re a bit of a pariah these days.

But when we do meet up over the $13 all-you-can-eat buffet at the RACV Club in the next couple of weeks we’ll try and eke out of them what kind of message is going around Australia’s broking rooms.

Our guess – and it’s only a guess – is that it will be similar to the message written by Michael Pascoe in The Age yesterday. It was under the headline, “Why a China slowdown will be good news.”

The whole article has a similar ring to the “house prices will plateeeeeeaaaaauuuuu” argument.

You’ve got to give it to the mainstream, apparently nothing ever goes down. Except when it’s already gone down of course. But don’t mention that because everything’s going back up again.

But a pretty good sign of the market getting near the top is when brokers and commentators start cheering 5% and 10% falls in the stockmarket, or when growth in the economy slows, “Oh, it’s OK, the market needed to take a break, it’s a good buying opportunity.”

Or, the economy “needs to pause, it should plateeeeeeeaaaaauuuu from here for a few quarters…”

Sometimes that’s true, but when the mainstream is singing it in unison, it’s time to be on guard.

But all that aside, there’s more to worry about that just whether Pascoe thinks a slowing China will be good news.

It’s the whole attitude towards China that’s even more worrying. The general idea that the Chinese are privy to a miracle formula that enables them to conduct not only the Chinese economy but the global economy in the same way that Andre Previn conducts an orchestra.

Take this quote from Pascoe:

“China knows the switch must be thrown to greater domestic consumption and less reliance on export growth. The comrades are taking steps in that direction. It would be nice if they took more of them and did so faster, but they are wary of rocking their bus – there are an awful lot of people jammed into it.”

Again, the assumption is that China can throw a “switch” and miraculously everyone in China will perform exactly as directed. That everyone will buy and sell in exactly the correct quantity and at exactly the right time.

Not only that but they’ll also pay exactly the pre-set price when they buy something and receive precisely the right pre-set money when they sell something. And when they’ve got that money they’ll hold it for just the right time before spending it on something else as directed by central planners.

Make no mistake, that’s what central planning requires. Heaven forbid if someone should buy two pairs of shoes rather than one pair, or a jar of jam rather than marmalade. Doing so would send the whole plan out of kilter.

And even worse, should a black market develop where goods and services are provided at a different price or quantity than the central planners decree, then there’s another spanner thrown in the works.

Not that the mainstream commentators consider any of that. According to them, central planners such as the Chinese or the Reserve Bank of Australia can just throw a switch and individuals and businesses just eagerly follow the determined path like brainless automatons.

To be honest, we’re not sure why the Chinese government have been placed on this pedestal. We can only think that the mainstream believes because China operates a fully coercive economy, that it can order people about at its whim and therefore economic success is assured.

The reality is far from that.

No economy can be centrally planned continuously without it leading to an eventual total collapse. That the Chinese economy has managed to go on for so long is what’s really amazing.

But get something straight. I’m sure you’ve seen the impressive photos of the Shanghai skyline and the vibrant and bustling downtown areas. But just because yuppies in Shanghai are buying Rolex’s and Louis Vuitton bags doesn’t signify wealth any more than Australians buying a 150 inch plasma television or a seven-bedroom house signifies wealth.

Wealth and spending aren’t the same thing. You can have wealth without spending, spending without wealth and spending with wealth. Oh, and no wealth and no spending of course.

But to simply come to the conclusion that because some Chinese are spending on fancy watches and fancy cars that those individuals or the whole economy is wealthy is misleading to say the least.

The important thing to remember is that the Chinese economy has taken off, largely thanks to being able to provide western businesses with cheap labour and cheap production. But it has done so coercively.

For every fancy watch buying person in Shanghai, there’s thousands of others who haven’t curried favour with the government and are therefore left to suffer the consequences of a repressive society. A government created oppressive society.

And like any other coercive and violent government it has rewarded those it favours and hurt or destroyed those it dislikes.

But that doesn’t mean Western governments are no less discriminatory, just because Western governments have adopted minimum wage legislation. All that’s done is to push employment offshore into the lap of coercive governments. Where they own the means of production and force individuals to accept labour terms or… well, you get the picture.

Those left in the West unable to find work because they’ve been priced out of the market may not be forced to work in oppressive conditions, instead they become part of a permanent underclass relying on favours from their own coercive government.

A government that can turn the welfare tap on and off as it sees fit.

Without minimum wage legislation in Western economies, there would be less demand for cheaper overseas labour and less ability for socialist governments to control those individuals.

Besides, Western governments are no less guilty of giving favours to certain people and industries while simultaneously penalising those it considers to be less desirable.

So while Pascoe and the other mainstream cronies talk about the heroic Chinese government and its ability to flick a switch to point the economy in the right direction, they should remember that the switch flicking is not the result of free markets and free will.

It’s the result of coercion and violence.

I’ll make the point again, there’s much, much more to fear from putting more power into the hands of governments than there is from putting power into the hands of individuals. Yet people in the West have somehow become dependent and reliant and over-trusting of government authority.

The result is less freedom – as Shae will explain in Money Weekend tomorrow.

But to sum up, the idea that Australia can ride on the coattails of a booming Chinese economy forever is mistaken. Sure, take advantage of it while you can from an investment perspective – as we have in Australian Small-Cap Investigator and Alex has in Diggers & Drillers – but if you think it will last forever as the mainstream commentators seem to believe then I’m afraid you’re going to be sorely disappointed.

Cheers,
Kris.

At other times we’ve argued that housing is not a productive item, that it’s simply a very expensive consumer item.

Sure, it may be used multiple times but it is still a consumer item. It’s just that it’s ‘consumed’ over a very long time frame. The fact is, a house doesn’t produce anything, all it does is provide a dwelling and shelter.

Proof of that is in the size of houses. As we’ve pointed out before, a 50 square house that provides a dwelling for one person isn’t more productive than a 15 square house that provides a dwelling for one person.

In fact, it’s less productive as it has drawn resources away from other areas of the economy.

But somehow, in the weird and whacky world of the Lifestyle channel, and the equally whacky world of what can only be called ‘Lifestyle Channel’ Economists, housing has taken on the guise of a productive good.

It has morphed from a consumer item into an item that is now seen as the lifeblood of an economy. Housing has been changed from being considered as a dwelling or as shelter, to becoming the fountain of wealth.

If you believe the ‘Lifestyle Channel’ economists, housing is the ultimate barometer of the health of any developed nation.

But what we ask is, how can this be true?

The fact is it can’t be true and it isn’t true. Let me explain in a way that should dispel the myth of productive housing once and for all.

Let’s imagine a village of 10 people (a butcher, a baker, a shoemaker, a tailor, a barber, a builder, a doctor, a farmer, a cook, and a carpenter). Each of whom owns their own home. Each home is worth the same – $100.

All of these people earn an income from making and/or selling consumable items or from providing a service to other people.

Now we’ve set the scene, consider this. The carpenter offers to buy the shoemaker’s house for $110.

The shoemaker has just made a $10 gain on his house. How easy was that? What’s to stop him from making more money from real estate? In fact, he finds out the carpenter is in the market to buy more houses and is prepared to pay up to $120 for each house.

The shoemaker spots the opportunity to make a quick buck. Knowing this, he offers to buy the butcher’s house for $105, which the butcher accepts. The shoemaker then offers to sell the house to the carpenter for $120.

The shoemaker is ecstatic, how easy is this? Cobblers to the cobbling, the shoemaker can make easy money simply buying a house from one person and selling it to someone else.

And it doesn’t stop there, on he goes to the tailor and offers to pay him $105 for his house. Then quick as a flash he’s off round to the carpenter’s to collect the $120 from selling the house to him.

That’s another $15 in profits, simply from buying and selling houses. In fact, the shoemaker is so happy with his new venture that he decides to completely pack in the shoemaking game and take up property investing instead.

Anyway, we could carry on with this example forever. But let’s finish it there. We’ll finish it on a happy note. Everyone seems happy, there is a boom in property prices, and no one has been harmed.

But here’s the point. Take a look at the scenario above again. It’s a very simplified version of what happens in any property market. If housing is as productive as we are led to believe, exactly where in the example has anything of any value been added to the economy?

To be honest, we can’t see it. That’s because there’s no productivity from buying and selling houses. There’s no more productivity in buying and selling houses than there is buying and selling shares.

Look, I’m not saying that everything that happens in an economy must be productive. It’d be a pretty boring life if that was the single driver behind every action. But what I am saying is that if something isn’t productive it’s pointless – and potentially dangerous – to pretend it is.

The buying and selling of things doesn’t necessarily create productivity. Buying and selling shifts capital and goods. It doesn’t automatically produce anything.

Making a pair of shoes is productive, or slaughtering animals for meat is productive. The shoemaker selling his house to the carpenter is not productive. It doesn’t add anything to the economy that wasn’t already there.

Sure, at this stage the buyer and seller of the property are both satisfied. The seller is happy with the price he’s received, and the buyer is happy with the price he’s paid.

However, as our example shows, the buying and selling of houses has actually had a negative impact on the economy because the shoemaker has packed in shoemaking. The town will now have to import shoes from another town – which isn’t necessarily bad, but what can our town export in return? Not houses.

The shoemaker is now gambling on someone being prepared to pay a higher price for houses in the town. If they stop doing that, what happens?

So, not only is housing unproductive but it simultaneously takes resources away from elsewhere in the economy. Rather than the shoemaker investing in leather and shoehorns, he’s using all his capital and resources on buying houses and selling them to someone else.

That harms the leather manufacturer and also the shoe buyer as there is no one in the town to take the leather and turn it into shoes.

The lure of making money from houses has taken money and resources away from the manufacturing industry and other industries and instead invested it in housing.

And that’s exactly what Australia’s banks have caught on to. You can see it in their lending numbers. They’ve tapped into the idea that property prices always go up and are therefore helping to pump up the property bubble.

They’ve seen the soaring house prices over the last thirty years and are now determined to keep the market going. As far as they’re concerned there’s less risk in housing because they know what the attitudes of consumers are towards it.

But make no mistake, contrary to popular belief, that doesn’t mean a bubble won’t pop.

As the example above shows, the ability to make money from the buying and selling of houses is all based on the willingness of someone else paying a higher price – the Great Fool Theory we believe it’s called. Without that the profits disappear.

Look, don’t take my word for it, think about it for yourself. Think over the numbers. How does the buying and selling of a house contribute anything to an economy? I’ll have something else to say on that in a moment.

But let’s leave our fictional town and return to reality. Last Thursday’s Australian Financial Review and The Weekend Australian Financial Review laid bare the desperate story behind property investing, and the confirmation of what we’ve said all along, that property investors invest solely in the belief that house prices always rise.

We were scorned by some investors who claimed that wasn’t true, that income generation was a big part of it. Well, let’s take a look at some of the numbers…

According to last Thursday’s paper, there are 1,705,683 landlords in Australia. That’s roughly 7% of the entire population. But here’s the amazing thing, of those 1.7 million landlords 69.4% of them are making a loss based on the income received versus outgoing expenses.

That doesn’t surprise us. We’ve pointed out before that rental properties are a money pit. More money goes in than comes out. And with average rental yields in Melbourne under 4%, it doesn’t take a Doctorate from the Université Paris Sorbonne to work out that your costs will exceed your income.

The Weekend AFR, lays out the details. Based on the numbers, $22.9 billion of rent is received each year by landlords, yet total outgoings come in at $31.2 billion, creating a loss of $8.3 billion.

Call us mad if you will, but we’re yet to find anywhere in our investing textbooks where it says making a loss from your investments is a good idea.

Now, we’re assuming that property investors aren’t dumb. They must be taking the hit on the income for a reason. And the simple reason is that they believe the price of housing will continue to rise, and that the rise in the price of the property will more than offset the loss from the income.

Therefore reader, it’s unarguable that the primary reason that property investors invest in property is for capital gains rather than income. There’s no denying it. In which case, prices have to keep increasing in order for the investors to make any money.

And there’s the problem. As we know from every other asset class in Australia and around the world, it’s just not possible for the price of an asset to continually rise without a major correction.

Take it from me, whatever excuses the property spruikers come up with, the Australian property market isn’t immune from this outcome.

As you can see from our make-believe economy, resources have been skewed towards one area, the buying and selling of houses. All other industries are potentially suffering as no one wants to invest in those industries.

As we say, it’s exactly what the Australian banks are doing, investing in houses and mortgages at the expense of other productive sectors of the economy.

But I wanted to mention one other thing. Referring back to the risk/reward attitude, housing is a perfect example of the cart being put before the horse. If you’re like me, and you see housing as a consumer item then it makes sense you only buy the consumer item as a reward for your productivity.

It’s should be the same with housing.

However, thanks to leverage and the ingrained impression that house prices always go up, housing has changed from being a ‘reward’ for productivity to being treated as the source of productivity – it is of course, nothing of the sort.

It’s not helped by all the ridiculous stories about buying a home being the “Australian dream”, and “rent money is dead money”, etc…

But this attitude explains why housing is now seen as a leading indicator. How many times over the past year or so have you heard economists looking for positive signs from housing? Almost every month from what we can recall.

There’s a simple reason for that. And it’s exactly what happens with every asset bubble. Buyers overestimate future price rises and scramble to get in early. You saw it with the dot-com boom, and you’re seeing it with the housing boom – “buy now before it’s too late.”

The overestimation leads to anticipatory buying. Only, not everyone can afford to pay up in advance to get onboard so they have to borrow in order to get a piece of the action. This pushes prices up further and necessitates further borrowing.

Again, does that sound familiar?

In reality and absent price and market manipulation, housing should lag the economy not lead it. Housing is the reward paid for by the productivity of the economy, it’s not the driver of the economy itself.

The idea that the housing market can lead an economy out of recession, or to grow the economy is false. Housing is a consumable item. When it is bought or built it is consumed at that point. It provides no further benefit to the economy.

To claim it does is false.

If anything, a positive housing market indicates one of two things. Either people are rewarding themselves for their past productivity, or they are anticipating future productivity and price rises by buying houses now.

The trouble is, if the economy is skewed towards the buying and selling of houses, guess what? There won’t be the necessary future productivity to pay off today’s anticipatory buying of houses.

With all the credit and investment going into the housing market today, you have to wonder about the future state of the lopsided Australian economy. The simple fact is, buying houses today in the hope that others will pay a higher price for them in the future, isn’t the recipe for a sustainable and healthy economy.

Rather, it’s the recipe for a boom that is set to bust.

Cheers,
Kris.

“Consider a man and a woman each with a productivity of $10 per hour, and suppose, because of discrimination or whatever, that the man is paid $10 per hour and the woman is paid $8 per hour. It is as if the woman had a little sign on her forehead saying, ‘Hire me and earn an extra $2 an hour.’ This makes her a desirable employee even for a sexist boss. But when an equal-pay law stipulates that she must be paid the same as the man, the employer can indulge his discriminatory tendencies and not hire her at all, at no cost to himself.”

This example is applied to a comparison of male labour versus female labour. As was our article yesterday.

But in reality, it’s not even a Male v Female thing.

Because just take the same example and switch in ’skilled worker’ in place of ‘man’ and ‘unskilled worker’ in place of ‘woman’ – not that we’re saying all female employees are unskilled of course! – and the same principle applies.

Or interchange ‘experienced’ in place of ‘man’ and ‘inexperienced’ in place of ‘woman.’ Or any other example where wages are artificially manipulated by government decree.

You can use the same comparison to relate it to the minimum wage. In effect, pay equalisation is just another form of creating a minimum wage. It makes it illegal for an employer to employ someone for a lower wage than someone else.

And like the minimum wage, one consequence is that it creates unemployment.

Anyway, we just thought we’d drop that in. You can still leave comments on this article by going to the Money Morning website.

Back to today. We notice that even the mainstream commentary over at Business Spectator is starting to get a bit antsy with all this ‘economic recovery’ thing.

Two articles yesterday, one from Karen Maley and the other from Robert Gottliebsen clearly warn – as we have – that things aren’t as rosy as they seem.

Right now we’d say, hats off to these two mainstream commentators for saying it. However it’s too late, much too late for it to have any impact.

As the saying goes, the die is cast. The bubble has expanded. It’s like when you blow up a balloon. No-one likes having the thing pop right in their face, but there’s still the temptation to try and make it a little bigger, and that’s what’s happening with the Australian economy now.

The only problem is that in mainstream economics they either don’t believe that bubbles exist, or they believe they are caused by something else, or that even if bubbles do exist then they think they’re smart enough to manage them.

I mean, they’ll look at the last eighteen months and conclude they know the recipe for curing bubbles. So that even if another one is brewing, don’t worry about it, they’ve ‘fixed’ it before, they can do it again.

Look at all the economic data that’s been paraded before your eyes. As you know, we’ve been critical of the way the ANZ Job ad numbers have been reported.

Well, finally you could say the February job ads do look more impressive than some of the previous numbers. In February, ANZ Bank reports a total of 158,611 jobs advertised compared with just 109,177 in January.

You’d expect a pick-up in February, but still, it’s a 45% increase over the previous month. Although, compared to the same time last year, when the economy was on the verge of recession, job ads are still down by 3,723.

And remember, we’re using the original numbers, not the seasonally adjusted or trend numbers.

And then look at the other stats: “Australian economy continues to grow: ABS.”

According to the Australian Bureau of Statistics (ABS):

“Latest ABS figures show that GDP, in seasonally adjusted volume terms, grew 0.9% in the December quarter 2009, after growing 0.3% in the September quarter.”

The Australian economy continues to grow, grow, grow. That provides even more evidence to the mainstream that Australia has figured out how to perfectly direct and manipulate an economy to avoid collapse.

Although, the next paragraph from the ABS statement gave the real game away:

“Growth in the expenditure measure of GDP was driven by a 3.5% increase in private investment , a 10.2% increase in public investment and a 0.7% increase in household expenditure. Offsetting these increases was a fall in net exports. The fall in net exports was due to imports (up 7.7%) growing faster than exports (up 1.7%).”

Actually, we’ll rephrase that. We’re not sure it’s really given the game away as everyone knows public spending – or public ‘investment’ as the public sector drones prefer to call it – is going mental: money spent to ‘create’ jobs, then more money spent to ’save’ jobs, then another bunch of cash to compensate for jobs lost.

The madness never ends.

But that brings us back to the point we made above. While it’s good that some in the mainstream press are starting to whiff a bit of trouble, it’s all rather too late.

The time for warning about the nonsense idea that you can borrow to get yourself out of debt was a subject for twelve months or two years ago.

Yet at the time the mainstream press was too excited about making sure their elected representatives ‘did something.’ At the depths of the market meltdown, it wasn’t the time to ‘play politics’ or get bogged down in ‘economic theory.’ It was the time to ’save jobs’ and help those families who seemed to be constantly ’sat around the kitchen table.’

But the biggest problem right now is the sense of false security – or false sense of security, whichever you prefer.

We’ve noticed quite a bit of excitement about all the increased profits Australia’s robust and excellently run companies have made in 2009. Today’s Australian Financial Review (AFR) trumpets, “Earnings return, are shares next”, “Property turns the corner” and “How banks came out in front.”

According to the AFR, 80% of Australia’s companies reported profits in-line with expectations. It goes on, “Profits for industrial companies rose 3.8 per cent from a year earlier.”

But the AFR does point out, “Cost-cutting was an important driver of profits in the half. Some big companies reported falling revenue but were able to increase profits by reducing their spending on wages, property and technology.”

That’s something we noticed last week. This is what we wrote to Australian Wealth Gameplan subscribers last Friday:

“Last week we conducted a simple exercise. We looked at the company results for that week as reported in the Australian Financial Review (AFR). It printed the earnings results for 131 companies – large and small. As you’ll have read in the mainstream press, a lot of companies produced bumper profit results, such as Flight Centre [ASX: FLT]. What the mainstream press didn’t report was the less than exciting news on the revenue figures. Of the 131 companies detailed, just over half (66 of them) reported lower sales revenues than the previous corresponding half-year or full-year.”

It wasn’t just ’some big companies’ that reported falling revenue, it was half of those companies that reported during that one-week period.

What does that tell you? Well, as the AFR reports, many companies have slashed costs in order to beef up the bottom line. So the first question is whether they can keep doing that?

The other question is whether they can increase sales by as much as the market is now pricing in? Our guess is that will be much harder to achieve. And much of that is down to the sense of false security and the misplaced belief that the bright economists and central bankers have engineered Australia’s escape from the global meltdown.

The economy is growing, companies are hiring again, miners are mining stuff, credit is booming, and everything appears to be ticking along as though nothing has happened.

And as for that old subprime stuff, well surely that’s all fixed up, and no-one will make that mistake again. Trouble is, it’s often forgotten that subprime wasn’t the cause of the problem, it was the effect. The cause of the problem was excess credit and government interference.

Excessive credit simply manifested itself as subprime loans. Subprime borrowers were the means by which politicians could parade themselves as helping the poor, and by which bankers and young gun traders could earn themselves a bucket load of cash.

Therefore, solving the subprime problem will do no more than shift the excesses of credit elsewhere.

We’ve seen that before. Look at Enron. The trading guys at Enron weren’t specialists in electricity trading. They were young kid traders sat in front of six computer screens who just had to click ‘buy’ or ’sell’.

As soon as Enron collapsed they went off looking for other things to ‘buy’ and ’sell’. Many of them probably ended up trading credit default swaps and other such derivatives. Financial instruments that they were just as ignorant of as the electricity market.

Solving the global meltdown by blaming it all on subprime and removing that risk is like taking the keys from a youngster who’s been driving a sports car too fast, and instead handing him the keys to a 3000cc motorbike.

There will still be carnage it’s just that it will look different.

As much as the mainstream commentators may claim that lessons have been learned and that Australia didn’t have a subprime culture, it all misses the point. The old habits of excessive borrowing are still unchanged, and in fact are likely to get worse.

So the message is, if you’re looking for the next big economic meltdown to come from the US subprime housing market, odds are you’re looking in the wrong place. So where will it come from?

We’ll look at that another day. But our guess remains that you need to look north. Because China is brewing up quite nicely right now.

Cheers.
Kris.

Greece on the verge of default – [whistle].

China trying to engineer a soft economic landing – [whistle].

US Federal Reserve increasing interest rates – [whistle].

Australian property bubble bubbling – [whistle].

Millions of your taxpayer dollars wasted on home insulation stimulus – [whistle].

But funnily enough, it’s the mainstream response to the last one that baffles us the most.

After four insulation installers have been killed – and doubtless tens or hundreds of others have been injured – and at least 87 fires have resulted from the installations, Environment Minister Peter Garrett has abandoned the scheme.

Of course, already, billions of taxpayer dollars have been spent on this monumental waste of money.

But here’s the thing we don’t get. At the time all these whacky schemes were announced, the mainstream told you that it was necessary to spend money because spending money was good for the economy.

You remember that don’t you?

Well, if spending money is good for the economy, then surely the disastrous outcome of the housing insulation scheme is an unexpected boost for the economy.

Because if simply spending money is good, then surely spending more money is even better.

The government now has to fork out hundreds of millions of dollars more to arrange for inspectors to make sure the work on at least 48,000 properties has been done properly.

Doubtless it hasn’t – hence the four deaths – so those inspectors will need to arrange for the work to be fixed up. That will cost more money.

Then we’re sure that just to be on the safe side, the government will send inspectors out again to make sure the fix-ups are safe – there’s even more taxpayer dollars spent.

According to the lame thinking of the mainstream that should all equal a boost to the economy, as more taxpayers dollars are spent.

Not surprisingly, the mainstream press haven’t mentioned any of this. Either because they’re too thick to work it out, or because they realise how illogical the idea of stimulus spending is, but they don’t want to admit it. After all, spending other people’s money is fun!

Aside from the wasteful spending, the 6,000 job losses suffered in the home insulation sector is another perfect example of how the misallocation of resources can permanently damage the economy.

As Paul Howes, national secretary of the Australian Workers Union points out, “77,000 jobs went in manufacturing, and the knock-on of that will be felt for years and decades ahead as factories were shut that will never re-open.”

Of course, what Mr. Howes fails to point out is that it’s the unions that help to ensure there are job losses. Their push for higher minimum wages guarantees that Australian businesses will either go bust or have to ship the work offshore.

And he doesn’t mention the millions of other manufacturing jobs that have vanished over the years thanks to the trade union movement.

But here’s the bigger problem. All the excitement about the stimulus programmes ‘creating’ new jobs masks the fact that those jobs which didn’t benefit from direct stimulus spending – such as manufacturing – lost jobs.

Not only that, but once a factory has closed down, as Mr. Howes correctly points out, they “will never re-open.”

If it was uneconomical to maintain a manufacturing business, it will be ten-times more uneconomical to try and re-start one from scratch.

Yet, all those jobs that were ‘created’ by the government to install insulation, what’s happened to them? Oh, that’s right, the programme has been cancelled. So the billions of dollars spent on ‘creating’ jobs have not only destroyed 77,000 manufacturing jobs, but it’s not even benefited the industries that were supposed to gain.

As we wrote a year ago on 4th February 2009:

“The government economic stimulus package will have no positive impact on the broader economy whatsoever. None.”

Yet again we’ve been proved right, and the mainstream press proved wrong.

At the time we also quoted some of the shrill headlines from the mainstream press:

“Rudd throws $42bn at economy” – Australian Financial Review

“Schoolyard blitz to avoid recession” – AFR

“We’re all in this together: except Turnbull” – AFR

“Rudd and the Reserve free up billions to beat recession” – The Age

“Rudd splashes the cash” – The Age

Every last one of them cheering for the government to spend your money to save the economy. Not a single journo was capable of expending one brain cell to figure out what the terrible consequences for the Australian economy would be.

An economy that believes the best solution to national wealth is to build, and then buy and sell houses between each other.

But there’s the consequence for you. One industry gets a bunch of stolen taxpayer money to keep prices sky-high and the credit bubble growing. The other industry gets swamped and ravaged by trade unions and minimum wage legislation which forces it to close down forever.

The upshot is the Australian economy hasn’t benefited one jot from the billions spent in the stimulus programme. All it’s done is allocated resources to prevent a bubble from popping – for now – and ensure thousands of people have received training for an industry that can’t possibly sustain them without the presence of taxpayer money.

Because if it could, then they wouldn’t need the stimulus to begin with – it’s not rocket science.

Despite the complete failure of stimulus spending we’ve little doubt the spin doctors will continue to call for more taxpayer dollars to be thrown at the economy – especially the housing sector.

And as long as that happens then we’ll continue to see headlines such as this:

“Housing debt in overdrive” – News Ltd

According to journalist Anthony Keane, “Total housing debt is set to reach $1 trillion within a year. The figure itself is not a worry, but there is concern the pace of borrowing is exceeding household income growth.”

“Not a worry”! Is he mad?

Nearly $1 trillion isn’t a worry? Oh Lordy. We’ve heard it all now.

But anyway, we’ll end today on that note. As we’ll get stuck into housing again tomorrow.

Cheers.
Kris.

Clive Palmer’s $70 billion deal with supply coal for 20 years to China Power International Development is a massive boost for the Australian resources sector.

If it ever comes to fruition.

Look, it wouldn’t be the first time a multi-billionaire deal was announced with a fanfare of trumpets only to quietly fade away as the proposed deal never gets off the ground.

However, the thing in its favour is that it’s a simple buy and sell arrangement. We’re not talking about complicated foreign ownership deals that need approval from shareholders and the Foreign Investment Review Board (FIRB).

But as we’re writing in the February issue of Australian Wealth Gameplan today:

“Based on the news over the weekend with Clive Palmer’s $70 billion deal to sell coal to the Chinese, it looks as though the Chinese economy remains Australia’s get-out-of-jail free card – for now.”

The Australian economy is first and foremost a resources economy. I’m not telling you anything you don’t know, but what I’m trying to say is that all these pretensions to Australia being a centre for financial markets or a breeding ground for new technology is just wishful thinking.

The beginning, middle and end to the Australian economy is resources.

And it’s that which is keeping the economy afloat, most certainly not the “robust” Australian financial system.

But aside from that, this deal by Clive Palmer shows how business enterprise and markets work when government interference is either non-existent or at a minimum.

Again for Australian Wealth Gameplan this month we’ve written about the debacle around the ‘Green Loans’ scheme. This was a half-baked idea by the federal government to fund 360,000 assessments on how homes could be made more ‘green.’

The upshot is there has been an overload of assessors paying up to $2,000 to become accredited to carry out these assessments.

While that doesn’t sound bad, the point is that they are now over 4,000 assessors to do assessments on just 360,000 homes – or, 90 homes each. At $200 a pop that’s a total income of just $18,000.

Furthermore, the scheme had envisaged that up to 70,000 households would then apply for a $10,000 interest free Green Loan to carry out the recommendations in the assessment.

So far, only 1,000 people have bothered to do so, even though more than 200,000 assessment have already been carried out. The scheme has already cost taxpayers $72 million. All of it a monumental waste.

But it’s a perfect example of how the public sector ‘creates’ 4,000 unproductive and useless jobs all paid for by the taxpayer, whereas Clive Palmer, in search of a profit is investing millions and billions of dollars of private money to potentially create 6,000 jobs in the near term.

The coercive sector (public sector) sucks resources away from the private sector and costs the taxpayer money. In contrast the private sector takes risks and creates genuine jobs.

But I thought this example of the private sector doing good and the coercive sector doing evil was a good follow on to last Friday’s Money Morning where we looked at how government has a disastrous impact on an economy.

We used the example of the government making it illegal for a young lad to work one-and-a-half hours after school at his local hardware store.

It wasn’t that there was an exploitative evil capitalist rubbing his hands and cackling, having ruthlessly cajoled the youngster into working just 90 minutes a day.

No, the fact was that the young lad could only get there by 4pm after school each day and that the store closed at 5.30pm. Hence a 90-minute shift.

But we were quite surprised to read a number of emails into the Money Morning mailbag that followed the same line as this email from one reader:

“I’m sorry, I totally disagree with your opinion of the poor student who only wants to work an hour or two a day. Forget about him, the reason for a minimum amount of hours a worker gets paid is so the worker doesn’t spend more money going to work than what they will get paid. You might think that the worker has the choice on whether they choose to work or not; but if there wasn’t a minimum amount of hours clause, people would be worse off.”

“Forget about him” – It may have been a throwaway line from the reader but it’s typical of the attitude of many that the sacrifice of a few individuals is fine because it’s in the greater public good.

Of course that’s nonsense. The beauty of capitalism and individualism is that the actions of individuals who act for their own benefit have a knock-on effect to the rest of society.

Think about it, a person doesn’t necessarily work in a supermarket because they believe in helping their fellow human to buy groceries. They work in the supermarket so they can get paid. But that ’selfish’ action enables the supermarket to open its doors and therefore admit shoppers who can buy groceries.

If those ’selfish’ individuals did not act in such a way, then people would have to farm, forage and hunt for their food.

But apart from that, there’s a common misconception that working people are so dumb that they’ll work even though it costs them more to work than the wages they earn.

We never cease to be amazed at the patronising tone from those that have a so-called ’social conscience,’ that they believe the working class are idiots who need to be protected by the nanny state.

I’m sorry but that just doesn’t wash.

The fact is, if it is uneconomical for someone to work then they won’t work. The number of people on government benefits confirms that’s true. If people really were dumb then surely an evil capitalist would be able to convince people to forgo government benefits and instead work for them for less.

So this idea that someone will continue working when it costs them more in travel costs than they earn in wages just isn’t true. Sure, that could happen for a short time until they work out it just isn’t worth it, but soon enough they’ll figure it out and they’ll leave the job.

In fact your editor can remember a stint we had as a pizza delivery driver in our young school days. The pizza shop paid us one pound per delivery. At the time we were happy to accept that.

However, it didn’t take us more than a couple of weeks to figure out that the fuel costs of our petrol guzzling 1977 Mini 750 was more than the money we made as a pizza delivery driver. So we gave up the gig and got a job in a pub instead!

And that’s exactly where the idea of evil exploitative employers just doesn’t make sense.

Because we can also assume the employer isn’t dumb either. If new employees are constantly leaving because it costs them too much to get to work, the employer is going to have to fix things or else eventually go out of business.

Considering even the most basic of jobs can take weeks for an employee to get the full grasp of it and reach their most productive point, it’s important that the employer understand the costs faced by employees of getting to work.

The employer surely doesn’t really want to have to constantly train new staff.

I mean, if it really was to the advantage of an employer to only give people 1 hour shifts per day then why don’t all employers offer this to all staff as the starting point in negotiations? If this is the most profitable arrangement for an employer then offering 40 hour weeks must be the most unprofitable.

If that was the case surely the power of these evil capitalists would have ensured everyone worked minimal hours. And you can’t say “well, the government has prevented that,” because it hasn’t. The minimum shift is three hours so why don’t all employers force employees to only work for the minimum shift?

The obvious answer is that in most cases it isn’t advantageous for an employer to have eight different staff members each working a one hour shift when one staff member can do more work during a single eight hour shift.

The second reason is that it’s not agreeable to most employees to work short shifts because of the fixed costs of travelling to and from work.

In order for the employer to attract and keep workers they know they have to offer longer shifts.

Of course, there are always exceptions to that. Workers that live close to the place of work are more likely to accept shorter shifts as their cost of travel – maybe they can walk or ride a bike to work – is less than those who use public transport or drive.

But if an employer insists on just offering short shifts then he or she is naturally limiting the pool of potential workers to just those in the immediate area. If that strategy works and the employer can fill the vacancies with local workers who are happy to work short shifts who has lost out?

Have these workers been exploited to their detriment? Are they being enslaved by the employer?

From what we can see, the only ones to miss out are those that live further away and who would prefer longer hours. But as with anything, ‘them’s the breaks.’

On the reverse side, if the employer only offers longer shifts, or is forced to by the government, then those that live closer and who only want short shifts will lose out.

And because they may not be able to travel further for work because they can’t drive or don’t have access to public transport or need to pick the kids up from school, then ultimately it is those workers that suffer most from minimum hour and minimum wage legislation.

It’s a fact and not a theory that minimum wage and its sibling, minimum shift legislation not only destroys jobs, but it will always destroy the employment opportunities of those that the ’socially conscious’ claim to represent.

Cheers.
Kris.