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

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

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

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

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

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

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

Source: CMC Markets Stockbroking

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

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

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

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

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

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

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

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

And that could create a supply problem.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The numbers are similar for the other banks.

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

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

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

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

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

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

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

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

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

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

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

Regards,

Kris Sayce
for Money Morning Australia

How much gold is too much gold if you’re a fixed-income investor…?

GOLD DOESN’T pay any income, of course. Which is why retirees and pensioners should hate it.

But since gold cannot go bust – and because its tight supply typically finds strong demand when cash loses value to inflation in the cost-of-living – gold in fact makes the perfect insurance for fixed-income investments like corporate or government bonds. At least, that’s what €39 million gold investor Stichting Pensioenfonds Vereenigde Glasfabrieken says.

Crazy name, crazy Dutch fund managers! SPVG holds a massive 13% of its assets in gold, running a total €300m ($400m) to try and ensure a pension for workers past and present at the Schiedam, Netherlands glass manufacturer.

That compares with the typical 5% or 10% allocation which even the friendliest gold-friendly advisors might suggest. And seeing how the average European pension fund holds 2.7% in ALL commodities, never mind just gold, Holland’s central bank, De Nederlandsche Bank (DNB), thinks SPVG is nuts. And so – as its regulator – it’s given the fund two months to slash its gold position to below 3% of assets.

Good call? Not if you’re holding a full 85% of your savings in fixed-income bonds, all denominated in the Euro, and primarily issued by the Dutch or German governments, says SPVG in a statement. Speaking to Investment & Pensions Europe, board member Rob Daamen picks up the story…

“[The gold purchase] was a way to secure the pension fund’s assets value. If we win our appeal against the instruction of the DNB [to sell] we can claim compensation for any loss we might incur.”

Did you get that? A pension fund obliged by law to defend its members’ savings – and doing a very good job of it by all accounts – bought gold to secure its asset value. It’s seeking a legal decision that means it can then sue the central bank if selling down those gold holdings means the fund loses value overall.

“The decision to raise the gold allocation [doubling it in October 2009, while selling off the fund's 17% position in equities] was made in the expectation that the stock market’s rise would not be sustainable and a considerable downward correction was likely to follow.” Which has paid off handsomely regardless of the broader stock-market’s continued gains, especially in terms of the faltering Euro which denominates pretty much all of SPVG’s other investments.

Zero-yielding gold might look worthless to retirees and pension savers, in short. But if you’re entirely reliant on fixed-income debt – as the SPVG has become, matching its liabilities to its assets to make sure it can pay its members their pensions – then it’s all-the-more important to insure your savings against inflation, currency loss and default.

At least, that ‘s what a glass-company’s pension fund in Holland believes, holding pretty much only AAA-rated government debt and stateless, debt-free gold bullion as a warranty on its members savings.

Regards,

Adrian Ash

for Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com

“It finds that the IMF provided few clear warnings about the risks and vulnerabilities associated with the impending crisis before its outbreak.  The banner message was one of continued optimism after more than a decade of benign economic conditions and low macroeconomic volatility.  The IMF, in its bilateral surveillance of the United States and the United Kingdom, largely endorsed policies and financial practices that were seen as fostering rapid innovation and growth.  The belief that financial markets were fundamentally sound and that large financial institutions could weather any likely problem lessened the sense of urgency to address risks or to worry about possible severe adverse outcomes.  Surveillance also paid insufficient attention to risks of contagion or spillovers from a crisis in advanced economies.”

Those words come from the Independent Evaluation Office of the International Monetary Fund (IMF).

It’s contained in a report released a month ago titled, “IMF Performance in the Run-Up to the Financial and Economic Crisis: IMF Surveillance in 2004-07”.

The report also states:

“The IMF’s ability to correctly identify the mounting risks was hindered by a high degree of groupthink… a general mindset that a major financial crisis in large advanced economies was unlikely… Weak internal governance, lack of incentives to work across units and raise contrarian views… also played an important role, while political constraints may have also had some impact.”

Well that’s hardly surprising.  We could have told them that without writing a fifty-nine page report.

But despite the IMF’s failure to foresee the economic problems, in April 2009 the G20 agreed to give it even more money… to not see the next problem.

As the British Broadcasting Corporation (BBC) reported at the time:

“To help countries with troubled economies, the resources available to the International Monetary Fund (IMF) will be tripled to $750bn.”

So there’s the punishment for failing to alert the markets to the collapse of the global economy.  Have another $750 billion.  And keep up the good work… by not saying anything next time either.

Let’s be honest.  That’s what the IMF cash git is.  A payoff… hush money.

The last thing politicians and central bankers want is for an organisation they fund with taxpayers’ money, to point out flaws in the economy and banking system.

Because if it did, it would make it harder to justify their inflationary policies.

And it would also reveal the real solution.  The solution they don’t want anyone to know about – free banking.  Because with a free banking system, there’s no government interference, there are no central banks, and there’s no backstop or bailout for private retail banks.

Bankers would shudder at the thought.

Now, by free banking I don’t mean free bank accounts for everyone.  And I most certainly don’t mean a government operated “People’s Bank”.

That type of policy can only make the problem worse than it is.

No.  What’s needed is a competitive banking system.

A system that’s free from political and central bank manipulation.

A banking system that does little more than act as a warehouse for your savings.

One that provides financing to businesses and individuals without the need to fraudulently create money from thin air.

The only way this could happen is with less government intervention, not more.  So the chances of it happening without a major economic revolution are pretty slim.

The negative impact of government involvement in banking and the money supply is highlighted in Murray N. Rothbard’s excellent “A History of Money and Banking in the United States: The Colonial Era to World War II”.

You can buy the hardback copy on Amazon (as your editor did), or if you’ve got more sense you can click here and download it to an e-reader for nothing!

If only your editor had more sense!  But the hardback version is nice.

Anyhoo, we’ve only just started to tuck into it.  But already we’ve read a few treats that highlight the problems caused by government manipulation of the money supply.

Take this for starters.  It’s a perfect example of why even a government mandated national currency isn’t required.  As long as you’re using a currency that has real value:

“It is important to realize that gold and silver are international commodities, and that therefore, when not prohibited by government decree, foreign coins are perfectly capable of serving as standard moneys.  There is no need to have a national government monopolize the coinage, and indeed foreign gold and silver coins constituted much of the coinage in the United States until Congress outlawed the use of foreign coins in 1857.”

Article 1, Section 8 of the US Constitution even recognises foreign coins had an important part to play in the fledgling republic.  Although the framers of the Constitution undoubtedly made the mistake of giving the new Congress powers:

“To coin Money, regulate the Value thereof, and of foreign Coin, and fix the Standard of Weights and Measures.”

But even more important is the historical proof that politicians and bankers always meddle with the value of money.  And they’ll always think they can get away with it.

It’s proof that today’s politicians and central bankers are doing nothing different to the wigged and powdered gentlemen of two centuries ago.  Read the following and see if it rings any bells – apologies in advance for the long extract:

“Massachusetts was accustomed to launching plunder expeditions against the prosperous French colony of Quebec.  Generally the expeditions were successful, and would return to Boston, sell their booty, and pay off the soldiers with the proceeds.  This time, however, the expedition was beaten back decisively, and the soldiers returned to Boston in ill humor, grumbling for their pay.  Discontented soldiers are ripe for mutiny, so the Massachusetts government looked around in concern for a way to pay the soldiers.  It tried to borrow £3,000-£4,000 from Boston merchants, but evidently the Massachusetts credit rating was not the best.  Finally, Massachusetts decided in December 1690 to print £7,000 in paper notes and to use them to pay the soldiers.  Suspecting that the public would not accept irredeemable paper, the government made a twofold pledge when it issued the notes: that it would redeem them in gold or silver out of tax revenue in a few years and that absolutely no further paper notes would be issued… The issue limit disappeared in a few months, and all the bills continued unredeemed for nearly 40 years.  As early as February 1691, the Massachusetts government proclaimed that its issue had fallen ‘far short’ and so it proceeded to emit £40,000 of new money to repay all of its outstanding debt, again pledging falsely that this would be the absolute final note issue.”

There you have it.  Hopefully you’ll agree it was worth it.

The upshot is that prices soared and the paper money became almost worthless.

But, as is always the case with inflation, not everyone loses out.  Those left holding the worthless bits of paper did poorly.  But, as Rothbard notes:

“[S]ince the paper was issued to finance government expenditures and pay public debts, the government, not the public, benefited from the fiat issue.”

In other words, the government was paying its bills with paper money it was deliberately devaluing.  The government was clearing the slate with creditors, but doing so with devalued paper money.

Reading through the long quote above, you should be able to draw plenty of parallels to US Federal Reserve chairman Ben Bernanke and his money-printing programme.

The promise to redeem the paper notes is broadly the same as the Fed’s current bond buying programme.  Investors who buy bonds from the US government have the safety net of knowing the Fed is standing ready to buy $600 billion worth of bonds with freshly printed money.

The trouble is, between buying the bonds from the government and getting paper money back from the Fed – redeeming the bonds, the value of those invested dollars has diminished… thanks to the creation of new dollars.

Once governments and central bankers get into a hole of issuing more debt and more new money to pay off old debt liabilities, it’s hard to get out.

That’s why they don’t bother trying.  Instead they dig deeper, hoping if they push the problem out further into the future someone else will deal with the it.

But, as Rothbard says, the decline into an inflationary blackhole doesn’t have to take long.  In a different attempt at a fiat currency, the US Congress began issuing paper money:

“The issue of this fiat ‘Continental’ paper rapidly escalated over the next few years.  Congress issued $6 million in 1775, $19 million in 1776, $13 million in 1777, $64 million in 1778, and $125 million in 1779.”

He goes on:

“The result was, as could be expected, a rapid price inflation in terms of the paper notes… By the spring of 1781, the Continentals were virtually worthless, exchanging on the market at 168 paper dollars to one dollar in specie.  This collapse of the Continental currency gave rise to the phrase, ‘not worth a Continental.’”

So, at the beginning of the US Revolution, the money supply was just $12 million.  Six years later it was over $225 million – about 90% of it backed by nothing more than a government promise that the paper money would retain its value.

As usual, the government broke its promise.  You would have needed 168 paper Continental dollars to get one silver dollar in return.  Yet just five years before the exchange rate was one-for-one.

If you’d held on to silver dollars during that time you would have been fine.

That’s how inflationary monetary policies change the value of the dollar in your pocket.  And it’s been going on in Australia and elsewhere for at least the last forty years.

And sadly the devaluation continues today.  Perhaps at a much faster pace than before thanks to US and European money-printing.

But that’s not all, unfunded government liabilities, especially in the US – but here too – will ensure governments and central bankers need to increase the money supply by many times over the next twenty years.

Not that they’ll blatantly admit it.  They’ll do it under the disguise of supporting economic growth and financial stability.  In reality it’s all about pushing the problem out to the future while at the same time destroying your wealth.

And of course, lining the pockets of the politicians and bankers who get their hands on the newly printed money first.

But not only that, the destruction of personal wealth has the feedback effect of making individuals even more reliant on government support.  Support that no government can afford.

The moral of the story is that protection of your assets and wealth is just as important as accumulating new assets and wealth.

Because every day central bankers and governments – despite their cozy exterior, [Ed note: cue tears Julia and Tony] – are working against you to destroy your wealth while lining their own pockets…

You’ve been warned, so do something about it and protect your wealth.
Regards,

Kris Sayce
for Money Morning Australia

Soft gold prices without hard-money rates? Not for long, says the world’s 40-year unbacked money so far…

JUST HOW MUCH ABUSE can soft money take? Two-thousand-and-eleven sees a big, but so far little-noted ruby anniversary. Expect to hear lots more about it as August 15th draws near.

Because that day will mark 40 years since the United States’ government finally stopped redeeming its dollars for gold. That ended over 250 years of formal “gold backing” for the West’s dominant currencies. It also took the entire world off precious-metal money for the first time in 5,000 years of civilization.

Gold wasn’t being used as money in Aug. ’71, of course. Long banished to central-bank vaults, the ageless metal was represented instead by paper notes – the medium of exchange – in purses, wallets and tills. Nor did gold bullion bars back more than $1 in every four in circulation, gradually slipping from the 40% cover-ratio set during the Great Depression. And unbacked money had also been tried many times in the past as well. Persian kings, Mongol emperors, Scottish chancers in the French court, desperate men at the Reichstag…they all thought they’d found “the secret of the alchemists”, as Marco Polo called China’s paper-note chao in his Travels of the late 13th century – and they all found it disastrous.

But irredeemable money had never been applied worldwide before, and never without some element of “hard money” (meaning gold or silver-backed notes) running alongside. Since US citizens were pretty much barred from owning physical gold, however, removing the metal from inter-government settlement looked a small, inconsequential step to most, especially next to the wage and price controls Richard Nixon also announced in his “Sunday special”. (Tricky was apparently worried about upsetting voters by delaying the latest episode of Bonanza on TV, but he was more anxious still to break the news before markets opened on Monday 16th August.)

Indeed, refusing to redeem foreign governments’ Dollars for US gold bars should have played well to the crowd. Because Nixon was defending the States’ ultimate hoard against those overseas partners who dared to doubt Uncle Sam’s promise to…ummm…redeem his paper dollars for gold. France alone had swapped $250 million for gold in “recent months”, the Financial Times reported on 5th August, helping draw the US gold reserve down to “just over $10,000m, the lowest point since the early 1930s,” as the paper said four days later.

“There has naturually been a revival of the traditional theory that when the gold stock hit $10,000m, the US would simply close the gold window,” the FT explained on 9th August, adding that “There is no evidence that the Nixon Administration plans such action,” even as the Dollar crisis continued to make its front page each day.

Slamming the window shut, just as the “theory” suggested, “We must protect the position of the US Dollar as a pillar of monetary stability around the world,” Nixon told the nation (and the world) on 15 August, 1971. But as his central-bank chairman, Arthur Burns of the Federal Reserve, had feared (“What a tragedy for mankind!” wrote Burns in his diary) the early results soon proved as awful as they were entirely predictable.

Freed from gold’s seemingly arbitrary limits, money bred so fast – everywhere – that wholesale and consumer-price inflation reached untold peace-time levels, crushing savers in both the equity and bond markets pretty much worldwide. Freed from its official peg, in contrast, gold prices rose 20-fold. The public grew so discouraged that, within a decade of Nixon’s decision, his Republican successor, Ronald Reagan, ordered a commission to consider reversing it.

But thanks to those falling bond prices, however – which came thanks to bond buyers everywhere demanding ever-higher interest rates if they were lend money for any period of time to government – Washington got to ignore the Gold Commission’s minority report, and extend the world’s experiment with unbacked money for another 31 years (and counting…).

Because by 1980, and thanks to those soaring bond yields, central bankers had already stumbled upon the solution to unbacked money’s first global crisis…

Hike interest rates so high that cash-on-deposit actually starts paying a positive real return, post-inflation. The effect on gold – and so on any thought of returning to gold-backed money – was signal, as you can see.

Over the first-half of the 1980s, real interest rates – paid over and above inflation – averaged nearly 5% per year. Major-currency savers hadn’t seen anything like it since Great Britain fought to defend (and lost) its own Sterling Gold Standard half-a-century before. And together with those desperate Gold Standard-style interest rates, the Dollar recovered something like a Gold Standard poise.

Peaking at almost 15% in 1980, the pace of US inflation then fell by more than two-thirds in the following half-decade. The Dollar gold price did the same, sliding from its (then) record peak of $850 per ounce to less than $285 five years later.

Why? Mining supplies rose, and the peak prices of 1979 and 1980 unleashed a torrent of scrap-metal supply back to market, too. But negative real rates had forced a growing number of otherwise cautious savers to abandon money for gold throughout the 1970s, just as they have again since 2001. Whereas strongly positive rates, in contrast – and positive like nothing since the scramble for gold of five decades earlier…when global bullion flows determined (and were thus targeted to maintain) international currency values – worked the opposite way. Because no one needs an inflation hedge, a defense against devaluation, when cash-in-the-bank pays 5% more. And that victory was so hard-won, the stability it brought to unbacked money continued even as real rates eased back…pretty much until they neared zero a decade ago.

Here in early 2011, cash savers and central bankers alike stand so far removed from gold-backed currency, let alone from gold-as-money itself, the idea of returning to redeemable notes seems ridiculous. But those killer rates of 1980-85 remain the only sure lesson of how confidence in unbacked money can be won back once it’s begun to dissolve. This month’s gold-price jitters, therefore, are both understandable and absurd. Most sensitive of all assets to a switch in interest-rate sentiment –and so clearly buoyed by the Fed’s repeated promise of “exceptionally low levels…for an extended period” – gold has turned 6% lower on inflation data that points higher, even as Western central banks make plain they’ve no plan of responding, and China holds its real rates some 1.5% below zero for cash savers.

Soft gold prices without hard-money rates? Not for long, we’d guess…not after faith in unbacked money has begun to dissolve. But the feint of 1975-76, however, might say otherwise.

Check the chart above. Gold prices halved even as real US rates stayed sub-zero but pushed upwards. Gold then rose 8-fold as rates fell again, finally forcing those very same hard-money rates which confidence in unbacked money demanded.

Adrian Ash

For Money Morning Australia
Adrian Ash is head of research at www.BullionVault.com

“World needs $100 trillion more credit, says World Economic Forum”, reports the UK’s Daily Telegraph.

The World Economic Forum (WEF) has published a report titled:

“More Credit with Fewer Crises: Responsibly Meeting the World’s Growing Demand for Credit”

You can click here to access the full 84-page report.

OK. So, more credit is needed is it? How’s that gonna happen then?

Yesterday I wrote to you about vested interests and how you should be careful… very careful… who you trust.

So, should you believe the World Economic Forum if it tells you an extra $100 trillion of credit is needed?

Well, take a look at the members of the working group who wrote the report:

Viral V. Acharya – Stern School of Business, New York University

Michael Bencsik – HSBC

Andreas Beroutsos – Eton Park Capital Management

Fabrizio Campelli – Deutsche Bank

Jayan Dhru – Standard & Poor’s

Michael Drexler – Barclays

Shawn Miles – MasterCard

Dan Mobley – Standard Chartered

Charles Roxburgh – McKinsey Global Institute

Simon Samuels – Barclays Capital

Alexander Wolfson – Citigroup

These are the ones saying the world needs more credit.

We’re sure it’s just a coincidence. But seven of the eleven members of the working group are employed by firms that provide credit. And one of the members works for a firm that issues credit ratings.

Funny that.

I’m sure by now you know our view on credit. Excessive credit and misallocated credit – created by central banks and financial hotshots led to an economic boom. It lasted through the 2000′s until it went bust in 2008.

As the report explains:

“Global credit stock doubled from US$57 trillion to US$109 trillion between 2000 and 2009, at a 7.5% compound annual growth rate.”

The report continues:

“Clear warning signs of credit excess in countries such as Ireland, Spain and Greece were largely ignored as borrowing continued to rise beyond reasonable levels.”

We argue banks such as HSBC, Citigroup, Barclays and Standard Chartered didn’t ignore the signs of credit excess. We argue they didn’t see them in the first place. We argue the banks and bankers thought the credit growth was sustainable… that’s why they kept dishing it out.

Now, I can’t review the entire report because it’s 84 pages long. But there are a couple of other points I will cover. Such as the comment on page 19:

“The rapid expansion of credit in recent decades has enabled unprecedented levels of economic development, business activity, home ownership and public sector spending. Yet, excess lending in some markets and sectors sparked a global crisis which brought the entire financial system to its knees.”

Yes, that’s right, it was excess spending by businesses, home buyers and governments “which brought the entire financial system to its knees.”

Let’s be honest about it at least.

It goes on to say:

“Not surprisingly, many commentators believe credit should be scaled back, even at the expense of economic growth.

“The analysis in this report suggests the opposite is true… credit levels must grow substantially over the next decade. At the same time, public and private decision-makers must avoid a repeat of the credit excesses that have caused so much damage in recent years.”

Strangely, what we’ve read in the report so far doesn’t make a single reference to the credit providers – the banks. Surely the private decision-makers, those who hold the credit purse-strings are the banks. Can’t they just stop their fraudulent money creation?

Obviously not. It’s too much to expect the bankers to pin the blame on their own kind.

The report asks:

“Can the world’s growing demand for credit be met responsibly, sustainably – and with fewer crises?”

We wait with bated breath for the answer. We wouldn’t dare guess what it could be. Here it is:

“The answer, this report shows, is ‘yes’.”

Hurrah! Sherries all round.

We never would have guessed bankers would vote for more credit. How do they plan on doing this? Oh, it’s an ingenious plan. I’ll let the report explain:

“But to achieve this goal, financial institutions, regulators and policy-makers need a far more robust toolkit to foresee and forestall potential credit crises. They need earlier, more in-depth indicators of unsustainable lending, contagion risk and credit shortages – and better mechanisms to ensure that credit drives development.”

What a letdown. The banking clowns still don’t get it do they?

Don’t they understand that a toolkit already exists? There’s a toolkit that can foresee and even forestall potential credit crises. However, it’s a toolkit the bankers and their central banking pals have steadily destroyed in recent years. It is…

The interest rate.

Interest rates do everything they’re after. Interest rates inform the market of the price of money. Interest rates inform the market about the risks of certain investments.

Interest rates can foresee a potential crisis. And they can forestall a potential crisis. But, here’s the thing, interest rates can only do that if they are free of political and central bank manipulation.

As soon as you get wiseguys fiddling around with the single most important tool in the market, that’s when the trouble starts. And once it starts, it’s darn hard to stop.

So, we’ll say good luck to the World Economic Forum and its attempt to find a super-duper toolkit. We know what it’ll look like. It’ll look like one of those fancy computer models that claim to price risk and foresee the future.

And something else we know is that it’ll go the same way as the other fancy computer models. None of them managed to foresee the future.

At least one thing is guaranteed, it was the banks and central bankers that created the doubling in credit from USD$57 trillion to USD$109 trillion in nine years… it was the banks and central bankers that oversaw the economic meltdown in 2008… it’s the banks and central bankers who are blowing the bubble up again right now…

And, that’s right, it’s the bankers and central bankers who will destroy the market again when they ignore the next warning signs from their new fancy “toolkit”.

Cheers.
Kris.

Monday: It means government knows best – again. It means government and bureaucrats trampling over the market and deciding the market has gotten it wrong. What will this mean for you? It means higher insurance premiums. Click here for more…

Tuesday: What you’ve got are banks that made a bunch of bad investments – thanks in part to government influence. Banks that needed a bail-out from national governments. Those bail-outs were so huge the national governments were at risk of going bust. The solution? Banks that were bailed out by national governments are now underwriting an issue of government bonds that will be used to help the governments pay for the bail out of the banks! Click here for more…

Wednesday: We felt like Lieutenant Columbo. There was a small clue we knew we’d stumbled across. A clue that was staring us right in the chops… but we couldn’t figure out what it was, where it was and why it was important. Click here for more…

Thursday: “This is the first time in my life I have ever put my thoughts out there (I’m in my 50?s now) but over the past couple of years I have become so frustrated with government, banks, corporations, big pharmaceutical companies, etc., that I felt the need to put something down on paper.” Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else). Click here for the most intriguing stock story of 2011. Click here for more

Before we get to today’s Money Morning we just had to relay the exciting news about the Queensland floods.

According to today’s The Age:

“Queensland rebuilding will boost GDP”

We wondered how long it would take the mainstream press to roll out that old chestnut.

The mainstream press’s new economic heartthrob, HSBC’s Paul Bloxham said:

“By the second quarter of 2011 the economy will probably be boosted by rebuilding and replacement of household durable goods.”

Hooray! Let’s boost the economy by destroying things.

It never ceases to amaze us. The mainstream continues to take these guys seriously. Not only that, but the bureaucrats hang off every word too. Sheesh!

But anyway, we’ll leave that subject for tomorrow’s Money Weekend. Today we’ve got something else to wrap up… the continuing secret loan scandal…

Tell you what, it’s been like drawing blood from a stone… only harder.

But finally, yesterday, the National Australia Bank [ASX: NAB] and Westpac [ASX: WBC] replied – sort of – to our questions.

It’s funny how quickly you get a reply when you send an email to the chief executive officer, the chief financial offer and the legal big-cheese at the banks.

We’d waited four weeks for the media relations goons to get back to us… and nothing. Go to the top, and boy do the wheels start moving.

Again, here are the questions we sent them:

“Please can you advise on what date the bank informed APRA, RBA and ASX about NAB’s use of the Term Auction Facility (TAF) from the US Federal Reserve?

“And why this information was not made public at the time?”

The questions were fairly clear.

Here’s the reply we received from an NAB spokesperson:

“During the GFC, NAB worked to ensure its balance sheet maintained a bias towards safety during what was a difficult market. Participating in the TAF was a cost effective way to raise funds. NAB accessed the TAF through our New York operations, and was encouraged to do so by the US Reserve, as a way to encourage term liquidity moving in the market. In the context of the bank’s overall funding requirements the amount was not material. Our regulators had a clear understanding of our overall funding and liquidity position.”

Oh how we hate the term “GFC”. We’ve vowed never to use it in Money Morning unless we’re quoting someone.

We don’t know why we hate it. But it grates.

However, we weren’t entirely happy with NAB’s answer. So quick-as-a-flash we fired back another email. We asked:

“Thanks. Which regulators?”

Almost as quickly, the NAB spokesperson replied:

“As you would expect, as part of our usual course of business, we provide updates to our regulators on the state of our overall funding and liquidity position.”

Still unhappy with the answer we fired back another email:

“Which regulators… APRA, RBA or ASX?”

The reply came… not so quickly though this time:

“During the crisis, we kept our responsible prudential regulator APRA informed. However, we obviously kept regulators such as the RBA and ASIC updated on issues such as our funding and liquidity position during this time. The ASX was kept up to date, through normal processes, such as Trading Updates and half and full year results.”

Still doesn’t answer the question though does it? It’s still an ambiguous reply… it called for another email from your editor:

“But did you specifically inform APRA, the RBA and ASX about the loans from the US Federal Reserve?”

Surprisingly the spokesperson replied:

“Specifically, we kept APRA (our responsible prudential regulator) informed.”

But we still weren’t happy:

“Are you saying you informed ASX and RBA about the Fed loans?” we asked.

The obvious answer to that is no. Which was confirmed in the final reply. Playing with a straighter bat than the Aussie cricket team, NAB replied:

“The participation in TAF was not material. However, regulators were aware of our overall liquidity and funding position as required. I can’t provide any further comment on the matter.”

Goodness me, why can’t these people just answer a question right away. Don’t they know we’ve got to get on with important research for Australian Small-Cap Investigator?

As for Westpac this is the reply we received to our initial question:

“Westpac met all its regulatory obligations on this issue. There were no disclosure requirements to the ASX. This facility was available to highly rated banks.”

Oh stop it… ha, ha, ha…

Highly rated banks like Citibank, Lloyds TSB and Royal Bank of Scotland. Clowns.

Anyway, before we go on. We were interested to see what the Australian Securities Exchange (ASX) had to say on this… so we forwarded Westpac’s email to ASX CFO Ramy Aziz and our new media pals there.

I’ll let you know when we get a reply.

But at least it adds another piece to the puzzle…

We bashed back a reply to Westpac:

“What about APRA and the RBA. Did you inform them and if so when?”

To which they replied, grumpily we think:

“Kris – as I said in our response – we met all our regulatory obligations.”

So we replied:

“But did the bank tell APRA and the RBA? It’s not a difficult question to answer. To save me the trouble of finding out whether informing APRA and the RBA is part of your regulatory obligations it would be easier to just answer the question.”

So far we’ve just heard the sound of crickets… no reply just yet.

Email is great isn’t it? It takes just a few seconds to fire off a question and you’ve got written evidence in return. No fussing around with shorthand or repeating answers or being misquoted… it’s all there in black and white.

But as I say, it would be nice if the banks answered the question the first time rather than prevaricating about the bush.

So where does this leave us? Well, here’s the state of play on who knew what…

Based on what the Reserve Bank of Australia (RBA) has told us, the banks didn’t tell the RBA a thing. That seems to be confirmed by the NAB, and judging by its shiftiness, also by Westpac.

It also appears that the “stable” and “strong” banks didn’t tell the ASX about the secret loans.

Apparently $4.5 billion of loans from a foreign central bank wasn’t “material” to NAB so it didn’t tell the ASX. And Westpac has explicitly confirmed that it didn’t tell the ASX either.

At least in that respect the ASX is close to being cleared of accusations of conspiracy to conceal information. So that’s one positive to come from this sorry mess.

But it’s still no excuse for its lack of interest in the matter since the secret loans became public.

That leaves one last regulator – APRA. APRA is the official regulator of Australia’s banks. But APRA is legally prohibited from disclosing any information on the companies it regulates… ie. the banks.

The only way we’ve got of knowing whether APRA was informed is if the banks tell us.

So, remember what we wrote to you yesterday:

“Why tell APRA? Hang on. That might work. APRA is exempt from FoI enquiries. And as I mentioned before Christmas, APRA is covered by Section 56 of the APRA Act. This provides complete secrecy for any firm APRA regulates… in other words, secrecy for the banks.

“Telling APRA could be the banks ultimate fall-back position – ‘But we did disclose it, we told APRA. It’s not our fault if they can’t tell anyone.’”

Gee, and they call us a conspiracy theorist.

Turns out we were spot on. It looks like the banks didn’t tell the ASX. And they didn’t tell the RBA. Why? Because of the possibility the loans would be made public.

But telling APRA? Perfect. NAB admits it told APRA. So far Westpac hasn’t admitted it told APRA.

But if they both did so it was in full belief that Australian investors would never find out…

The plan worked perfectly. No one knew anything until those meddling libertarians in the US such as congressman Ron Paul got involved. He demanded the US Federal Reserve release full details of all banks that received emergency loans from the Fed.

At that point the cat was out of the bag. Man the battle stations, the banks must have thought. They needn’t have bothered. No one in the Australian mainstream press gives a hoot.

After all, they now look just as dumb as the RBA for falling for the spin that Australia’s banks were somehow different to other banks. Turns out they were just the same.

But it makes sense of what we read in yesterday’s Australian Financial Review:

“But Mr Laker [APRA chairman] said APRA would act as a gatekeeper to and set tough conditions for access to the RBA back-up facility.”

That’s in reference to the Basel III rules I mentioned yesterday.

In other words, everything will be kept secret from the taxpayer and the RBA. The banks will secretly approach APRA, tell it they want access to the RBA’s insurance policy and then we dare say APRA will give them a permission slip to take to the RBA.

But because all dealings with APRA are top secret you’ll never know the full details. You’ll only know what the banks want you to know.

Even more than that, what this whole affair proves is how much secrecy there is in the world of banking.

Call us a conspiracy theorist if you like – we don’t mind, our so-called conspiracy theories are more often proved right than wrong – but seriously, what else have the banks and APRA conspired to keep secret?

Think about it, if it wasn’t for the unexpected release of data from the Fed you’d still be in the dark on this.

Make no mistake, there is more to be revealed. Much more is our bet. The banking closet is doubtless stuffed full of bailouts and secret deals that the regulators and banks are fighting to keep secret from the taxpayer.

For instance, how much of the $53 billion the RBA received from the Fed flowed through to the bankrupt Aussie banks?

Will that ever be revealed? We doubt it.

Then there’s all the stuff we can’t even imagine that’s gone on.

Look, you shouldn’t be surprised by any of this. We’ve warned all along that regulations and regulators don’t protect investors.

Regulations and regulators only protect those that are regulated… in this case the banks.

It’s been a cover-up job from start to finish.

However, Money Morning reader Luke writes:

“You guys keep harping on about this secret loan but when we are talking about a company with assets of over $600 billion I don’t really care whether or not they secretly borrowed a measly $5 billion from the federal reserve.”

It’s a fair question. Is this issue really as big as we’re making out?

Yes. It is.

Let me give you an example to draw a comparison. It’s not exactly the same, but it’s close enough and should help you better relate to it.

Imagine if you’d borrowed $1,000 from your friend knowing that you had to pay it back in one month. Then imagine you’d taken that $1,000 and used it as security for a margin loan to buy $100,000 worth of shares ($99,000 margin loan and $1,000 loan from your friend).

Now imagine the stock market fell – that’s not hard to imagine! – so the value of the shares was now only worth $99,000.

Unless you can come up with $1,000 pronto the margin lender will close out your position by selling your share portfolio so you can repay your margin loan of $99,000.

But that would leave you with a problem, because your friend is expecting you to pay back the $1,000 you borrowed. How are you going to do that? None of your other friends have any money to spare…

Apart from one “friend”. This friend happens to be called the Federal Reserve. It lends you the $1,000 to tide you over for a while so you can pay your friend back, or ask him or her for an extension on the loan. If he or she agrees then you can pay your margin call and hope the shares rise again.

If he or she doesn’t agree then you can sell your stock, pay back your friend and then just owe your Federal Reserve friend the money.

As I say, it’s not exactly the same as the Fed loans to banks. But it’s close enough. And there is one similarity. And that’s with the leverage involved. And the way banks borrow other people’s money in order to leverage into assets while still having an obligation to pay its borrowings back on demand.

But as you probably know, leveraged positions are double-edged. It magnifies your returns but magnifies your losses as well. This is the position the Aussie banks were in and are in – which is no different to any other bank around the world.

If it wasn’t for the secret loans from the Fed, the Aussie banks would have been unable to roll over short-term loans. Failure to do so would have been comparable to our example of a share trader being unable to roll over the $1,000 loan from his or her friend.

That’s why NAB and Westpac needed the emergency secret loans from the US Federal Reserve.

$4.5 billion may sound like a drop in the ocean, but it wasn’t.

Apologists for the banks can bleat all they like about the loans being small-fry, but it won’t wash. Australia’s banks were staring into the proverbial abyss in 2008.

If it wasn’t for secret loans from a foreign central bank, bail outs from the Australian taxpayer, and top secret back room deals between the banks and its regulator, it’s likely all four of the major banks would have gone to the wall.

And NAB and Westpac insist that these loans were not “material” and not a “disclosure requirement to the ASX”. Give us a break.

Cheers,
Kris Sayce
For Money Morning Australia

Today’s Money Morning contains a special surprise for you…

With the help of one of my colleagues I’ve produced a short cartoon video. It’s based on our revelations surrounding the Aussie banking bail outs.

Hopefully you’ll like it. And if you really like it perhaps you’ll forward it to your friends. Then they can find out what the mainstream press are too afraid to tell them.

But, before you watch the short video you’ll be pleased to know that the final piece of regulatory incompetence is in place. As you’ll remember we sent the following email to the Reserve Bank of Australia (RBA), the Australian Prudential Regulation Authority (APRA), and the Australian Securities Exchange (ASX):

“1. When did the RBA/APRA/ASX become aware of Westpac and NAB’s loans under the US Federal Reserve TAF programme?

“2. If the RBA/APRA/ASX was not aware of the loans under the TAF programme please explain why.

“3. If the RBA/APRA/ASX was aware of the loans please explain why this wasn’t considered to be important enough to inform the market?”

Before I run through the answers again with you I’ll mention one quick thing. We’ve received a number of notes from Money Morning readers in New Zealand. They suggest things are just as ropey there. Don’t forget that the Kiwi banking system is almost completely dominated by the big Aussie banks.

It’s clearly something we’ll need to look further into.

Anyway, the first responder to our questions was the RBA:

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

Right…

Next came the reply from APRA (paraphrased from our notes of the telephone conversation):

“APRA is never in a position to discuss the institutions that we regulate.”

Er, thanks…

And finally, on Wednesday afternoon we received the following from the ASX:

“ASX does not discuss specific supervisory action it may be taking.

“Speaking generally, the obligation is on the listed entity to inform the market immediately that they are aware of any developments that may have a material effect on the price or value of their securities. It is not for ASX to ascertain if an issue is material. That is for each company to determine.”

Good grief. As Money Morning reader Ian described the regulators to us in a letter this morning. It’s like a “wall of silence.”

Anyway, after getting the reply from the ASX we shot back a quick question and comment for them – Gosh, your editor can be annoying!:

“I don’t understand. If that’s true, why does the ASX issue “speeding tickets” to listed companies? This is clearly a precedent of the ASX asking for a listed company to provide information to the market.”

We haven’t received a reply to that one yet.

But in just a handful of sentences you have the entire case for why regulations don’t provide protection for investors or consumers.

Simply because it’s generally not in the regulators’ interests. I know that sounds funny and counterintuitive, but it’s true.

It’s like the Stockholm Syndrome. In this case the banks are the hostage takers and the regulators are the hostages. They become reliant, dependent and dare we say it, friendly with each other. So much that the regulators begin to defend the actions of the organisations they’re supposed to be monitoring.

Why? Because should anyone point out misbehaviour by a firm it questions the effectiveness of the regulator. Why didn’t the regulator know about something? What did they do to stop it? And so on…

So, in order to avoid answering those embarrassing questions the regulators simply say, in the words of Sargeant Schultz, “I know nothing… NOTHING!”

And claim that everything is a secret. It’s best you don’t know.

But because we’ve drawn a blank with the hopeless regulators we’ve decided to go straight to the horses mouths. We’ve dropped a line to NAB and Westpac asking them when they notified the regulators about their Federal Reserve emergency loans.

Let’s see how they reply. Or whether that’s top secret too…

Look, let me make this clear. Don’t think we’re in favour of increased regulations, because we’re not. We believe the free market is best placed to regulate business activity not power-crazed bureaucrats.

The fact is, if it wasn’t for the government and central bank created fiat (paper) money system, banks wouldn’t have gotten themselves into the situations they did.

Banks wouldn’t have the legal authority to create money from thin air. And if they did it illegally by counterfeiting then depositors would eventually get wind of it and withdraw their savings. Effectively causing a run on the bank and sending it out of business.

Therefore banks would have a commercial interest in not creating money from thin air. If they did they would be aware of the consequences. And with no chance of a government or central bank bailout, only the foolhardy, corrupt and criminally minded banker would dare to produce counterfeit money.

Unfortunately, under the current banking system the foolhardy, corrupt and criminally minded banker is free to counterfeit. In fact, they are encouraged to do so by the politicians. You’ve heard them egg the bankers on, “You must lend more.”

And it’s all completely legal for them to do so.

In a nutshell, in a free market banking system there wouldn’t be a need for a regulator. Just a simple act of law making it illegal to counterfeit the currency. A law which is already in place but which somehow the banks are able to flout.

And importantly for you, the lack of a regulator, central bank and corrupt government would mean the banks would have no way to conspire. No way to keep a multi-billion dollar bail out a secret from the public… because they wouldn’t have gotten the bail out in the first place.

But anyway, if nothing else, the RBA, APRA and the ASX have proven themselves to be about as useful as a proverbial chocolate teapot.

Seeing as it’s your taxpayer dollars on the line, and seeing as we have to suffer with regulators, perhaps they could do you a favour by asking the two banks to explain their actions. And perhaps those same regulators could apologise for having misled Australian taxpayers and savers about the strength of the Australian banking system.

But for your benefit, here’s an example of some of the lies either knowingly or unknowingly peddled about the Aussie banking system:

“The resilience of the Australian financial system through the crisis period has reflected a combination of factors including the comparatively mild nature of the the overall economic slowdown in Australia, the absence of large-scale exposures to structured securities, and relatively conservative lending practices, particularly for housing.” – RBA, Financial Stability Review, September 2008 (News.com.au)

“The thing about the Australian banks is that they will come through this crisis extremely well… They are looking very strong… They [Australian banks] are among the safest in the world… They are some of the best banks in the world…” – Mike Smith, ANZ CEO, September 2008 (Heraldsun.com.au)

“First, our banking system has remained strong with the four major Australian banks now among just 11 AA-rated banks left in the world. The result is there’s been no need for government bailouts and not one cent of taxpayer money has been expended in supporting banks.” – Mike Smith, ANZ CEO, September 2009 (Moneymorning.com.au)

You can click on the link above to see how we knocked Mr. Smith down to size with his argument. And the NAB and Westpac Fed bailouts make his arguments look even more ridiculous.

And poor old Terry McCrann must be looking back at his April 2009 column feeling slightly miffed:

“The National Australia Bank kicked off the first set of Down Under bank profit reports in this time of global financial cholera.

“And every one of you should be glad it was a profit. Further, not just any old profit but one that was light years away from the dodgy numbers coming out of the Citibanks and Lloyds of Britain and the US.”

That would be the same Citibank and LloydsTSB who lined up alongside NAB and Westpac to snaffle a few billion dollars in emergency loans from the Federal Reserve.

As we’ve pointed out before, it’s no wonder the mainstream press has been so quiet on this. Pointing out the Fed bailouts now means contradicting everything they’ve written over the past two years about the so-called strong Australian banking sector.

And finally, before I let you sit back and enjoy the video, we noticed a strange article in today’s The Age and Sydney Morning Herald. It’s in the CBD column.

In a nutshell, it appears to be the Fairfax papers having a pop at your editor… for having a pop at the mainstream press – including the Fairfax papers. So we’ll have a pop straight back!

To be honest, we don’t understand the point the column is trying to make. And unfortunately we won’t find out until at least next year, because in typical mainstream journo fashion, the column advises readers that “CBD will return next year.”

Ah well, at least the NAB and Westpac bailout gets a second mention in the mainstream press… but rather than mentioning your editor we’d have preferred it if the journo had actually followed up on the NAB and Westpac story in more detail.

That’s obviously more than can be expected of the dismal Australian mainstream press.

Anyway, on to the video. It may take a few seconds to load. But I hope you enjoy it… click here. And don’t forget to pass it on if you like what you see.

Cheers.

Kris Sayce
For Money Morning Australia

Poor National Australia Bank [ASX: NAB]. Or I should say poor customers of National Australia Bank.

Another so-called “glitch” struck it again yesterday afternoon. Twice in the space of a couple of weeks. Dear oh dear.

If you’re an NAB customer I’d suggest twice is enough. It’s time to shift your savings account somewhere else.

But we’re not going to write about Australia’s insolvent banks today. We’ll leave that for tomorrow. It should be a corker so make sure you tune in…

Your editor nearly fell off the couch while watching CNBC this morning.

There isn’t much on that channel worth watching, but we watch it anyway. Usually while tucking into our three Weetbix®. We try to ignore the blathering hosts and their drone-ish guests by turning the sound down.

Instead we just follow the ticker at the top of the screen… Dow Jones… S&P500… AUDUSD… USDJPY… Gold… Silver… UST10YR… zoiks…

With all our focus on the Aussie banking system over the last couple of days, we’d taken our eyes off the yield on the 10-year US Treasury. What we saw nearly caused the couch-falling incident.

And we could see why Money Morning reader Jack had sent through this email yesterday afternoon:

“In your discussion toward the end of today’s MM, I’m surprised you did not pick up on the 10year & 30year USGovt bond prices falling (thus yields rising) during the time since they announced & implemented QE2.”

We had noticed the rising of the bond yield since early November. It was something that flew in the face of the supposed reason for the money printing – to keep interest rates low.

But what we hadn’t noticed was the price and yield action over the past few days. The chart below explains it all:

Source: Yahoo! Finance

It’s important to know that price action in any financial market is based just as much on what investors think will happen as on what has happened.

So you can argue that leading up to early November when the US Fed announced its money-printing programme, investors were positioning themselves for what they thought the Fed would do.

They thought the Fed would print a certain amount of new money (not actually printing it, but creating it electronically) and therefore bought or sold US Treasuries on that assumption.

When the Fed made its announcement some punters saw this as the time to get out. The price had risen (yield fallen) as far as they thought it could go. What were they to do next? Hold on to an investment yielding less than 3% for the next ten years? Or sell it and lock in the capital gain.

The latter obviously.

Especially if they were in leveraged positions… which they would be. Remember, even retail investors in the US can get 10:1 leverage on government bond. So goodness knows what leverage the institutions can get. That’s because they’re seen as safe investments.

In contrast, in the US, a retail investor can only get 1:1 leverage on stocks. If you know the Fed is going to print a whole bunch of fresh cash to buy up these bonds, why wouldn’t you front-run the Fed and look to profit.

Well, that’s exactly what they did. And now they’re getting out.

Even the prospect of further money-printing may not be enough to draw buyers back. And if it does there would still be a big bunch of sellers trying to cut their losses and get out.

It’s a problem the Fed has created for itself. If you think about it logically it makes sense. Unfortunately, logic is one of the things in short supply at any central bank.

The fact is, the more new money the Fed creates to push down bond yields, the more new money it will need to create in order to push them down the next time. The Fed is creating 600 billion new dollars to lower interest rates.

So far it has only spent about one-sixth the amount – this morning it bought another USD$1.63 billion of US Treasuries. The bond market is becoming desensitised to the Fed’s bond buying programme.

Bond yields will undoubtedly fluctuate, but will it push rates back down to the level the Fed wants? We doubt it.

So what next? That’s where QE3 and QE4 come into play. But the Fed can’t announce it’s going to just buy another $50 billion or $100 billion… that won’t cut it. The market won’t care. It won’t have enough of an impact on the market to attract bond buyers.

If the Fed really believes printing money is the solution to helping the US economy. And if it believes this involves keeping interest rates low the only action it can take is to really ramp things up… one trillion dollars, two trillion dollars… or more likely, just an open-ended buying spree.

But just as bond buyers have become unimpressed with the Fed’s bond buying so soon, can they be relied upon to maintain enthusiasm for an open-ended bond buying programme?

We doubt it. And that’s when it’ll get super exciting. Not only will the Fed become the main buyer for existing debt, but it will become the main buyer for new debt – bidding for bonds direct from the US Treasury.

In other words, skipping the middleman.

The way we see it is that all the elements for an inflationary super-spike are being created right now. The rotation of new money from the Fed to the market to the government is speeding up… then it’ll reach terminal velocity, and the economic ship won’t be able to take it anymore.

There will be so much worthless paper and electronic money flying around the US and global economies that consumer prices will soar and the economy will collapse. What will that mean for commodity prices?

Well, if you want an example of what to expect, look at the price action for bonds. What has happened with the 10-year US Treasury is a perfect example of how inflation doesn’t necessarily increase asset prices… or I should say it doesn’t necessarily keep asset prices high.

It’s all about expectation and anticipation. Bond buyers expected new money to be printed (inflation), so they bought an asset in advance. Now some of the new money has been created the bond buyers have lost interest. They’ve already priced it in.

And bond prices are falling. Yet there’s still more than USD$500 billion of new money waiting to be created at the tap of a button.

Why shouldn’t that happen for other asset prices?

There’s no reason it shouldn’t.

Commodity prices have already taken off. You can see that on the RBA Index of Commodity Prices:

And it’s a pretty good bet prices could go higher.

But when it comes down to it, a commodity bubble is like any other bubble. Investors and speculators bought US Treasuries because they are supposed to be safe, and also to front-run the Fed’s buying.

As for commodities, investors and speculators are buying commodities because they are seen as a hedge against inflation and because of the growth of emerging markets.

But when it comes down to it, commodities are produced to be used. Businesses buy copper, corn and sugar because they need to use it to produce goods. But in addition to that, there are investors and speculators buying and selling these commodities in order to make money.

But ultimately, the price investors and speculators will pay depends on what they believe the underlying supply and demand is for the commodity.

And also don’t forget that buying by end users, investors and speculators is done using leverage. When the credit taps dry up – as we saw in 2008 and 2009 – the ability for end users, investors and speculators to keep buying becomes much more limited.

So if the buying dries up, that’s right, it becomes a buyers’ market. Sellers jump over each other looking to be the first to the exit.

In other words users, investors and speculators are buying commodities based on certain expectations. A variety of expectations. Once those expectations change, the price correction can be savage.

And as you know, very rarely – if ever – is everyone right about the ultimate price of an asset.

The commodity bubble has already burst once. The chart above shows you that. There’s nothing to say it can’t burst again.

Just as front-runners helped push bond prices to an unreasonably high level based on certain expectations, the same is happening right now in commodity markets.

Staying on board to profit from this surge makes a lot of sense – as Dr. Alex Cowie has done in Diggers & Drillers. But assuming it will last forever and that inflation, China and India will provide a backstop to commodity prices is a risky game if you don’t know what you’re doing.

Cheers.

Kris Sayce
For Money Morning Australia

You’ve read a lot about the banks in Money Morning during the past week. And today is no different. So strap yourself in…

Yesterday we gave you the reply we’d gotten from the Reserve Bank of Australia (RBA). We’d asked them when the RBA had been told about National Australia Bank [ASX: NAB] and Westpac’s [ASX: WBC] secret loans from the US Federal Reserve.

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

This apparently even extends to when the taxpayer is also underwriting the banks.

Its funny isn’t it. When you apply for a loan with a bank they quite rightly want to know what other loans you have. That way they can supposedly figure out whether you can afford the repayments or not.

Although over the past thirty years we’ll admit, even that is less important than it used to be. Because over that period it was assumed asset prices would always rise and therefore borrowers were given bigger loans – if they defaulted, no problem, just sell the mortgaged asset at a profit… easy.

Yet when it comes to the taxpayer underwriting loans to banks it seems to be a different story. Everything must remain top secret. The RBA “does not comment…” So there.

So while the taxpayer was told about the deposit guarantee and the wholesale funding guarantee – big enough obligations by themselves – the taxpayer was kept in the dark about the USD$53 billion of loans the RBA had taken out with the Fed. Again, backstopped by the Australian taxpayer.

And the taxpayer wasn’t told about the over USD$5 billion of obligations to the US Federal Reserve that two of Australia’s banks had committed themselves and the taxpayer to.

But the RBA isn’t the only regulator to lose its tongue.

We spoke to Andrew McCutcheon, Media and Communications Manager at the Australian Prudential Regulation Authority (APRA). We’d sent APRA the same email that we’d sent the RBA last week.

We wanted something in writing but Andrew preferred a phone call. Hopefully you’ll forgive us, our shorthand isn’t what it used to be. Actually, that’s not saying much, our shorthand has always been bad.

So we’ll just have to paraphrase the response.

Andrew tells us that Section 56 of the Australian Prudential Regulation Authority Act 1998 forbids APRA from revealing any information regarding the institutions it regulates!

What? How does that work? What’s the point of a regulator if everything is top secret?

Although we’re not surprised he won’t tell us. According to the Act there’s a penalty of two years imprisonment for revealing secret information on the banks.

You can check out the full Act by clicking here.

And here’s the best thing, Section 56 comes under Part 6 of the APRA Act. The heading for Part 6 is… of course… Secrecy.

And because it’s top secret, the Act informs you that “A document that: (a) is a protected document; or (b) contains protected information; is an exempt document for the purposes of the section 38 of the Freedom of Information Act 1982.”

As I say, your editor is no legal eagle. Our only legal training was gained from the Matlock School of Lawyering followed by a post-graduate qualification from the Rumpole Academy. But even that limited training tells us that APRA will never reveal the full extent of what it knew and when it knew it about the Aussie bank bailouts from the US Federal Reserve.

So, the last response we’re waiting on is from the Australian Securities Exchange (ASX). But considering we’re yet to see a notice appear against NAB or Westpac’s names we can assume either the ASX already knew about the secret bailouts and aided the banks in keeping it a secret, or it’s going for the old head-in-the-sand routine.

Quite frankly, either explanation is possible.

And don’t think there are any Australian politicians who are keen to expose the bankers. Unfortunately Australia doesn’t have an equivalent of Ron Paul in Federal Parliament. Someone who’s prepared to stick up for sound money.

Instead, you’re more likely to get the kind of response that Money Morning reader Stuart apparently received from Joe Hockey’s office:

“Dear Stuart

“Thank you for your email to Mr Hockey.

“The Australian banks were not bailed out by the US federal reserve [sic], nor was the Reserve Bank of Australia. As NAB is a public company it would have needed to disclose this to the market, and I can assure you that it did not.

“Yours sincerely

“Alistair”

We’ve not idea who “Alistair” is, but he may want to check his facts. As he seems to have got his logic in a muddle. His argument seems to be that because neither NAB nor Westpac disclosed the bailouts to the market then the bailouts didn’t happen.

Even though they did. Because it’s there in black and white on the Federal Reserve website. But no, a public company would have to disclose that information, and because they didn’t, no bailout!

Madness.

Even the mainstream press has pointed out the bailout dollars received by the RBA from the US Federal Reserve.

And even the mainstream press has acknowledged that Australia’s banks would have received some of that cash as emergency loans.

The fact that NAB received USD$4.5 billion of US Federal Reserve bailout money but didn’t report this to the ASX – or if it did the ASX agreed to keep it confidential shows you this cover-up has gone right to the top.

But as the Wikileaks disclosures show you, governments worldwide – including Australia – have plenty they need to cover up.

Politicians, bureaucrats, conservatives and socialists are all labelling the Wikileaks revelations as treasonous or at least criminal.

We take the opposite view. We take the view that the kind of corrupt and inappropriate behaviour revealed in those documents proves how dangerous it is to have glorified town councillors in positions of immense responsibility.

Put it this way, if you tell your American friend to whack your Chinese friend on the nose, who gets hurt? Well, the Chinese fella obviously. And he may not take too kindly to what you asked your American friend to do.

But that’s pretty much the extent of the damage.

But if a glorified town councillor like the Fairy Ruddfather asks his American buddies to bop China, who gets hurt then? Potentially everyone.

A career in politics for most people in our opinion is simply an attempt to gratify a perverse urge to control others. It’s the same urge from town councillor all the way up to Prime Minister.

Anyway, it seems to be the more we dig, the more we’re prevented from digging. Neither APRA nor the RBA have any interest in keeping you informed about the safety of your taxpayer dollars and your savings… we don’t like that.

However, we have seen several comments that suggest NAB and Westpac were simply doing what any bank should do, access funds for a cheap interest rate from the Federal Reserve.

That the banks were simply borrowing cheap money which they could then lend out for a higher rate and pocket the difference.

It’s a nice line. And it could even sound plausible – if it wasn’t complete nonsense.

Let’s not beat around the bush here. NAB and Westpac borrowed from the US Federal Reserve because they had to. And the Reserve Bank of Australia borrowed from the US Federal Reserve because it had to – because it needed to bail out Australian banks.

The idea that NAB and Westpac executives suddenly decided to borrow cheap out of choice is ludicrous. It ignores the entire reason why these emergency loan facilities were made available by the Federal Reserve.

You see, it’s true that banks borrow money all the time. That’s how they work. They borrow money from depositors. They then create ten-times the deposited amount in new money to lend out to borrowers. All the while, the depositor is free to withdraw his or her money on demand.

But we won’t worry about that last aspect today. We’ve covered that before. Banks borrow money for short-term and long-term durations. That means on any given day a bank has to roll-over a loan.

Simply put, if a bank takes out a loan for a 30-day duration then at the end of 30 days the bank needs to repay the loan or it needs to roll it over to a new loan. In normal circumstances, when everyone was happily – and foolishly – lending money left, right and centre, this was pretty easy – out with the old loan, and in with the new.

But then through 2007, 2008 and early 2009, you remember what happened don’t you? The “credit crunch” occurred and lending ground to a halt.

Now, that was a good thing. It should have been the beginning of the end for the current unstable and corrupt banking system. But the central bankers, politicians and mainstream economists thought they knew better.

Instead of acknowledging the dangers of a highly leveraged banking system and allowing it to collapse, they didn’t want that happening on their watch. Hence the bailouts. Bailouts that have only succeeded in postponing the natural consequence of the credit meltdown.

Anyway, can you guess what happened to the banks?

That’s right the banks needed to repay loans but found it hard to borrow the money to pay off those loans.

So, in order to meet short-term loan repayments, the banks needed a bailout from the US Federal Reserve – the loans to Westpac and NAB that we know about – and from the RBA – loans to the banks that we assume will remain top secret.

Without those loans the banks wouldn’t have been able to meet their obligations to repay short-term funding. And if the banks couldn’t repay their short-term funding… they would have defaulted and you would have seen a run on the banks.

That’s why the banks took the loans from the Fed and the RBA. Not out of choice. Not because they recognised an opportunity to make a quick buck. They did it because they had to. They had to in order to not go bust.

But the other thing that amazes us about this is the lack of interest from the hopeless credit rating agencies.

As we’ve pointed out, without the loans from the Fed and RBA the banks would have defaulted on their obligations. Yet the banks retained their AA ratings throughout. And despite this info now being made available to the public, the banks are still double-A rated.

You probably remember all the guff spouted by the Aussie banking execs about how our top four banks all have double-A ratings. How they are four of only twenty banks in the world to hold a double-A rating.

A double-A rating that means nothing when the four banks were obviously within days of collapse. A sure thing if it wasn’t for the Fed chucking them a few billion to tide them over.

But as I say, don’t think that means you should heap praise on the Fed or Ben Bernanke for having saved Australia’s banks from collapse, because you shouldn’t.

All this sorry affair has done is prolonging the pain. Pain that would have been swift and sharp in 2008 has turned into something that will last for years, possibly decades.

Even Ben Bernanke has admitted on 60 Minutes in the US that:

“At the rate we’re going, it could be four, five years before we are back to a more normal unemployment rate”.

So much for saving the economy. Ruining it more like.

Make no mistake, the Australian banking system was bailed out in 2008 and 2009 just like most other banks around the world.

We figure that’s the reason why the mainstream press has completely ignored this story. Because it rubbishes their entire argument about the strength and stability of Australia’s banking system.

It isn’t strong, it’s just like the rest – perpetually on the verge of collapse.

Cheers.

Kris Sayce
For Money Morning Australia

“The quality stuff we’ve got is still selling well but the B and C-class properties have been hit harder.”

That’s according to John Bongiorno, director of Melbourne real estate agency Marshall White, quoted in today’s Australian Financial Review (AFR).

But the following part was the best bit, as written by AFR journo Ben Hurley:

“The reason for the discrepancy is likely to be that Mr Christopher’s numbers pick up all the second-rate or overpriced properties that don’t sell, and then fade into the background.”

Come again? Anyway, I’ll get back to that in a moment. Earlier this week I mentioned how US fund manager Jeremy Grantham had been challenged to a $100 million bet on the Aussie housing market.

That Grantham was being invited to take the short side and therefore profit if prices fell, while the other side to the bet would be long and profit if prices climbed.

So far we’re unaware if Grantham has bothered to tear himself away from managing a firm with $104 billion under assets in order to take the bait on the bet.

After all, such a bet, where his maximum gain is just $100 million if Aussie property prices fall to zero, would work out to add just 0.1% to the value of Grantham’s assets under management.

I don’t know about you, but I wouldn’t even bother getting out of bed for just a 0.1% return. And that would be the maximum assuming house prices fell to zero and you couldn’t give them away.

In reality his maximum upside would be a 0.04% return if – as he predicts – Aussie house prices fell by 40%.

So, we doubt Grantham would even bother messing around with such trivialities.

But, if Grantham doesn’t take the bet, then let’s see what we can do – just to make things interesting. In fact, your editor is in discussions right now to facilitate the $100 million transaction.

In a Money Morning exclusive we can reveal who our potential mysterious backer is:

There’s no guarantee that anything will come of this, I’m just waiting on a few character references on him – apparently he’s a doctor, so that shouldn’t be hard – before I proceed any further!

I’ll keep you updated on how our negotiations go.

Until then, back to our opening thoughts…

Apparently, according to the AFR headline, “House glut hits lower-end stock”. The article claims:

“Evidence is mounting of a glut of house listings on the market this spring without the demand to meet it.

“But real estate agents struggling to offload lesser-quality stock insist the best properties are selling well.”

By best properties they must mean the ones that were up for auction at the Ray White property extravaganza at the Sydney Opera House on Monday night.

Just last week the Wall Street Journal previewed the auction writing:

“Investors from around the world, but especially China, are expected to flock to the auction and snap up the residences.”

Maybe they did flock, but as The Age reported yesterday, they didn’t feed when they got there:

“An auction of luxury homes held at the Sydney Opera House last night raised just $4.1 million, much less than the $30 million vendors were hoping for, less than a week after borrowing costs increased.

“Only two out of the 11 homes were sold.”

Oh dear – Pffffffffffffffffffffffttt! We’re not much good at maths [Reader's voice: or English!], but a quick check on the calculator reveals that’s an auction clearance rate of just 18.2%.

Much, much less than the 54.6% overall auction clearance rate recorded for Sydney the previous weekend.

The only reason we can think of by way of an explanation is that despite the fancy setting, Ray White must have been trying to flog B and C-class properties. Because everyone knows that the real good stuff is selling like hot cakes.

The Age quotes Brian White from Ray White Real Estate:

“We’ve been a little bit crash-tackled by the interest rate increase last week. The Reserve Bank seemed to give the indication that they were keen to keep the lid on prices, and that’s not what buyers want to hear. That’s a very bearish sentiment.”

Hmm, why an Australian interest rate rise should worry all the buyers from China that are supposed to be flocking here is anyone’s guess. We thought the story was that Chinese buyers were cashed-up and read to buy, pricing local Aussie battlers out of the market.

Surely a 0.25% rise in the official interest rate would be neither here nor there for them.

And again, we thought the story that the high grade properties were still selling well.

Ah well, maybe it’s not so. Maybe another piece of the spruikers’ armoury has fallen off.

But we have to get back to the comment from John Bongiorno. We seem to have very quickly gone from a housing shortage crisis where there’s nothing available, to one where there’s a “glut” of stock, particularly for houses which are overpriced and well, not very good.

However, these properties don’t really count because they just “fade into the background”! You should only count properties that are good… so there.

We’ve definitely heard it all now.

But there’s other evidence that the “quality stuff” isn’t selling. SQM Research, the firm run by the same Mr. Christopher quoted in The Age – you know the guy, he’s the one whose analysis picks up “all the second-rate or overpriced properties that don’t sell, and then fade into the background” – keeps a track of asking prices on properties and how much the price has been discounted from the initial asking price.

Here’s a copy of the details we received yesterday for Western Australia:

Click here to enlarge

We looked at the second home listed, in Maylands. We’ve got no idea what the Maylands area of Perth is like, but it seems to be a commutable distance to the CBD.

It’s got five bedrooms, four bathrooms and enough room for four cars – everything a family of four could ask for. They could all use the bathroom at the same time without waiting – that’s gotta be worth $2.39 million doesn’t it?

Apparently not. According to SQM Research the house has been on the market for… [ahem] 578 days… a quick check on the fingers works that out to be over one-and-a-half years.

And seeing as Realestate.com.au reports the recent median house price for Maylands as $531,000 these sellers are clearly looking at attracting buyers in the top end of the market.

Of course, that should be fine because top end properties are selling well… except for these top end properties in Perth that is… and the ones in Sydney. Which appear to be doing terribly.

But maybe the lower end of the market is still doing well.

Which reminded your editor of a comment in that daft Westpac housing bubble myth report:

“[B]orrowing and lending decisions appear to have remained sound, and most of the new wave of first home buyers either have a significant equity buffer (particularly in NSW, Victoria and South Australia) or face low risk of job loss due to exposure to the mining boom (Western Australia and Queensland).”

For a start, I’d like to hear from you if you’re in the mining sector to see if Westpac is right about the risk of job loss being low. Having done the odd bit of research on mining stocks for our Australian Small-Cap Investigator newsletter, we can hardly think of a higher risk industry in terms of job security than the resources sector…

But anyway, with higher interest rates and a much lower first home buyers’ bribe, you wonder how much equity WA buyers really have. We don’t know for sure, all we can do is rely on stories we hear. Such as this sent to us by a Money Morning reader last week:

“I am in the process of selling my O/O home. The Purchase price for this 3 bed ‘cottage block’ in 2007 was $449,000. I cannot find a real estate agent willing to list the property for more than $420,000. How do the pundits determine that house prices have increased? Every real estate agent you speak to tells you how bad the market is (being a buyer’s market).”

Don’t forget, even our pals at RP Data admit it’s a buyer’s market. Remember their Facebook comment:

“What is most puzzling is that the number of properties advertised for sale continues to increase at a time when conditions are not particularly strong for sellers.”

Listen to most of the spruikers and they’ll tell you everything is tickety-boo. It is, but only in the properties they can sell. But the ones they can’t? Those of course just “fade into the background.”

But that hasn’t stopped the banks from singing their same old tune. First the Commonwealth Bank [ASX: CBA] trotted off around the world with an investor tour, spruiking fibs about the health of the Aussie housing market.

Then the desperate boys and girls at Westpac [ASX: WBC] released their bubble myth report.

Now we’ve got the ANZ Bank [ASX: ANZ] heading off to the US and UK in an attempt to hoodwink overseas investors to buy some of the bank’s lovely debt – but they forget, they’ve seen and heard the same old stories before.

Not surprisingly, the presentation includes a section on the robustness of the Aussie housing market.

A few slides in particular made us chortle. The first is an old favourite. It’s this one:

We love it for the simple impression it leaves the gullible viewer with. The idea that the housing shortage will continue to increase forever. The addition of the arrow above the rising bars is a nice little touch.

When we first saw an example of this methodology of calculating the housing shortage a few months ago we were able to respond fairly easily.

Back in March we wrote an article titled, “Housing Shortage Set to Hit 35 Million by 2050″.

It was a crazy headline, but it was based on crazy numbers from the Housing Industry Association (HIA). The HIA claimed in a press release:

“The report finds that if current building trends persist, then Australia’s cumulated housing shortage would reach 466,000 dwellings by 2020…”

Blimey, if we look at the ANZ chart it has the housing shortage at over 400,000 by 2015… that’s about five years earlier than the HIAs dire warnings.

But before you decide to start subletting rooms in your house for all those desperadoes in search of a home, you may want to consider this… in that same article we wrote:

“You see, if we take the HIA’s 15.6% annual growth rate – remember, we’re using their numbers – and extrapolate the number further, then by 2025 there will be a housing shortage of 958,946.

“But why stop there. If we go out to 2030, the housing shortage rises to 1,979,626. And best of all, if we follow their growth rate all the way out to 2050 we find out the housing shortage will reach 35,953,391…”

We then put all those numbers in a chart to show the ridiculous nature of the ever-increasing shortage nonsense:

That’s right, the housing shortage will be exactly equal to the forecast total Australian population!

And, as we pointed out, just five years later, the housing shortage would be twice the predicted Australian population!

A shortage of 75 million homes for a population of just 35 million people. How does that work?

But look, read the full back issue for yourself by clicking here. In our opinion it’s one of our better ones.

As far as we can figure out, the ANZ hasn’t disclosed what annual growth rate they’ve used. All we can see is the arrow pointing towards infinity and beyond…

But it turns out the ANZ numbers aren’t too far different from the HIAs.

Based on the growth rate from 2009 to 2015, ANZ is banking on an average 13% gain… give or take a fraction. The result by 2050? This:

A thirty million housing shortage… just five million short of the HIAs prediction. Even by 2025, just fifteen years from now, the shortage at this rate will reach 1.4 million.

I mean, this must be what the ANZ is predicting because they’ve made no attempt to explain at which point the housing shortage growth rate will stop. They’ve just included a nice little arrow pointing upwards.

But these following slides tickled our fancy as well:

Click here to enlarge

By the way, you can see the entire presentation for yourself. The ANZ has lodged the presentation with the ASX.

What the ANZ and indeed the Reserve Bank of Australia claims, is that because household debt is mostly held by higher income households then that’s fine and there’s no problem.

But what the bank fails to mention is that more people than ever before are borrowing against their homes to purchase personal items.

So that while the Housing figure has gone ballistic since the early 1990s, while Personal debt has remained lower, it doesn’t mean that personal debt levels have dropped.

The idea, as the bank claims that “Debt largely used to acquire assets” is absolute rubbish. Depreciating assets such as a car maybe. But what else? New TVs, furniture… hardly what you would call growth assets. Or what about the holiday overseas? All paid for with equity from the home.

All that’s happened is that consumption spending has been capitalised into housing debt. The bank knows this is the case yet it insists on claiming that the debt position is fine because Aussies are buying “assets”.

The fact is, not only are Aussies buying overpriced housing on the back of the perpetual lie about a housing shortage, but they’re consuming against the so-called equity in those same overpriced houses.

Finally there’s this chart:

ANZ explains:

“Households in the top two quintiles account for 75% of all outstanding debt.”

In other words, the few hold the most.

Well anyone could tell you that, it’s the old 80-20 rule. Or in this case the 75-25 rule. But it means nothing. The size of the household income is of no relevance when it comes to the ability to service debt.

You’ve just got bigger debt.

A $500,000 a year earner who has borrowed six-times their income is in proportionately the same amount of debt as a $70,000 a year earner who has borrowed six-times their income.

Is there no stopping the amount of twaddle the banks are prepared to put out in their pathetic and desperate attempt to prevent the inevitable? It appears not.

If the last few weeks have proven nothing else it’s that the Aussie banks have been forced to go to extraordinary lengths to keep facts about the housing bubble from coming out.

Unfortunately for them they haven’t realised that the Australian general public is more informed on the formation and destruction of asset prices and asset bubbles than they have ever been.

No longer can the banks spin a few lies to the mainstream press and expect that message to filter through to everyone. Today an increasing number of people rely on more than the pap served up in the mainstream press and can see the facts for themselves.

Hopefully we can get the financing for this $100 million bet from our new doctor pal… because there’s gonna be plenty of money to be made from shorting this massive housing bubble.

In absence of that, we’d say to keep on shorting the bank with the biggest mortgage exposure – Commonwealth Bank [ASX: CBA].

Cheers.

Kris Sayce
For Money Morning Australia