The most recent before this is probably ex-Treasurer Peter Costello’s 3-Child policy. We don’t care to recall exactly what it was, something about “having one for the country.” Or something like that. We do recall mainstream journalists thinking the joke was hilarious at the time.

But the sad thing is, all this focus on trying to control the population is just more grist to the mill that confirms Western nations – including Australia – are heading head first towards totalitarian Socialism.

It wasn’t so long ago that the Chinese were lambasted and even ridiculed for their one-child policy. “It’s not natural to restrict family sizes” was the general theme of those arguing against the policy.

But now, Australia is following the same path.

We’re not sure what plans Australia’s “Population Sinister” or “Population Tsar” will have for the nation. Will it be a continuation of the 3-Child policy? Maybe it will be expanded to a 4-Child policy.

Or perhaps the reins will be tightened to a China-like 1-Child policy.

Who knows? But whatever the outcome it’s just another futile attempt by megalomaniacal politicians to manipulate something which is impossible to control.

We’re not about to claim to be an expert on population in China, but we can take a look at a fancy chart we’ve cobbled together in Microsoft Excel to see just how successful population controls there have been:

We’ve relied on our friends at Wikipedia for some of the data and then whacked in a steady growth rate to fill in some of the gaps. Yes, we’ve used Wikipedia. Come on, be honest, we all do. Even the snobs in the mainstream press who deride it doubtless use it for background research.

They’re more than welcome to wade through the Encyclopedia Britannica if they really want to, but we’ll stick with Wikipedia thanks very much…

Anyhoo, what we can pretty much guarantee is that if the new Population Tsar has plans to limit the population growth it will doubtless lead to an increase in population. And if his plans are to increase the population it will doubtless lead to a decrease.

But whatever happens, as is the case with all attempts at manipulation, it will have many unintended consequences elsewhere in the economy.

The next thing we know they’ll try to manipulate the price of money. Oh that’s right, they’ve already stuffed that one up. Doesn’t stop them trying though. As we’ll see yet again with today’s Reserve Bank of Australia (RBA) interest rate decision.

But before we get on that, a quick note on the “good” news about the US job numbers from Friday night.

According to dailyfinance.com “it was the biggest U.S. employment rise since March 2007, when the economy added 239,000 jobs.”

For your information, if you haven’t read the news already, the US economy added 162,000 jobs for the month.

That’s got to be a good sign doesn’t it? I mean, the best job numbers in three years. Although it should be pointed out that March 2007 was just seven months before the stock market topped out in October 2007.

But the other more important point worth noting about the job numbers is the composition. Again, as you may have already read, “the number of nonfarm jobs added during March was skewed upward by the 48,000 jobs added by the U.S. Census…”

In other words, the only reason the jobs number is the best since March 2007 is because the US government hired 48,000 people to, erm, er, count a bunch of other people.

If that isn’t a perfect example of manipulating the numbers then I don’t know what is.

We’re not quite sure how anyone can claim that the government employing people to count other people can be considered as a positive sign for any economy. Quite the opposite we’d have thought.

By our way of thinking it’s more akin to a confirmation that the economy has gone mad. When commentators and analysts whoop and holler about job growth when one-third of those jobs are for temporary government number counters, then you know something is seriously wrong.

You can see how wrong things are just by reading this article in The Age which it sourced from Bloomberg News:

“…Non-manufacturing businesses that make up almost 90 per cent of the economy rose to 55.4, higher than anticipated… Readings above 50 signal expansion… Sustained job gains on the heels of the biggest payroll increase in three years would lift incomes, giving households the wherewithal to keep spending, which accounts for about 70 per cent of the economy.”

We’ve always been troubled by that number. That US consumer spending accounts for 70% of the US economy. To our way of thinking – backed up by the economic numbers – it means US consumers are spending way more than they earn.

But here’s the really scary quote from the article. It’s made by James O’Sullivan, chief economist at MF Global in New York:

“The recovery is looking increasingly self-sustaining.”

We’d argue that it’s anything but self-sustaining. Surely a self-sustaining economy is an economy where you produce a bunch of stuff, sell it, and then use the proceeds to buy or invest in other stuff.

A self-sustaining economy isn’t one where you earn $100, ask for a loan of $100 from someone, and then buy $200 worth of goods from the person you borrowed the money from.

That of course is exactly how the US relationship with China works right now.

As Peter Schiff pointed out in a video blog recently, it’s similar to the vendor finance deals that swept through the economy during the dot-com boom. In hindsight – and even at the time – it was seen as funny money.

We remember some of those stories. Maybe some were apocryphal such as the online companies that would buy $10 million worth of advertising space from each other without a single dollar changing hands, yet they’d book the amounts as revenue and expenses.

That ‘works’ fine until they have to pay real bills.

There were more gems such as, what’s the solution to the problem where your customers can’t afford to buy from you? You lend them money. It’s ingenious. It’s also high risk and unsustainable.

If your only why of selling stuff is to buy your own goods on behalf of your customers something is seriously wrong. The vendor financing terminology is a perfect illustration of how the US and China relationship has developed. And as you can imagine, the outcome is sure to end in tears.

But, enough of that for now, quickly back to manipulation of the price of money.

We wrote this in our weekly update to Australian Wealth Gameplan members last week:

“But getting back closer to home we now have the perfect example of the impossible task a central bank has of trying to manipulate interest rates. It’s the old problem of it not knowing whether to put the foot on the gas or on the breaks… or to just coast. On one side you’ve got the Reserve Bank of Australia (RBA) governor Glenn Stevens appearing on TV warning about speculating on housing – even though it’s the RBA’s artificially low interest rate that’s causing the speculation – on another side you’ve got economic indicators telling you the economy is slowing and could be harmed by further interest rate rises. And then on the final side there’s a pick-up in price inflation. Price inflation which we’re told isn’t possible while there’s an ‘Output Gap’.”

So, what does the RBA do? Whichever way it moves – or doesn’t move – the RBA is picking winners. If it increases interest rates then it’s giving a slap across the chops to anyone that’s in debt.

If it doesn’t increase interest rates then it’s giving a knee in the groin to savers, whilst allowing the debt bubble to expand further.

We’ve pointed this out many times before, but it’s worth continuing to express it. It’s impossible for a central bank to micro-manage an economy using interest rates to the degree which mainstream commentators and economists believe it can.

Take two economic numbers from last week as an example. The TD Securities-Melbourne Institute inflation gauge showed an increase of 0.5% in March (even though the ‘Output Gap’ theory says that price inflation is impossible right now!), yet the AIG-PricewaterhouseCoopers manufacturing index fell 3.6 points in March.

For a start you’ve got two separate indicators giving you two different signals on the state of the economy. One tells you that inflation is a threat, the other tells you it possibly isn’t.

At what point does the RBA do something about these numbers? And when they decide when to do something, what does it do?

We all know the RBA has a range for price inflation of 2-3% over the course of an economic cycle. But what does that mean? Why 2-3%? Why not 1.9% to 2.9%? Why not 2.1% to 3.1%?

Does the 2-3% really mean anything or is it just useful because they are round numbers? Is it good or bad news if the average over the cycle is 3.1%? Or is it OK because it’s only 0.1% higher than the target?

But if 3.1% is OK then why not make the range 2% to 3.1%? Or will the RBA compensate for that by keeping the price inflation number below 2.9% over the next cycle so everything evens out?

As you can see, it’s all just a complete nonsense. It’s smoke and mirrors that hides the real role of the RBA, and that is to devalue the money in your pocket.

Contrary to mainstream belief, the RBA doesn’t have a panel of fancy buttons at its disposal where it can perfectly and precisely direct the pace and the direction of the economy at its whim.

Every action the RBA takes does have some impact on the economy. But it isn’t an impact which it can accurately direct or predict. If it could then the RBA wouldn’t be in the position right now of talking up the prospects of the economy while simultaneously trying – half heartedly – to take the heat out of the property bubble.

Today’s interest rate decision will excite the market, whatever the RBA decides. But the fact remains that artificially moving interest rates creates the very problems of a boom and bust economy that the RBA claims it wants to avoid.

Cheers,
Kris.

In a couple of weeks the RBA will release the full minutes of the meeting. If the official version is anything like the previous versions it will mention international economic conditions, domestic economic conditions, financial markets, and considerations for monetary policy… Blah, blah, blah.

Of course the unofficial version goes something like this: [pump, pump, pump...]

For all the bluff and bluster about wanting to return interest rates to “normal” levels, there’s absolutely no doubt that the RBA lost its bottle.

It knows the impact that higher interest rates will have on the economy and so chose to take the cowards’ way out. The decision means the era of cheap money and easy credit continues. And that crazy housing bubble will last a while longer yet.

But yesterday’s decision by the RBA really shouldn’t come as any surprise. After all, as we pointed out in Money Morning on December 4 following Westpac’s interest rate increase of 0.45%:

“So, come next February and the next interest rate decision will the bank increase rates again because that’s what they planned to do anyway. Or will it cut them to take into account that Westpac has increased them too much? Or will it just leave the rate as it is?”

The fact is, last December Westpac played the RBA like a violin. In the same article we went on:

“All Westpac was doing was betting on the RBA continuing to increase rates through the early part of next year. Quite clearly, it’s [sic] thinking was, if the RBA is going to put rates up and harm all the lovely lending banks do, why not get in first and at least try and make some money out of it.

“That’s what they did. Their first gamble was that the other banks would follow. Their second gamble was that the RBA might think again about increasing rates at the February meeting, seeing as the banks were increasing rates anyway.”

And that’s exactly what happened. The poor little power-freaks on the RBA board who think they can tweak financial markets at their whim received a lesson from the bankers at Westpac.

As the RBA admitted in its statement:

“Lenders have generally raised rates a little more than the cash rate over recent months and most loan rates have risen by close to a percentage point.”

And not only that, but the bankers have backed the RBA into a corner so tight it’s in danger of crushing Governor Glen Stevens’ wooden head.

A new moral hazard

Just as the bank bail outs gave the banks carte blanche to take as many risks as they like – moral hazard, knowing full well the government will save their bacon, so the RBAs move yesterday has let the banks know that if they act independently of the RBA by increasing rates then the RBA won’t do anything.

That means bigger margins for the banks, higher interest costs for you, and a lame duck reserve bank. Not that that will stop it from fiddling with what it shouldn’t.

But let’s be honest, what is the point of the RBA? As we’ve mentioned before, it’s failed spectacularly in its main aim of providing a stable currency. Inflation of the money supply is proof of that. As our sometime contributor and ex-builder, Mark Thompson commented last year, it gets a “Grade F” on that score.

The general idea of having a group of half a dozen or so individuals invincibly setting interest rate levels is ridiculous. There’s nothing the RBA does that couldn’t be done better by the free market.

I mean, you don’t even have to look past the quarter-percentage point steps the RBA uses to raise or lower rates. Apart from it being a “tidy” number, what is the logical reason for moving rates by increments of 0.25%?

Why not 0.24% or 0.26%?

When you look at interest rate movements on the markets you don’t see them move in increments of a quarter point. Rates change on increments of 0.01%. Why does that happen? Because the free market demands it.

If futures markets traded in increments of 0.25% then few, if any traders would play along. In contrast, the RBA has no such market dynamic. It has a government mandated monopoly over interest rates and therefore can do how it pleases – it’s the same for all central banks.

Take a look at the table below of the ASX Target Rate Tracker:

The table shows the market expectation for an interest rate rise at the March RBA meeting.

Until yesterday, the financial markets had factored in a 100% chance of the RBA increasing rates by 0.25% in March. It was as dead a cert as you’ll ever see.

But then following yesterday’s RBA decision to not raise rates, suddenly markets don’t have a clue. Now the futures markets are only pricing in a 30% chance.

Last December we wrote that we’d like to give Westpac bankers a high-five for their ingenious decision to increase rates higher than the RBA move. We bet the other banks wish they’d followed Westpac’s lead and increased by the same amount.

Well today we’d like to give Glen ‘Woodenhead’ Stevens and his RBA buddies a slap across the chops for manipulating the markets.

Legalised market manipulation

And look, that’s exactly what it is. If any other private citizen or private firm intentionally manipulated financial markets for their own benefit as the RBA board members do, they’d be up before the beak quicker than you can say ‘monetary policy.’

That’s right, and I do mean for their own benefit. Maybe they don’t gain financially from it, but they gain mentally. It’s an ego thing. In their own mind they know the power they have to influence markets and they wield it with pride.

The fact is, holding rates at artificially low levels is doing irreparable long term damage to the economy. But it shouldn’t be left to a bunch of superannuated public servants and control freaks to determine the level of interest rates, it should be left to the free market.

Consider that table again. What is the market betting on? The truth is we don’t know. And the market doesn’t either.

The market is confused. Does it bet on an interest rate rise because market players believe an interest rate rise is necessary? Or does it bet on whether it thinks the RBA board thinks an interest rate rise is necessary?

And to take the manipulation further, the RBA board is trying to work out whether and how much the banks will adjust their interest rates before it decides whether to raise rates. So market players have to consider whether banks will independently raise rates in order to determine whether the RBA will raise rates…

Talk about a mess. It’s more like a standoff at the OK Corral than the functioning of a free market.

Think about it this way. For the past month individuals and businesses across the land have made decisions on their personal or business finances based on what they think will happen with interest rates.

The consensus among almost everyone was that interest rates would rise yesterday. So individuals and businesses may have acted accordingly. They may even have locked in a fixed interest rate in anticipation of it.

Or they may have bought Australian dollars and sold US dollars believing the rate would increase and the Aussie dollar would rise further or remain steady. Whatever individuals and businesses have done they’ve done so based on what they thought the market was telling them – that interest rates would rise.

Then what happens. The muggins’ on Martin Place decide to pull a fast one and not move rates. The outcome is that quite possibly hundreds of thousands of market players have been hoodwinked by the RBA.

But what would have happened in a free market? For a start, in a free market you wouldn’t get manipulation from government and government agencies.

Market players would make decisions free of manipulation by government. The market would send clear signals about which way interest rates were tending and people would act accordingly.

That very action would cause interest rates to move over time. The free market would eventually push interest rates to a level determined by free market forces.

Central banks create false signals

The problem with a manipulated market is that people see false signals. In hindsight people were fooled into believing the RBA would return interest rates to “normal” levels. And they were fooled into thinking that because it was the message coming from the RBA and all its mouthpieces in the mainstream press.

But then the RBA punched market players – that includes you by the way, individuals comprise the market as much as anyone else – in the guts by saying, “not so fast, we’ve changed our minds.”

Sure, in a free market individuals and businesses can change their minds and their priorities too. The difference is no one person or organisation would have the same level of control over the entire market.

No one person or organisation would be able to impact the personal or business decisions of millions of people through a single act.

Yet again, it’s the government’s banker that has decided who the winners and losers are rather than a genuinely free market. We can only hope the RBA is abolished before it gets the chance to celebrate its 60th birthday in nine years time…

Somehow and unfortunately, we can’t see that happening.

Cheers.
Kris.

We’ve found what can only be described as the bankers’ “playbook.”

The top secret document that lays down the rules of banking. And, contrary to what you may think, this top secret document isn’t thousands of pages long.

It isn’t stored in a prestigious library or national archive.

It doesn’t even have leather binding. And it isn’t written in Latin.

In fact, the secret to banking is just twenty-three words long. I’ll reveal the secret to you in a moment. But before I do, a quick word on our publishing schedule over the holiday period…

Your editor is on a half-day today. Once we’ve finished chiseling these notes into a stone tablet we’re off to meet up with the rest of the Sayce Clan and then it’s into the Melbourne CBD for our annual trip to see the Myer windows, lunch, some shopping, movie and then home for dinner.

Our “relaxation” – with one eye on the market – will continue until next Tuesday. Then we’ll publish Money Morning on Tuesday and Wednesday of next week before we take another short break.

Full service of your Money Morning newsletter will then resume on the following Monday, 4th January.

Anyway, following on from yesterday we thought we’d begin our final run towards the end of the year in the same way as we started it – poking a big pointy stick at the property market and bankers.

In foresight it was an unlikely place to find the influence behind today’s Money Morning. Yet in hindsight it was perhaps obvious.

Over the past year and a bit we’ve struggled to work out where the mainstream economists and commentators get their ideas on finance and economics from. The most obvious is their idea that more debt is the solution to a debt problem!

We’ve also struggled to work out what influences the bankers and their overlords at the central banks.

Lord (John Maynard) Keynes is usually the easiest suspect to point the finger at. His whacky ideas on how an economy works have spread its way like an unstoppable cancer into the minds of nearly every business and economics student of the last fifty years.

But it’s hardly surprising his ideas are so popular. The belief that an all-knowing and all-powerful government and bureaucracy can manipulate the market is a powerful drug for, erm, governments and bureaucrats.

And it’s equally handy for the professors and other academics who receive their lifetime salaries thanks to stolen taxpayer funds.

No public servant in their right mind would push for a free market. They know they’d be the first ones out of work, or that they’d actually have to do work rather than living off the fat of the taxpayer.

Any theory that aggrandises the role of the coercive sector will obviously be favoured by those in the coercive sector.

But back to banking. As luck – or should we say Chance – would have it, there seems to be a much simpler text for the bankers’ to rely on rather than Keynes’ “The General Theory of Employment, Interest, and Money.”

It’s the twenty-three words that set the road map for banking. Or in the marketing phrase of the 2000s, the “mission statement.”

Here it is:

“The Bank never ‘goes bankrupt’ but can issue as much money as is necessary in the form of IOUs written on ordinary paper.”

There it is. The secret to modern banking. Everything Mike Smith at ANZ Bank or Ralph Norris at Commonwealth Bank, or Gail Kelly at Westpac, or… the tall dull looking dude at NAB never wanted to reveal.

We’re sure that wooden-headed governor Glenn Stevens would be mortified if he knew the secret to banking had been revealed.

The secret of banking is revealed not in some fancy text book written by an English peer of the realm. And it’s not contained within a leather bound book high on a shelf at Reserve Bank of Australia (RBA) headquarters on Martin Place.

Nope, the secret of banking was simply and succinctly described by the non-Nobel Prize winning Parker Brothers in their Monopoly board game.

As we’ve said before, playtime for the Sayce kids can be a hoot as their old man randomly spots otherwise insignificant things and relates them back to the world of finance.

Which is exactly what happened yesterday evening as we refreshed our memory with the rules to Monopoly as the girls laid out the board. Within minutes your editor’s eyes sparkled on reading the paragraph.

And within a few minutes more our interest in the game of Monopoly had waned, “Er, wouldn’t you prefer to play by yourselves rather than having this old duffer who’s hard of sight and hearing annoying you?”

We had to lay it on thick, but it’s good practice for when your editor becomes a frequent buyer member with Zimmer Holdings [NYSE: ZMH].

And so we made off to make some notes for today’s Money Morning.

The version we’ve quoted is our copy of the rules. You can find an almost identically worded version at the bottom of page one here.

Look, we’re only being slightly facetious here. But the fact is, the rules of banking laid down for the Monopoly board game by Charles Darrow and the guys at Parker Brothers nearly eighty years ago are the precise rules being implemented by the central banks and retail banks today.

Normally when we’re looking to draw an analogy with past events we’re left to draw a fairly long bow – “It’s kind of similar, but not quite…”

But if we took these twenty-three words: “The Bank never ‘goes bankrupt’ but can issue as much money as is necessary in the form of IOUs written on ordinary paper” and showed them to our pencil lipped RBA governor Glenn Stevens or his lifetime-in-the-public-service deputy Ric Battelino, they could not reasonably disagree that this is an exact definition of the role of central banks and the retail banks.

We remember years ago how the currencies of tinpot dictatorships were referred to as monopoly money. That the promises to “pay the bearer on demand” were worthless thanks to their inflationary policies.

Now – sadly – the same can be said for the paper (fiat) currencies of Australia, the US, UK, Europe, and anywhere else that runs a paper based currency system.

There can be no dispute that these same currencies should be labelled ‘Monopoly’ money. Because in effect they are almost worthless.

In essence there is almost no difference between the $20 issued by the Reserve Bank of Australia and the $20 issued by the little fat man with the moustache on the Monopoly box.

Neither is backed with anything of any value. And both are printed for little cost and no effort on a printing press. The only difference is that for now one of them will allow you to buy a Mighty Angus from McDonald’s while the other won’t.

But why should the RBA issued $20 note be worth any more than the Monopoly issued $20 note? Why can the RBA print money when it wants and circulate it around the economy when if we did the same thing we’d be hauled off to gaol?

How come the banks are allowed to create money out of thin air by telling you your money is available on demand in a savings account while simultaneously lending it out for someone to buy a house with?

The same money surely can’t be available at the same time to both borrower and lender…

In any other walk of life or business this would be considered embezzlement or fraud or counterfeiting. But not in banking circles. They can do what they like.

But it all goes to make a mockery of the nonsense you see in the papers about the robust banking system. It’s nothing of the sort. NABs $13 billion Italian debt problem is a perfect example.

This simple definition in an eighty year old board game shows you exactly why central banks can’t be trusted with your money. And neither can they be trusted to maintain the value of your money.

As we pointed out last week, since the RBA was established, the value of the Australian dollar has been decimated by 90%. In other words it has lost nine-tenths of its purchasing power.

Or to put it another way, if you were a young lad starting out in work at the end of the 1950s you would have needed to see your wages rise by 1,000% in the following fifty years just to maintain your standard of living!

That’s right, “maintain”, not to get ahead, but just to hold on to your standard of living.

Does that sound like the work of a competent central bank? No answer required there.

Yet this is the same central bank that lamebrain commentators such as Ross Gittens – “The Reserve Bank is relaxed about its forecast next year the economy will be right back in the groove… I can guarantee this forecast will be rock solid” – and Michael Pascoe – “Does anyone really think the Reserve Bank is silly enough to be forecasting two months out what it might or might not do in February? Nah, they leave that sort of nonsense to the poor old market economists.” – who believe the RBA are geniuses.

That the RBA can’t possibly put a foot wrong. That because the RBA is made up of a bunch of anaemic public servants it knows exactly how to forecast and manipulate an economy of 21 million people.

We’re sorry to break the news to Gittens and Pascoe, but the RBA ain’t geniuses. It has destroyed the Australian currency by 90% in fifty years simply by issuing “as much money as is necessary in the form of IOUs written on ordinary paper.”

That reader is why we’ve been saying all along, that a paper based monetary system is unsustainable. Unless it is backed by something of value, the bankers have unlimited ability to create as much paper money as they wish.

And it is that act of inflating the money supply which results in the value of your money, your wealth and your earnings being destroyed.

On that note, Merry Christmas, a Happy New Year, and try not to think too much about the theory of money when you settle down to play Monopoly over the holidays!

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished the day 1.49% up, closing at 4,704.20. International markets were all up overnight and the Aussie market has opened higher again today.

Making headlines today is the Australian Securities Exchange’s (ASX) criticism of Treasury’s planned new market supervision regime. Read more here.

The Dow Jones Industrial Average was up by 50 points overnight, ending the session at 10,464.93. The positive news on American housing numbers was seen as an optimistic sign to investors.

Overnight in the UK, the FTSE added 34 points to finish at 5,328.66

The Nikkei finished the day at 10,378.03, higher by 194 points.

The price of spot gold in Australian dollars is trading at $1,239.02 while in US Dollars it is trading at $1,084.16. The price of silver in Aussie dollars is $19.41 and in US Dollars it is $16.99.

The Aussie dollar was lower this morning against the US dollar as home sales in America were stronger than expected for November. Experts are suggesting that more data like this will see an interest rate rise in America by mid-2010.

The Aussie dollar versus the US dollar is trading at USD$0.8756, and against the Japanese Yen JPY80.41

Crude oil closed at 74.45.

For the biggest movers on the market yesterday click here…

That’s my final market wrap for this year. I’d like to wish you a very Merry Christmas and a safe and happy New Year. I’ll return on the 4th January 2010.

“The long-run prospects for the Australian economy have not deteriorated to the extent that some people may presently be feeling,” he said. “We do have reasonable grounds for some quiet confidence about the future, however bad the storm at present.”

more...