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

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

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

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

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

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

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

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

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

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

But it didn’t.

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

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

On with today’s Money Annoying…

The Emperor is Dead… May He Remain So

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

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

Cue the snivelling tributes:

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

Swan went further. According to The Age:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What a guy. What a performance. What a…

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

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

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

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

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

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

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

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

“Taxes are what we pay for civilised society.”

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

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

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

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

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

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

Who is or was HC ‘Nugget’ Coombs?

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

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

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

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

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

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

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

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

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

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

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

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

The original ‘Champagne Socialist’ perhaps.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Coombs wrote in 1990:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regards,

Kris Sayce
For Money Morning Australia

But let’s get one thing straight. Behind all the sound bites about “helping battlers” and “ensuring the rich pay their way” and “closing loopholes” and “making tax returns easier”, the ultimate objective is for the government to increase the amount of tax it takes from you.

When the government says it wants to make the tax system more efficient, it means that it wants to make it more efficient for it to take your money.

When the government says it wants you to be able to lodge your tax return with the click of a mouse, it means it wants to make it easier and quicker for the government to take your cash.

There is zero chance of the tax burden on Australians being reduced as a result of the Emperor’s tax review.

Unfortunately we don’t know what’s in the review yet, that will be released on Sunday. But one of the hot topics is the supposed resource rent tax. It’s the idea that mining companies could be taxed up to 40% of their profits. And that this would replace state royalties and the corporate tax rate.

What will that mean to Australia’s resources companies? According to Digger’s & Drillers editor Dr. Alex Cowie:

“Miners currently have a 30% corporate tax rate, with state production royalties of 2-8% on top. The theory goes that the review would scrap both taxes, and replace them with a single 40% tax rate. Those companies already paying higher royalties, such as coal producers, would be less affected by the change than those companies paying lower royalties, such as gold producers.

“Looking on the bright side, there are a few obstacles in the way of the proposed tax changes. Realistically, the state governments would first all need to agree to give up their royalties, which would be about as easy as rounding up a room full of cats. WA’s premier, Colin Barnett, is getting ready to defend his state’s royalties with a good punch-up with Kev if he has to. The resource sector is not taking the proposed tax very kindly either.”

But not surprisingly, the collectivists such as the trade unions think a resource tax is a wonderful idea. As Tony Maher, the top commissar of the Construction, Forestry, Mining and Energy Workers’ Union (CFMEU) told the ABC:

“This is a tax on the super profits, the profits above and beyond a normal or generous rate of return… They should share some of the billions they are making with the community.”

He goes on:

“Everybody knows that no-one likes to pay tax, but they have to pay a tax on the resources that are owned by the Australian people that they make squillions [sic] out of. It is only fair and it is the smart thing to do. Other countries have sovereign wealth funds. This is the opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

We’ve chosen these quotes because they contain everything that is wrong about the socialist and mainstream approach to economics.

We’ll look at the key points that Commissar Maher raises. Although we’ll point out that he isn’t the only one with this view. And we’ll also point out that it isn’t just the ’socialist socialists’ that adopt this view either. It’s the ‘conservative socialists’ that take pretty much the same line.

So, let’s take a look at the first point, the idea that “This is a tax on the super profits, the profits above and beyond a normal or generous rate of return.”

Our simple question is, if current profits are “above and beyond” what the socialists determine to be a normal rate of return, what level do they consider to be a normal rate of return?

Is a profit of $1 billion too much? What about $990 million? Or $826 million? Would that be OK?

And who determines what that profit level should be? Do these control freaks envision a panel of [hehem] experts setting profit levels for specific industries?

Retailers can make X amount of profits. Miners can make Y amount of profits. And chemists can make Z amount of profits.

But then what happens to a diversified company such as Wesfarmers?

It’s clearly a lot of nonsense.

What Mr. Maher and others fail to appreciate is that there’s no such thing as a “normal” rate of return. There’s no such thing as a “normal” profit. “Normal” profits only occur in the mythical world of a planned economy.

Except in those circumstances the profits aren’t real anyway.

A profit only occurs if consumers are prepared to pay more than what it costs the company to produce the product. A profit level can’t be arbitrarily set by a Profit Tsar.

If consumers don’t believe a certain product is worth the price set by the company then consumers won’t buy it. The company will have to reduce its price. And sometimes it may have to reduce the price so much that it makes a loss.

Maybe in the world of trade unionists they’d prefer that companies didn’t make any profit. But then of course what would be the incentive for the entrepreneur to go into business in the first place?

These so-called super profits merely indicate that buyers are prepared to pay up for something they want. It’s a bit like housing right now. Buyers are prepared to pay ever higher amounts for a house.

There isn’t much different as far as we can see. Except one – resources – has an end use, whereas the other – housing – is bought simply in the belief it can be sold at a higher price to someone else.

But in both cases the boom won’t last. The housing market will crash and burn. And China will crash and burn too.

Both are inevitable. But that’s a different story…

So, the fact is, there’s no such thing as a normal profit level.

What about the next part of Commissar Maher’s statement, “They should share some of the billions they are making with the community… they have to pay a tax on the resources that are owned by the Australian people…”

We have to say that those comments are the biggest load of hogwash there is. But again, Maher and the union movement aren’t the only ones to say it. The idea that all Australians own the natural resources in Australia is engrained in people across the country.

But is that really the case? Do you really own 1/22,000,000th of BHP Billiton’s Olympic Dam project in South Australia?

Do you really own 1/22,000,000th of Bow Energy’s coal seam gas fields in Queensland, or Woodside’s gas fields on the North West Shelf?

Of course not. You no more own 1/22,000,000th of the natural resources of Australia than do you own 1/22,000,000th of your neighbour’s backyard.

Just because Western Australia has a whole bunch of iron ore and copper several hundred metres below the surface doesn’t make it the property of the nation.

I mean, what have you or I done about all the natural resources buried deep underground in Western Australia? It’s not as though we’ve been in any hurry to raise millions of dollars in capital, pick up a shovel and head west. Well, maybe you have, but your editor hasn’t.

The fact is, the natural resources that are underground are owned by no-one. They only become someone’s property when an individual or an organisation invests the capital to recover them.

At that point it’s their property and they should reap the rewards of taking the risks. After all, how many explorers spend millions and billions searching for a resource only to strike dirt or water? The Australian Stock Exchange is littered with zombie miners perennially searching the outback for one big find.

Think about it, why should your editor take a 1/22,000,000th stake in Fortescue Metal’s iron ore mine when we’ve not done one single thing to earn it?

But let’s look at it this way. Let’s say a 40% tax is introduced on resource company’s profits. That means the “nation” supposedly gets 40% of the profits and the company and its investors keep 60%.

If we’re talking about having a fair tax system, how is that fair? The resources explorer only gets to keep just over half of the returns yet it’s the resources explorer and its investors that have taken all the risks.

The explorer will have spent millions of dollars searching for the resource. It will have spent millions more trying to recover the resource and then processing it. And then when all that’s done, the government steps in and says, “Thanks, we’ll take 40%. And if you don’t hand over the cash we’ll send you to jail. So pay up sucker!”

What has the government done for the money? Nothing. And what have you or I done, each as 1/22,000,000th owners? Nothing.

And as for the idea that resources companies should share the bounty with the community. Well, they already do that. They employ people to work at the mines. Those people don’t offer their labour for free, they demand a wage in return.

Then there’s the allied services that benefit from the exploration of the resource. And we’re talking real investment here, not a sham investment of building a school gym or a new hospital wing.

Not to mention other beneficiaries in the community. Such as steel makers who need iron ore. Or construction firms who need steel. Or electricity installers who need buildings to install wiring.

That’s what real investment provides to a community.

Of course, we suppose the nanny-staters wouldn’t get that. They’re too busy believing that money can just be printed to build stuff rather than wealth being created through real investment.

And don’t forget, you can draw a straight line from the mining sector all the way through to personal taxation. The government does the same with your income.

It would seem that if we use the same standards applied by Maher to the mining industry then the same standards must apply to your income. That is, that each Australian owns 1/22,000,000th of your income.

That’s why at the end of each week you only get to keep about 60% or 70% of the money you make. The rest is syphoned off to be shared by the community.

Finally, what about the idea of a sovereign wealth fund, “This is the opportunity for the Australian people to have a sovereign wealth fund that can pay dividends after the minerals are gone.”

Again, it’s the idea that money should be taken from you and given to the government to invest. Supposedly on your behalf. In reality it’s on the behalf of the government and its cronies.

Unfortunately, a sovereign wealth fund is undoubtedly on the cards. It’s the next logical step for Australia’s superannuation system. As we pointed out yesterday, it’s all about taking away control from the individual and placing it in the hands of “experts” and bureaucrats.

Make no mistake, Australia and all Western nations are heading down the same path of self destruction. It’s an economy where entrepreneurialism, initiative and effort are despised, frowned upon and penalised by coercive governments.

And where the mainstream view decrees that entrepreneurialism, initiative and effort are surplus to requirements because as Prof. Kriesler from the Australian School of Business reminds us, “printing money as a way to increase demand is a good move.”

Why go to all the trouble of exploring for minerals in the middle of a desert when the government can just print money and use coercive means to take it from its citizens instead.

I don’t know about you, but it’s pretty clear which one provides a real benefit to the economy and which one is a money printing, inflation loving parasite.

Cheers.
Kris.

It’s pretty easy to say that when you’re a career leach. Sorry, we mean public servant… No, actually, we do mean ‘leach’ after all.

On reading those words from Emperor Henry, it rather reminded us of this moment back in 2003:

“Major combat operations in Iraq have ended. In the battle of Iraq, the United States and our allies have prevailed… [Applause, whooping and hollering] And now our coalition is engaged in securing and reconstructing that country.”

At the time it did indeed appear as though the ’shock and awe’ military strike in Iraq had ‘worked.’ Seven years later and, erm, well, the last we heard there was still a bit of bother going on there.

The story is similar with the global economy. Thanks to the meddling of national governments and central bankers, there’s the impression – a false impression – that the worst is behind us.

But as you’ll know from reading Money Morning, the facts are different. The worst is yet to arrive. Although if you look at the news, there are signs beginning to show that the delayed effects of the global financial meltdown may only be just around the corner.

Like George ‘Dubya’, the bankers and governments believe they’ve got this thing licked. And that after saving the world they’re now determined to secure and reconstruct the global economy.

New regulations are proposed. New taxes are being invented. Government will take the driving seat instead of leaving things to so-called free markets.

But the real outcome of their meddling is plain for all to see. The dodgy situation in Greece is a perfect example. But we’ll have more on that tomorrow…

First, a look at those ‘amazing’ job numbers that sent the markets and commentators wild last week.

“What we particularly celebrate about these figures today is the thought that 52,700 Australians have told their families in January that they got a job.”

That was Treasurer Wayne Swan’s comment in Parliament last week after the release of the Australian Bureau of Statistics (ABS) employment data.

According to the ‘great’ news in the mainstream press last Thursday and Friday, “Australia’s jobless figure [fell] to 5.3 per cent from 5.5 per cent.”

Gee, wouldn’t that be nice if it was true. Wouldn’t it be nice if the unemployment rate really was 5.3%? And wouldn’t it be nice if 52,700 Australians really did tell their families they got a job.

Look, we’re sure plenty of people did get work in January. That’s the nature of the job market. Some people get a job and some people lose a job.

The problem is, in the world of statistics, what the press is actually reporting isn’t actual job numbers. What they are actually reporting is a statistic.

It may seem obvious, but it’s important to realise that a statistic is just that, it’s a number contrived by the ABS rather than an actual picture of job gains or losses.

It’s a bit like the home index numbers. It’s an index that’s based on real numbers, but which gets fed into a fancy computer programme, out of which comes a neat little number.

But if you look at the unemployment numbers there’s more than one way to interpret them. We’re not saying our interpretation is any more accurate than Wayne Swan’s, but what we will say is that if you look at the original numbers rather than the ‘trend’ or ’seasonally adjusted’ number, it tells a completely different story to what has been reported.

And furthermore, as we’ve seen many times over the years, the ability of the mainstream economists to make accurate forecasts based on economic data has been woeful.

As we pointed out with the misleading reporting of the ANZ Job Advertisements, the same misreporting has happened with the unemployment numbers.

In both instances, the press reports and analyst commentary has gone cock-a-hoop over the fantastic numbers that show Job advertisements rising and the unemployment rate falling.

When in fact the reverse is the case.

The mainstream press reporting of the December ANZ Job Ads chose to only look at the seasonally adjusted figures. In other words, they looked at a statistic rather than the raw data.

That was only the start of the deception because the January job ads were even worse.

According to the ANZ, total internet and newspaper job advertisements fell to 109,177 in January, a 25.8% decrease on the January 2009 number, and a 50.8% decrease on the January 2008 number.

In fact, get this, the January job ad number was the worst since at least November 2004.

Of course the argument could be that, “It’s bound to be lower because the Australian economy didn’t lose as many jobs, so employers don’t need to advertise.”

Well, you could argue that, and it could be true.

In fact, if you look at the employment numbers from the ABS it tells you in January there were 10.85 million employed persons in Australia compared to just 10.61 million employed persons two years earlier.

So, during the global financial meltdown Australian businesses maintained total workforce numbers.

But the not-so-rosy number is the number of unemployed people. That’s increased by 150,000 during the same time.

And in fact, according to the ABS, a net 196,961 people told their families they’d lost their job in January alone.

That’s because the total number of employed people dropped from 11.047 million in December, to just 10.850 million in January.

Look, we’re aware of the reasons behind the use of ’seasonally adjusted’ and ‘trend’ numbers. It helps to smooth out seasonality and give a bigger picture view.

However, although it may smooth the numbers, it also hides the real story.

What the numbers likely tell you is that thanks to the stimulus spending and government bail-outs, many businesses recognised they could afford to maintain staff numbers.

Of course, that’s only the net employment position. Some industries will have fared better than others. Especially those in the construction sector and allied industries.

Over this time many businesses have been able to maintain their pricing levels and their staff numbers. If they’d had to cut prices, odds are more businesses would have fired workers to try and cut costs.

The stimulus programmes and bail-outs prevented that from happening.

The consequence is that prices didn’t fall. The proof of that is in the consumer price index (CPI) numbers which indicated rising prices during the last year.

And contrary to mainstream opinion, that’s bad news.

Because the biggest fear now is that what should have happened in 2008 could very well now happen in 2010, only it’ll be worse.

It’s easy to think that a stable employment number is good. That the stimulus programmes prevented these people from losing their jobs. The reality is different. It certainly helped those in some industries, but it has punished those in other industries that didn’t receive the benefit of the bail-outs.

Besides, look at where many of those jobs have gone. Crazy government funded projects such as the Green Loans scheme and wasteful school building projects.

But even worse than that is the fact that those stimulus programmes need to be paid for at some point. The only way the government can do that is to pay for it through the tax system.

Right now, according to the Australian Office of Financial Management, there is $124 billion of taxpayer subsidised government debt outstanding. $117 billion in Australian dollars, and nearly $7 billion in foreign currency denominated debt:

That works out to around 11% of Australia’s GDP.

But that’s not all. Add in the private sector debt and as we’ve noted recently, Australia’s debt position is well above 100% of its total income.

The problem for the economy now is what will happen over the next year when we assume there won’t be any further stimulus packages? That’s billions of dollars worth of spending that was in the economy last year but which won’t be there this year.

We’ve already seen that the retailers have produced revenue and profit numbers below market expectations.

And this year the economy faces the prospect of increasing interest rates and higher taxes.

One alternative is for the government to follow the Greek, US and UK example to the next level. And that’s to keep spending, and then borrowing more money to cover it.

You only have to look at Greece to see the mess it’s in. Yet it would be a mistake to think that Greece is a basket case, and that Australia is so much better off.

In nominal terms, the Greek public sector debt is €294 billion. That’s around AUD$449 billion, or about four times the Australian public debt.

But then compare household debt. According to Barron’s: “Greek consumers are relatively frugal, with household debt equal to just 61% of GDP.”

Which puts Greek household debt at around the equivalent of AUD$313 billion, compared to Australian household debt which is over AUD$1 trillion – or nearly four times as much.

So, all up, the nation that’s been roundly scoffed at as an economic disaster, is not much more indebted than Australia. Certainly in terms of its GDP, the Greek position is worse, but in simple dollar terms Australia’s debt levels are far in excess of the Greeks.

And this is where the real problem for Australia is. Rising interest rates. Even without the impact of a Greek debt default, interest rates are pointing towards going higher.

Domestically, the Reserve Bank of Australia looks certain to raise interest rates to at least 5% by the end of this year. And considering the reliance of Australia’s banks on foreign debt, odds are that investors will demand higher interest rates in order to offset the risks of default.

And that will be the case regardless of how safe domestic commentators believe Australia’s debt position to be. If risk premiums are rising globally, whether we like it or not, there will be a flow on effect to Australia.

And being a commodity economy, that will add a further risk premium – especially as Australia doesn’t have much to offer the world apart from commodities.

So, while Australia’s ‘miracle’ economy may have escaped without much damage so far, it has only been due to China and excessive debt.

And right now, any investor will be very wary of relying on either of those coming to the rescue of any economy.

Cheers.
Kris.

Mainly because we’ve got nothing further to add for now.

We had hoped to come up with some elaborate analogy to illustrate the foolishness of the Copenhagen Conference and how the 34,000 attendees won’t achieve one single thing that will benefit the environment.

But fortunately we don’t need an analogy because it’s plain to see that nothing good will come of it.

I mean, take the opening paragraph to an article on page 14 of today’s Australian Financial Review (AFR):

“Heavy industry is pressuring the Rudd government not to lift its greenhouse target above a 5 per cent cut by 2020…”

Seriously, for the amount this scam is going to cost, 5%, what’s the point? It hardly seems credible that a 5% cut will prevent the whole world from melting and sea levels rising to the moon.

As we mentioned yesterday, we’ve been told Climate Change is of such vital importance for the survival of humankind, yet the government is only proposing a 5% cut in emissions.

It can’t be that urgent then. Maybe if the government stopped giving a free kick to the fossil fuel industry at the expense of ‘greener’ fuels they might actually achieve something.

Anyway, as I say, we struggled to come up with a suitable analogy. We were looking for something Danish and the best we could come up with was bacon, pastries and Lego.

None of which seemed to offer any plausible comparison.

So we turned to the literary world instead. But still we’ve come up short. Our pea-sized brain could only come up with Hans Christian Andersen and Hamlet.

“The Emperor’s New Clothes” probably fits the bill best. Politicians and bureaucrats swanning around – like Ugly Ducklings – wearing their Climate Change clothes, only for the crowd on the sidelines to shout “But they aren’t wearing anything at all!”

But, like in the story, they keep strutting, hoping no one will notice.

Perhaps the best analogy is yet to come. That’s if the ending of Hamlet is anything to go by. We can only wait and see.

If you’ve read the Bard’s play you’ll know that after a few hundred pages only two or three of the players is knocked off. But then in the grand finale the entire main ensemble is sent off to meet their maker.

Meeting their end by the sword or from poison – and in a couple of cases a combination of the two! Of course we’re not advocating such an event in Copenhagen(!), but it would certainly liven up the proceedings.

Anyway, considering we weren’t going to mention Copenhagen we’ve done a pretty good job of, erm, mentioning it. We were going to pull the pants down on property again today, but that can wait until next week.

Instead a follow up on yesterday’s Money Morning article on the planned theft of your super.

As a refresher, we pointed out that two jumped-up boffins from the University of New South Wales had presented a submission to Emperor Ken Henry’s tax review panel recommending that a “compulsory” government provided annuity was the most “efficient” way to provide for retirement.

It would mean that the hundreds of thousands of dollars, or even millions of dollars that you’ve accumulated in your superannuation fund would be compulsorily acquired by the government on your retirement and in return you would get an Aged Pension MkII.

The worst thing about it is that it was a commissioned submission. In other words Emperor Henry selected the two profs to come up with this report. So we can safely assume it’s in line with what the Panel has in mind.

But we’re still amazed the submission didn’t once mention the already tried and failed existing Aged Pension. That’s a perfect example of what happens when a government grabs your money and then tries to “invest” it for your retirement.

Because it turns out they don’t invest it, like most Ponzi schemes they just spend it.

But there are more examples. Money Morning reader Steve sent us this perfectly timed article from the UKs Daily Telegraph headlined, “Taxpayers face £2 trillion unfunded pensions liability.”

The article explains:

“The entire bill of around £2.2 trillion would more than triple the size of the national debt overnight. It is entirely unfunded, so will have to be paid directly by future generations of taxpayers, rather than paid out of a pot contributed to by the pensioners themselves.”

That’s what happens when the state is given responsibility of looking after you. It spends all the cash and then has to borrow and steal from future generations just to pay you an income that won’t even keep you above the poverty line.

In fact, there’s not much difference between what the UK and Australian governments have done with pension money to what dead crook Robert Maxwell did with company pension funds in the UK in the 1980s and 1990s.

Maybe Ken Henry and the tax review panel plan on taking a leaf out of Robert Maxwell’s book on how to handle pension money.

According to the ‘Lazy Researcher’s Handbook’:

“It emerged that, without adequate prior authorisation, he [Maxwell] had used hundreds of millions of pounds from his companies’ pension funds to finance his corporate debt, his frantic takeovers and his lavish lifestyle. Thousands of Maxwell employees lost their pensions.”

You could easily replace those words with “… pension funds to finance government stimulus programmes, infrastructure spending and public sector salaries.”

But before you say, “Aha! That proves the free market and private enterprise can’t handle this either”, I’ll quickly point out that being a crook and stealing money from people has got nothing to do with free markets.

Being a crook is being a crook whether it’s private sector or the coercive (public) sector.

The best way to stop crooks getting hold of your money is not to give it to them. Trouble is, in the government’s case it’s hard not to when you’re forced to do so, and when you’ve got the threat of jail if you don’t.

So, as Money Morning reader Dave asked us yesterday:

“What can we do to stop this theft of our super funds?”

The simple answer is probably, not much. But it’s a theme I’ve already started to look at in Australian Wealth Gameplan. One simple solution which I’ve advocated for some time is that you’d be mad to contribute more than the compulsory amount into your super fund.

I know many financial planners will tell you that super is the most tax effective investment vehicle there is, but just as with any other investment, you should never invest purely for tax reasons.

I don’t care how good something looks, if the primary reason for investing is because of a tax break, then the odds are it’s a bad investment – just remember all those “tree farms” and “grape farms” accountants and some of the dodgier financial planners were spruiking.

With the ‘compulsory acquisition’ proposal in the pipeline, adding more cash to your super fund now could be the equivalent of just burning it.

But don’t forget that if the trade unions and fund managers and super fund lobby group get their way, it won’t be 9% of your salary getting swiped each year, it could be up to 15%.

And there’s absolutely no guarantee whatsoever that you’ll ever see any of it ever again.

Which makes these pension plans sound more like a nightmare than a fairy tale.

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 finished down yesterday to 4,606.70, lower by 31 points. A positive day in Wall Street overnight has the index open up this morning.

The Dow Jones Industrial Average gained 68 points or 0.67% to end the day at 10,405.83. Despite the mix reports about job losses and unemployment in the US, the major retailers all finished the day higher.

Overnight in the UK, the FTSE ended the day higher by 0.78%, closing to 5,244.37. There were no changes to the £200 billion quantitative easing program and the record low interest rates 0.5% which helped all the major banks to finish higher.

The Nikkei finished the day down to 9,862.82, lower by 1.42%

The price of spot gold in Australian dollars is trading at $1,233.41, while in US Dollars it is trading at $1,130.52. The price of silver in Aussie dollars is $18.98 and in US Dollars it is $17.40.

The Aussie dollar versus the US dollar is trading at USD$0.9172, and against the Japanese Yen JPY80.98

Overnight, Crude oil was down again, closing at USD$70.54.

For the biggest movers on the market yesterday click here…

“I have great confidence in the common sense of individuals and families around NSW and indeed Australia to work out what an appropriate level of debt for them is, given their circumstance.” - Nathan Rees, Premier, New South Wales

That’s nice of him. It’s a shame that he doesn’t have any confidence in the common sense of individuals to spend or save the money they earn. If he did there wouldn’t be any need for Federal and State governments to swipe half your gross income through various forms of taxation.

The government takes your money on demand, and then makes you fill out a multi-page form every year just for the privilege of getting some of it back. Of course there’s always the chance that after filling out the form you’ll end up having to give the government more money.

There’s nothing like being forced to dob yourself in eh?!

A report in yesterday’s The Age perfectly illustrated the modern view on taxation with the opening sentence of Ian Verrender’s column:

“FORGET women and scorn, hell hath no fury like a taxman bilked.”

In other words it’s suggesting the money that YOU go out and work a 40-hour week for is the Taxman’s money and woe-betide you if you don’t give him everything he deserves.

That’s the consequences of a so-called ‘progressive’ tax system. What they should mean by ‘progressive’ is that the pendulum is progressively shifting towards government and away from the individual.

How long will it be before the taxman just takes everything and gives you a monthly allowance? Treasury Secretary Ken Henry is working on a project to revamp the tax system. All the special interests groups are having their say.

One thing can be guaranteed, the tax burden for all Australians will increase.

Ken Henry was at the Melbourne Institute yesterday, and in today’s Australian Financial Review (AFR) it reports a speech given at the institute by Professor Peter Whiteford from the University of New South Wales.

The article claims that:

“Australia had the most progressive tax system in the Organisation of Economic Co-operation and Development, redistributing more tax from rich to poor than any other country.”

The problem with this claim is that it actually isn’t true.

When you think about it, the redistribution of wealth doesn’t go from rich to poor at all. It doesn’t even go from rich to middle class. And, amazingly enough, it doesn’t go from middle class to poor either.

In reality wealth is redistributed from rich, middle class and poor in one direction only. And that direction is always to the government.

The poor are merely used as a convenient foil by governments to argue for increased taxes and an increase in government. The middle classes are typically made to feel guilty for being more fortunate than others and are therefore told that their tax dollars are being put to good use in schools, hospitals, public transport, etc.

And the rich? Well, no-one need worry about them, they’ve got lots of money they should give almost half of it away to the taxman – it’s only fair!

The real fact is that no-one benefits from “progressive” taxation.

The rich are forced to forfeit almost half of their income, even if they set up fancy structures to lower the tax burden. In most cases people are rich because they have worked hard for it, or because they have invented, developed or marketed a product or service that people want or need.

They should be rewarded for that. And they are with high incomes. Yet they don’t get to receive the full benefit of that reward because the government grabs half of it before it even gets to their wallet.

The middle class are punished by “progressive” taxation because they too are faced with having to forfeit nearly half of their income. Once you add up income taxes, levies, surcharges, state taxes, local government taxes, and sales taxes, there is very little real disposable income left.

And then other government policies compound this by distorting the market to make the cost of living higher than it should be. No wonder so many middle class have to rely on “welfare” payments from the government.

And of course the biggest losers out of this whole fiasco are the poor. Government taxes and regulation provide the biggest hindrance to the poor.

Far from being beneficiaries of government welfare, they are the victims of it. Higher taxes and higher regulation make people poor by denying them the opportunity to be productive. Minimum wage legislation ensures those with low or no skills find it hard or impossible to get a job.

As for the quality of public services, you only have to look at the billions of dollars spent every year on welfare, health and education to wonder where all the money goes.

Is this really the best that can be done?

You see, a high tax burden just encourages waste. And there is nothing better at wasting money than a government. Public servants live in a closeted world. They don’t know the market rate when they spend money on products or services.

They have arbitrary budgets assigned to them and then spend as much as they want. Even when projects are sent out for tender, those responding know they can over quote as they are not trading with a for-profit organization.

The fallacious argument is that taxes are needed in order to pay for the public services we can all ‘enjoy.’

Naturally we don’t agree with that. Left to a free market, the quality of healthcare, education and public transport would be far superior and far cheaper.

There is absolutely no difference between how the market should work for providing healthcare than how the market works for buying cars, or buying clothes. It is the presence of government that causes prices within the healthcare industry to continually rise.

In a free market health and education providers would need to compete for your ‘custom.’ This, as in every other instance of market forces would drive the overall price of the service down.

The idea that the poor would be priced out of the market is incorrect. They would be priced into the market. If healthcare providers raised their prices too high a free market would make it easier for other businesses to price their service lower and therefore attract more ‘customers.’

Again, it is no different to how any other business works. You only have to look at products such as plasma televisions. Only a few years ago the cheapest one would set you back $10,000, yet today you can buy the equivalent standard for less than $1,000.

That is all down to competition. Newer entrants into the market can rely on existing technology and develop a cheaper product.

As far as we can see there is no reason why it shouldn’t work for public services. As always we’re prepared to be proven wrong.

But cutting taxes, having a completely free market and stopping the redistribution of wealth to the government is the best way to improve the standard of living and standard of services for everyone.

Kris Sayce
for Money Morning Australia