“[C]ut carbon dioxide emissions by 1 million tonnes and save $344 million in fuel costs in the next 10 years”.

We then wrote, “But when you compare it to Australia’s total CO2 emissions as of 2007 of 374 million tonnes, the amount saved isn’t even a drop in the ocean. In fact it’s a paltry one quarter of one per cent.”

Of course our error was that we didn’t divide the supposed CO2 savings over the ten year period. So as a proportion of Australia’s total annual CO2 emissions, the dopey cash for clunkers scheme will actually reduce CO2 by even less than we claimed.

It will be a miniscule one-tenth of one quarter of one percent each year. Or to put it another way, 0.025%.

Not only that, but according to Michael Green at The Age:

“EcoBoost-Hybrid – wow! That sounds green, right? But it neglected to mention those other – ahem – icons of fuel efficiency, the Toyota Prado 4WD, or the Hilux 4X4 ute, which are also eligible. In fact, more than half of the 1800 new models sold in this country will qualify. Far from being an ambitious target, a greenhouse rating of six equates to the average performance of the entire Australian fleet, as it stands.”

We can imagine it now, “Save the planet, buy a 4-wheel drive truck!”

Furthermore, Green confirms our thoughts that buyers of new cars tend to drive their cars more, hence cancelling out supposed ‘green savings’:

“There’s some research to suggest that scrappage schemes increase greenhouse gas emissions overall. A Dutch study, published in the journal Transportation Research in 2000, concluded that “reducing the age of the current car fleet may result in an increase of life-cycle carbon dioxide emissions”.

As your editor mentioned yesterday, from personal experience we increased our driving distance nearly ten-fold once we replaced our clunker with a shiny new car.

But anyway, onto today…

The mainstream financial journos and economists have gone jargon crazy over the past week.

All in anticipation of the latest consumer price index (CPI) number.

But they aren’t content with just saying what they think the CPI number will be. They have to tell you what it will “print”.

We have to say that it’s an even more annoying bit of jargon than the urge for financial commentators to insist on rate “hikes” rather than rate increases.

To be honest, we’ve got no idea what “print” means or where it comes from in relation to the CPI. But they’re all at it. They’re printing faster than a central bank can print money…

“There would prima facie be some downside risk to our forecast for headline CPI to print at +1.1 per cent [for the June quarter],” – Michael Turner, RBC Capital Markets

“The highlight of the week will no doubt be the eagerly awaited CPI print on Wednesday… the CPI print would be key in determining whether they looked to raise rates by 25 basis points in August.” – Ben Potter, IG Markets

“I think that offers a pretext to duck an unusually high inflation print next week” – Ray Attrill, 4Cast Capital Markets

“It maybe will take three CPI prints to get there, though.” – Stephen Roberts, Nomura Australia

“We believe an elevated print on the upcoming second quarter CPI on both the headline and core measures will be enough to trigger another rate move” – Helen Kevans, JPMorgan

In the same article, David de Garis from National Australia Bank was guilty of cliché abuse when he spoke of a “rate hike”. But back to the prints…

“That’s because Stevens has signalled he will be unflinching in jacking up rates again if underlying inflation comes in at above 3 per cent in next week’s CPI print.” – Rob Burgess, Business Spectator

But Bill Evans at Westpac wins the gold medal for Financial Clichés by using “print” seven times in one article for Business Spectator:

“It now appears likely that a 0.7 per cent quarterly print for core inflation would see policy unchanged at the August meeting… we think that a print of 0.8 per cent quarterly on underlying inflation…”

Including three times in one sentence: “If this forecast prints on the day then the annual increase in the trimmed mean will print 3 per cent – the same print as the annual rate to the March quarter.”

He rounds off with, “Despite 10 of the last 12 prints of the trimmed mean being 0.8 per cent for the quarter or higher… the possibility that the trimmed mean could print ‘only’ 0.8 per cent quarterly”

Lovely.

In case you’ve missed it, the Australian Bureau of Statistics (ABS) will announce (print) the latest quarterly CPI number (print) at 11.30am today – about the same time you receive (print) this letter.

What will the CPI number be? We’ve got no idea.

The so-called experts however, have busied themselves by not just predicting the CPI but they’ve decided to put their money on a Double by predicting what the Reserve Bank of Australia will do with interest rates next week.

But whatever the number is, the universal message from the mainstream commentators is that they’re happy with price inflation running at around the 3% level.

Remember, in Mainstreamland, rising prices good, falling prices bad. Only in the world of mainstream economists and mainstream financial commentators is it a good thing to pay higher prices for goods.

But more to the point, what we’d like to know is what are these pointy-headed economists going to do about it?

Don’t forget that the rise in prices is a direct result of the monetary inflation wrought by governments and central banks over the last eighteen months.

You’ll recall that at the time when financial markets and economies were crumbling, the universal phrase was that you shouldn’t worry about inflation. It was more important that the economy was saved – by any means necessary.

There were those that claimed inflation was dead. Some – as we recall – seemed to think it was dead forever, never to return.

Others said that inflation wasn’t a problem because there was an Output Gap. If you’re not sure what that is, it’s a completely discredited economic theory that claims inflation isn’t possible as long as actual GDP is below potential GDP.

Oh yeah, then why is inflation currently running at 3%?

We won’t go into the full details here, but you can read our debunking of the hare-brained theory here and here.

So, they thought, because there was an Output Gap, inflation wasn’t something to be concerned about.

Finally there was the argument that, well yes inflation could be a problem, but that’s something for the future. Worry about it then…

We don’t want to sound too melodramatic, but the future is here. Now it’s time for the smart guys to put their anti-inflationary plan into action. So far we’re completely underwhelmed by their response.

It seems they’ve decided that interest rates are the way to go. Well really, how ingenious. We never would have suspected.

Of course it might have been nice if they’d mentioned that a bit more while they were telling everyone to spend every dollar they owned.

What about other plans? It seems their other hope is that the unemployment rate doesn’t fall any further! That’s a bizarre one.

We’ve seen and heard several references to how the Australian unemployment rate is so low it’s creating inflationary pressures. That any unemployment rate below 5% is considered to be full employment and therefore inflationary.

I don’t know about you, but surely full employment is where everyone who wants to work can work. Surely full employment is something to strive for, not to fear. Anyway, full employment most certainly isn’t the situation now.

Just ask the 341,602 Australians that are receiving the Newstart allowance as reported by Ben Schneiders in The Age at the weekend. Although a word of warning, keep the sound down on your computer because a video of Michael Pascoe babbling on automatically starts when you load up the page.

According to the article, the number of people claiming the Newstart allowance of up to $462.80 per fortnight for a single person, has increased by 36% since November 2008.

Yet according to the financial boffins, these 341,602 people are already employed… theoretically anyway, because we are at full employment. Apparently the Treasury considers it a “long standing practice” to effectively count these people as employed when they’re not.

That’s nice of them.

So because the Australian economy is hitting on a couple of theoretical numbers – CPI at 3% and unemployment near 5% – the financial manipulators are ready to meddle again, banking on the RBA increasing interest rates.

An increase that will obviously lead to higher costs to businesses and individuals and potentially lead to higher unemployment, or greater financial hardship.

Yes, that’s right, here’s the financial consequences of the borrow-and-spend it mania. Supposedly smart men and women armed with crazy economic theories such as the Output Gap, encouraging financial novices to spend and borrow like crazy and not to worry about the consequences.

Now the same pointy-headed economists see fit to apply more of their theories, only this time they’re spreading bad news. All that money you borrowed from the bank and then spent? Well, it’s got to be repaid, and if you can’t afford to repay it they’re going to need to charge you more.

Look, as we’ve pointed out before, interest rates were manipulated to artificially low levels. Levels which they never should have gone.

All the while the central bankers and their buddies at the banks spun the line that it was crucial to save the economy. Now the central banks and their banker pals are manipulating the interest rates higher.

Not because they necessarily want to, but because they have to. They have to because higher interest rates are a direct consequence of their previous low interest rate policies.

Not that they’ll admit that. You’ll just hear the rubbish about interest rates returning to “normal” levels.

Free market economists and thinkers get plenty of flak from the mainstream for being heartless and not thinking about others. As is usually the case, the opposite is true.

Supporters of free markets oppose government intervention and central bank manipulation because we know exactly what the consequences of those actions are.

One of those consequences are 341,602 unemployed who the Keynesian economists ignore because statistically there is full employment.

And soon enough, the ranks are likely to swell as their economic plans “work” causing even higher interest rates, higher inflation, and higher unemployment.

Cheers.
Kris Sayce
For Money Morning Australia

Coming out today is the consumer price index (CPI) data for June. Economists are expecting figures to increase 1% for the quarter, which would mean annual increases have risen 3.4% for the year.

The Dow Jones Industrial Average gained 12 points last night to close at 10,537.69. The consumer confidence gauge dropped almost four points to 50.4, its lowest reading since February this year. Consumers are still concerned about the job market in the US.

The FTSE closed at 5,365.67, up by 14 points. The Footsie finished higher thanks to the banking sector. Banks were boosted by news that the Basel Committee’s regulatory reforms would be watered down.

The Nikkei finished at 9,496.85, down by 6 points.

Gold dropped to a three month low overnight. The equities markets have stabilised which has slowed down ‘the-run-for-cover’ attitude that was pushing gold higher back in May and June.

The price of spot gold in Australian dollars is $1,287.64, while in US dollars it’s $1,160.45. The price of silver in Australian dollars is $19.56 and in US dollars it’s $17.62.

The Aussie dollar versus US dollar is AUDUSD 0.9013 and against the Japanese Yen it’s AUDJPY 79.14.

Crude Oil closed at USD$77.09.

For the biggest movers on the market yesterday click here…

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

Shae.

But anyway, today we’re referring to something sent in by a reader.

Money Morning reader Paul sent us an email on Saturday saying, “Here we go again…” followed by a link to a Sydney Morning Herald article titled “GM to pay $A3.9b for auto financier”.

We share Paul’s thoughts, here we go again…

Or kind of. Except we’ll make the point that what Paul refers to never really stopped. By that I mean excessive leveraging. As we’ve written many times before, the so-called deleveraging in financial markets and household balance sheets has been a massive lie put about by those who want the borrowing gravy train to continue.

A cursory look at the statistics will show you that even where there has been a small decline in borrowing in one sector it has been more than made up for by borrowing in another.

But I encourage you to read the article for yourself. To be fair to the SMH, the paper has just syndicated an article written by the Associated Press, so we can’t really blame them for the journalistic, er, quality of the article.

But we can blame them for running such tosh.

I mean, take the opening paragraph:

“General Motors Co. will buy AmeriCredit Corp. for $US3.5 billion ($A3.93 billion), a deal that allows the automaker to expand loans to customers with poor credit and offer more leases, key areas where GM must grow to accelerate its car sales.”

When we read that your editor’s head literally slumped into our open hands. Expanding loans to customers with poor credit is a “key area” for GM? Oh Lordy! But it gets better, or is it worse? Anyway, read this:

“Only 4 percent of GM’s sales come from subprime buyers, which the company hopes to expand with its AmeriCredit acquisition. ‘If you just had a modest increase from 4 to 5 per cent, that’s a significant number it its own right,’ Liddell [GM's chief financial officer] told reporters.”

Because of course GM would stop when it gets to 5 per cent. That’s right, there wouldn’t be a temptation to increase it to 6, 7 or 10 per cent would there? No, of course not.

If you recall, General Motors had to be bailed out by the US government to the tune of nearly USD$60 billion less than two years ago.

Why did it need the bailout money in the first place? For many reasons. But chief among them were company killing retirement and redundancy funds.

On top of that it was building crappy cars which it then had to bribe customers to buy using the incentive of zero percent finance.

But even that wasn’t generating enough cash to keep the company solvent. Even that incentive couldn’t encourage enough chumps to stump up the cash for its crappy cars. So it had to provide incentives to those with low credit scores too.

How could that possibly fail? As we’re told repeatedly by the mainstream press, interest rates are never going up again so the increase in household debt won’t be a problem. Similarly, with a zero percent interest rate for the life of a car loan, it must be impossible for anyone to default because there is no interest rate risk for the borrower.

It didn’t happen like that though did it. Hence the USD$60 billion bailout.

But as I’ve mentioned above, the fact that GM is hoping to increase its exposure to subprime borrowers isn’t new, it’s just ramping things up a little further.

It goes to show you that despite the massive bailout, and despite the ‘cash for clunkers’ programme, the auto industry is a terrible business to invest in.

It shows you that without massive intervention by governments and without taking on company-busting risks, car companies live on wafer thin margins.

Even the Ford Motor Company [NYSE: F], which didn’t receive direct government handouts – but which did benefit indirectly thanks to the Obama ‘cash for clunkers’ programme – could only manage a USD$2.7 billion profit for the last financial year on the back of a massive USD$116 billion of sales.

Yet despite that it’s been enough to see the Ford share price more than double this year! We’d go as far to say that it’s become one of the darlings of the American stock market.

And now it seems the Australian auto industry is on the verge of getting yet more handouts.

Has Australia ever subsidised an industry more than it has the likes of Toyota, Ford, General Motors and Mitsubishi?

The latest ruse offered by Australia’s first unelected female prime minister is for a $2,000 taxpayer funded rebate for anyone who trades in a pre-1995 car in order to buy a fancy environmentally friendly car.

No prizes for guessing what’s going to happen to the price of used cars over the next couple of years.

Of course there are plenty of conditions attached to the handout. Such as you need to have been the owner of the traded in car for at least two years, and the car you buy has to meet a minimum ‘green’ standard.

There could be a nice little earner here for scrap yards to offer a warehousing service. Pay them a fee and they’ll store a crappy car for you, registered in your name for two years. Then when you ‘trade it in’ for a new car you’ll get the rebate.

But anyway, we’re sure the handout will be fully maxed out before long, with $2,000 of your tax dollars going straight from your wallet into the hands of your friendly neighbourhood car dealer.

However, it’s all for a good cause because apparently, according to the Australian Financial Review it’s going to “cut carbon dioxide emissions by 1 million tonnes and save $344 million in fuel costs in the next 10 years”.

Naturally that sounds like a lot. 1 million tonnes less of a gas which is unproven to be environmentally unfriendly, and $344 million in fuel savings.

But when you compare it to Australia’s total CO2 emissions as of 2007 of 374 million tonnes, the amount saved isn’t even a drop in the ocean. In fact it’s a paltry one quarter of one per cent.

And as for the $344 million in fuel savings. Savings for whom? According to the AFR the so-called Cleaner Car Rebate scheme will cost taxpayers $394 million.

So the fuel “savings” will actually be an additional cost to the tax payer of about $50 million.

It’s the old robbing Peter to pay Paul story that’s so typical of government interference.

Besides, who says the scheme will cut any emissions at all?

We’d like to know how the 1 million tonnes in CO2 savings has been calculated. Has it been calculated on a like for like replacement? In other words, based on the assumption that the owner of the spanking new Toyota Camry hybrid will drive the car exactly the same way as the crappy pre-1995 bomb.

From personal experience we’ll say that’s unlikely.

Prior to trading in our 1996 Hyundai Lantra Sportswagon (and very sporty it was too!), we would only drive the thing to work in Fitzroy from home in Frankston two or three times per week.

And each time we made the 40km journey in each direction, we did so in the knowledge that we were never sure we’d make it home without the help of the RACV. Every day was an adventure… hill starts especially!

But after we traded the bomb in for a spanking new hip-hop red (that’s the manufacturer’s description, not your editor’s) Hyundai Getz, guess what that’s done to our driving patterns?

Yep, you’ve guessed it, we now drive to work every day, and have only used public transport less than a handful of times since then.

And based on the so-called CO2 savings you’ll get from buying an eligible car such as the Toyota Camry hybrid, it won’t take that much of an increase in driving patterns to wipe out the CO2 savings.

Because according to the Toyota website:

“Hybrid Camry’s 2.4 litre engine produces 142 grams per kilometre of carbon dioxide. This is equivalent to a small car with a 1.3L engine. Compare this to petrol-engine cars in its class which produce up to 60% more CO2 per kilometre.”

So to put it simply, it’d only take a 60% increase in vehicle usage to completely offset any of the supposed gains. If your editor’s new car experience is anything to go by, the actual carbon dioxide savings are likely to be negligible.

Look, let’s admit it, we are in the middle of an election campaign. The whole point it seems of election campaigns is to outspend your opponent.

But hats off to the PM for coming up with a policy that combines savings, increased government expenditure, and a green policy all in one.

It’s the Holy Trinity of election policies. Forgive us if we don’t yell Hallelujah!

Cheers.
Kris Sayce
For Money Morning Australia

Monday’s producer price index (PPI) figures have come in at slightly lower than economists expected. The PPI figure for the June quarter rose by 0.3% as economists were expecting an increase of 0.3%. The PPI has risen 1% since June 2009.

Overnight, the Dow Jones Industrial Average ended the day higher by 100 points to 10,525.43. The Dow jumped on the back of surprising new home sales data in the US. Sales for June were 23.6% higher than May.

However, Joel Naroff, president of Naroff Economic Advisors warned, ‘Builders sold almost no new homes in May, so the sharp rise in June shouldn’t be taken as a sign the housing market is suddenly on fire.’

The FTSE closed at 5,351.12, up by 38 points. Banking stocks clawed back Friday’s losses after the stress test showed there were no nasty surprises.

BP [LON: BP] shares gained 5% after CEO Tony Hayward stepped down, and then confirmed he was being shipped off to a joint venture in Russia.

The Nikkei added 72 points, closing at 9,503.66.

The price of spot gold in Australian dollars is $1,314.26, while in US dollars it’s $1,184.23. The price of silver in Australian dollars is $20.12 and in US dollars it’s $18.13.

The Aussie dollar is higher this morning thanks to the American new home sales data which saw our commodity-driven currency push past the 90 cent mark. The Aussie dollar has gained over 7% since the start of July.

Kathy Lien, Director of Currency Research at GFT, believes there is a chance that the Aussie dollar will reach 92 cents if the Reserve Bank raises interest rates next week.

The Aussie dollar versus US dollar is AUDUSD 0.9014 and against the Japanese Yen it’s AUDJPY 78.40.

Crude Oil closed at USD$78.95.

For the biggest movers on the market yesterday click here…

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

Shae.

According to CEBS, the banks are only mildly tense, rather than stressed.

You’ve probably read, or at least skimmed over the details of the results already.

The upshot is that as today’s Australian Financial Review reports, “Just seven relatively minor unlisted banks of the 91 subjected to stress tests failed to pass.”

It also reports that, “regulators decided the banks needed to raise an additional €3.5 billion of capital.”

Phew! Everything must be fine then.

That’s a piddly amount. Especially so when you consider these so-called strong European banks have already raised €220 billion over the last 18 months.

As the AFR points out, “much of it from governments.”

Of course what the AFR really means is, “much of it from taxpayers.”

You can view the summary of each banks’ results under what CEBS calls the benchmark and adverse testing scenarios by clicking here.

And just in case you’re wondering what those scenarios are, here’s a link to the document that spells it out. Skip to page 3 if you’re just interested in knowing what the scenarios were. If not, enjoy the full 55 pages.

In a nutshell, the benchmark scenario is based on there being a mild economic recovery, whereas the adverse scenario is based on the much-feared double-dip recession.

But, the most interesting part of the report was perhaps footnote 19 on page 47:

“Since no sovereign defaults are considered in the exercise, there is no impact on holdings of sovereign bonds which are held to maturity in the banking book.”

Considering how close Greece came to defaulting, you’d have to be pretty confident that a sovereign default in the European Union isn’t going to happen.

And they’re probably right. As we pointed out on Friday, it’s much more likely that the Europeans will continue to take the cowards’ way out by bailing out economies and inflating their way out of one problem and into another.

Not only that, but under the adverse scenario Greek debt would receive a “haircut” of 42.2%, and Portugal 26.6%. In other words, the value of those country’s bonds would be revalued significantly less should the adverse scenario play out.

The full list is on page 52 of the link I’ve provided above.

But yet again the stress test doesn’t stress because the report notes, “these haircuts were not used in the stress test exercise and are presented only for the sake of comparison.”

Which has the effect of making the stress tests pointless.

Furthermore, we have to wonder what’s the point of testing the banks against an adverse scenario if everyone knows the European Central Bank (ECB) and European governments will just bail the banks out anyway?

And what’s the point of a stress test if you’re not going to stress it out?

You see, it just goes to show you how worthless money is, which I’ll come to in a moment.

But just one more quick note. Money Morning reader Jack has brought our attention to some interesting details of who’s holding US treasuries.

According to the latest report from the US Treasury, holders in the UK increased their holdings of US treasuries from just USD$90.8 billion in June 2009 to USD$350 billion as of May 2010.

That’s the single largest increase by holders in any particular country.

Out of interest, Australians sensibly only hold USD$14.1 billion worth.

Over the same time as the UK has more than tripled its holdings, the Chinese – who are still the biggest holders – have gradually reduced their exposure.

In other words, the Chinese are selling and the Brits are buying.

What could it all mean? We’re not sure. There are claims by one blogger that it’s simply the US government monetising its debt through offshore holdings.

Could that be right? We don’t know.

Or, could it have anything to do with the European banking stress tests? It’s possible we suppose. In anticipation of the stress testing have Europe’s banks dumped their dodgier sovereign debt holdings onto the central banks and then used the bailout money to invest in what’s deemed to be a safer asset – US treasuries.

That would make sense if it’s the case. And it could explain the massive increase over the past few months. We’ll see when the next quarterly report is released in August whether UK holdings of US treasuries have increased further.

But bringing the subject back to the points we raised last Thursday and Friday, it’s clear that the ECB will just print as much money as it needs to get the European banking system out of a hole.

After all, what’s another 3.5 billion compared to the 220 billion they’ve already put their taxpayers on the hook for?

It’s what makes the following two news stories that caught our eye over the weekend even more interesting. The best way to summarise them is that one article is about a store of value, while the other is about a store of rubbish…

A few months ago a treasure hunter in the UK county of Somerset unearthed 52,500 Roman coins. According to the report from the BBC, most of them are “made from debased silver or bronze.”

He found them on a farmer’s land while waving his metal detector around. We’re sure one or two locals have laughed at the man over the years as he’s unearthed treasures such as old bicycle frames and thirty year old empty baked bean cans.

But now he could be about to receive up to GBP1 million for the loot.

That’s not bad for 52,500 coins that are reckoned to be around 1,700 years old! That would give each coin a value of around GBP19 each.

Now take a look at this second report that we came across over the weekend. Here’s the headline as reported by News Ltd: “Old Romanian banknotes turned into bins.”

The report states, “The [Romanian] Central Bank processes roughly 4.5 million banknotes daily, of which 1.2 per cent are deteriorated and must be withdrawn from circulation.”

Ah, the coincidences. Roman versus Romanian. 52,500 coins, versus 1.2% of 4.5 million – which coincidentally is 54,000 bank notes.

If there was ever an illustration to show how valuable a hard and sound money system is compared to the worthlessness of a paper-based fiat currency system then this is it.

I mean, look at the comparison. 52,500 coins that are 1,700 years old are more valuable then paper bank notes that were probably produced no more than ten years ago.

You see, here’s the difference. The Roman coins are valuable in two ways. First of all there’s the intrinsic value. By that I mean, the actual value of the metal that the coins are made from.

And secondly there is the numismatic value, ie. The value that a collector places on the coins over the intrinsic value. Depending on how valuable these coins may be to a collector or a museum will obviously have an impact on the price.

The point is, after 1,700 years the collection of Roman coins still has real value.

Whereas the collection of paper Romanian bank notes are worthless. They contain nothing of any value. Not even as a collectable. The only worthwhile use for these notes is apparently to recycle them into things like rubbish bins!

Look, obviously if these coins were gold coins they would be even more valuable.

Although as we understand it, by the time of the fourth century the Romans were already well down the path of monetary inflation. Gradually reducing the precious metal content of coins and making them smaller while trying to retain the same face value.

Which is no different to how the modern money system works.

Except rather than changing the content of the paper notes, all the central bank has to do is just print more of them. The effect is the same, a devalued currency.

That’s why we’re in favour of a genuine money system that’s backed by gold or other precious metals. After 1,700 years, even the debased coins are still around and still have value, whereas in 1,700 years not a single paper note from today will be in existence.

The Europeans have supposedly put their banks through a rigorous test to assess their ability to withstand another financial shock.

The reality is that they’ve done no such thing. All they’ve done is provide concrete evidence of how they will save the bacon of them and their banking pals while simultaneously using the evils of inflation to destroy the wealth of its citizens.

Despite the high price it’s still clear that buying gold should be the top of everyone’s ‘To-Do’ list.

Cheers.
Kris Sayce
For Money Morning Australia

The current ABC chairman, Maurice Newman has warned that corporations have a vested interest in ‘keeping the music playing’ and that the media and politicians were hiding the truth about the economy, as reported in The Australian this morning.

The Dow Jones Industrial Average gained 102 points, ending the session at 10,424.62.

Economists in the US will release a report this week that shows the economy grew at slower pace as consumer spending dwindled. In news that will concern policy makers, employers are unlikely to add more staff as the economy moves into a slower growth period for the second half of the year.

Over in the UK, trading was flat as investors were awaiting the ’stress test’ report of the European banks. The FTSE closed down 1 point to 5,312.13.

Only seven out of 91 European banks need to raise more than €3.5 billion (AUD$5 billion) of additional capital. Read more about the results here.

In more worrying news, a report will be released in the UK tomorrow suggesting that the base rate remain at its current low of 0.5% for years if the economy wants to avoid collapsing.

The Nikkei jumped 210 points, ending the week at 9,430.96.

The price of spot gold in Australian dollars is trading at $1,328.76 while in US Dollars it is trading at $1,188.41. The price of silver in Aussie dollars is $20.24 and in US Dollars it is $18.10.

The Aussie dollar versus the US dollar is trading at USD$0.8945, and against the Japanese Yen JPY78.30

Crude Oil closed at USD$77.40.

For the biggest movers on the market yesterday click here…

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

Shae.

[Please note: neither the authors nor any of the employees of Port Phillip Publishing own shares in any of the stocks discussed in Money Morning unless specifically stated. The articles do not give trading or personal investment advice, but are intended to provide a useful, independent news and analysis service to supplement your own investing and trading. Consult your financial advisor before making any investment decisions.]

Well, look no further than two articles yesterday from Bloomberg News:

“Purchases of U.S. Existing Homes Probably Dropped as Credit’s Effect Waned”

That’s the story from Main Street, USA. But it’s not the full story.

Take a look at what’s happening to Wall Street, USA. Or rather Long Island, USA:

“Hamptons Home Sales Double as Wall Street Buyers Fuel Rebound”

If you don’t know the Hamptons, take a look at this link from Google Maps of Southampton, Long Island. It’s part of the playground for Wall Street’s rich and infamous.

Although we do find it amusing that the Google Streetview cars have somehow not found the time to drive up and down the expensive streets of Southampton, Long Island yet they appear to have covered every block of the not-so-well-off rust belt city of Detroit.

And I have to say, they’ve found the time to drive down your editor’s street in Frankston too! We’d have thought the Hamptons would be much more interesting for people to look at than Detroit or Frankston.

But it’s just a coincidence I’m sure.

Anyway, all those stimulus cheques and banking bailouts that were supposed to save the economy have simply ended up in the pockets of those that helped cause the mess.

While Ma and Pa Kettle have been scrimping and scratching away, or even maybe taken advantage of what they thought were generous government subsidies, the real winners are those that received the biggest handout of all – the bankers.

And now these grateful bankers are helping to stimulate themselves and the pockets of other bankers by buying their big houses from them.

All thanks to the whacking great taxpayer funded bailouts which now apparently sits at USD$3,700,000,000,000 – or to put it another way, USD$3.7 trillion.

Now granted, a bunch of that USD$3.7 trillion has gone to Fannie Mae and Freddie Mac to help them write even more mortgages to the likes of Ma and Pa Kettle.

But “helping” someone to hock themselves up to the eyeballs when they can least afford it is hardly the kind of help we think they need.

However, you shouldn’t think it’s all plain sailing for the poor banks. Last year US banks went through an emotional stress test of their balance sheets. The upshot was that most came through with flying colours. Hurrah!

Now it’s the turn of the European banks to be stressed, sorry, we mean, stress tested. Is there any doubt they will come up smelling of roses too. We can imagine it now, “Ta-da, everything’s fine, move along please, there’s nothing more to see…”

The result of the stress testing is due to be released tomorrow evening Australian Eastern Time. Although we did find it quite amusing that one of the stress scenarios doesn’t include the scenario of a sovereign government defaulting on its obligations.

That pretty much gives the game away about how European governments intend on solving their debt problems – by taxing and inflating their way out of it.

Which by itself means another win for the banks. But as Niall Ferguson wrote in the Financial Times recently:

“Long before Keynes was even born, weak governments in countries from Argentina to Venezuela used to experiment with large peace-time deficits to see if there were ways of avoiding hard choices. The experiments invariably ended in one of two ways. Either the foreign lenders got fleeced through default, or the domestic lenders got fleeced through inflation.”

The last sentence sums it up. The Europeans, like the Americans, have decided to plump for the coward’s choice – inflation.

Oh, and by the way, don’t fall for all the guff you’re hearing about the heroic new UK prime minister, David Cameron. We’ll have more on that next week…

Anyway, all this talk about the corrupt banks got us thinking. In a way, it’s a flow on from what I wrote yesterday, about creative destruction.

In late 2008 we were within a hair’s breadth of seeing the banking system – and the glorious bankers within it – destroyed.

The years of chicanery and corruption would be over and something new and, well, less corrupt could appear in its place.

If we had been unlucky then the bankers would have come up with something worse. Although frankly, it’s hard to see how that would have been possible. But not to worry, because if it was a worse system then creative destruction and market forces would eventually put paid to it too.

But if we’d been lucky creative destruction would have seen the need for something better than the old banking system to appear. And eventually that will happen, it’ll just take time. As we keep saying, the bailouts and handouts have done no more than postpone the inevitable outcome.

I mean, think about it, if you’re starting a banking system from scratch, odds are you’re gonna have to make plenty of improvements.

After all, if you’re a saver who’s just lost a bunch of savings because ANZ Bank, Commonwealth Bank, NAB and Westpac have just collapsed under the weight of excessive and manic lending to the housing market, you’ll want to make sure your money is safer this time.

Wouldn’t you?

That’s all very well and good, but what improvements?

We’ve argued previously about the case for a gold backed currency.

Simply put, the case for a gold backed currency is that the gold coins are a physical store of value. Gold is widely recognised commodity. Due to its qualities it retains its value and is easily divisible and exchangeable.

Even paper money backed by gold – providing there is a 100% reserve held by the issuer of the paper money – is preferable to a system of fiat money where like here in Australia the money in your wallet is backed by nothing more than the trust in the government and central bank.

The only problem with paper money backed by gold is when the issuers of the paper begin issuing more paper than the gold they have in reserves.

But that doesn’t mean that a gold backed currency is a bad idea, it simply means that should an issuer of paper money issue more than the gold they have in reserve then they should be charged with counterfeiting.

That, you would hope, would prevent most honest issuers (let’s call them banks!) from issuing counterfeit paper money. Furthermore, the bankers would be loathe to even try as should customers become aware that the bank is counterfeiting by issuing excess paper money there would soon be a run on the bank as depositors rush to exchange their paper notes for gold.

And the idea of individual banks issuing their own notes backed by their own reserves isn’t as crazy as you may think.

For years, until the central banks became omnipotent, this was pretty much how many banking systems operated.

Banks could issue their own notes, much like you see today in the United Kingdom where three Scottish banks – Royal Bank of Scotland, Bank of Scotland, and Clydesdale Bank – all have the ability to print their own bank notes.

The same applies in Northern Ireland where The Bank of Ireland, First Trust Bank, Northern Bank and Ulster Bank print their own notes.

Those notes are widely circulated and accepted alongside Bank of England printed notes. It’s proof that a multi bank note system can work.

However, in the case of the UK, under the current banking system, having multiple note issuers is actually pretty pointless, because in effect Bank of England issued notes act as a reserve currency for the notes issued by the Scottish and Northern Ireland banks.

When the Bank of Scotland for example, prints Bank of Scotland bank notes, it can only do so if it holds an equivalent amount of Bank of England notes.

Plus all the notes – English, Scottish and Northern Irish – are exchangeable for the same face value with no potential for one to trade at a premium or discount.

Under a private banking system backed by gold reserves this would be the same. The only difference is that should a bank begin issuing more notes than the gold reserves held, and should the market become aware of this, notes issued by that bank would begin trading at a discount to other notes, to take into account the shortfall in reserves.

And in extreme cases people and businesses may refuse to accept them. Hence the incentive for the banks not to issue more notes than reserves.

Now, getting back to the stress tests, how easy would that be to do a stress test on private banks? Two simple questions – How much gold do you have in the vaults? How many notes have you issued against the gold?

Stress test over.

Compare that to this description from Reuters about what is involved with the European bank stress testing:

“The test scenario will assume a 3 percentage point deviation of the EU’s gross domestic product from the EC’s forecasts over a two-year horizon. It will also assume a “sovereign risk shock” in which some government bond prices would be marked down further from the depressed levels of early May. The size of such haircuts has not been officially announced and conflicting reports about them suggest national regulators may not be applying them consistently. A banking source told Reuters on Tuesday that the haircut on Greek sovereign bonds was 23 percent off “current market prices”.

“Banks will be tested on how their so-called Tier 1 capital, a key measure of financial strength, bears up. The ECB wants to see if the ratio of this capital to assets stays above a minimum benchmark of 6 percent of assets in the tests; although this is higher than the 4 percent legal minimum, it is lower than most bank shareholders are happy with. Deutsche Bank, for example, now has more than 11 percent.”

As we’ve shown before, the current banking system is so complex, even top banking analysts struggle to make sense of what state the banks are in. If you don’t believe me, listen in on the next bank earnings conference call.

But to be honest we don’t know what to expect from the stress tests. We can only guess that the results will be well stage managed…

All the big UK, French and German banks will most probably receive glowing reports.

All the banks from the medium sized economies will get a tick of approval, perhaps with a small comment about something unimportant.

Then almost all of the banks from the smaller economies will get a good report card too. Again with perhaps a comment offering helpful suggestions… but nothing to panic about of course.

Finally, we wouldn’t be surprised to see one bank from one really tiny economy get the book thrown at it. Just so they can say to the markets, “Look, see, we vigorously and transparently applied the stress test and only the Bank of Whatever from the Republic of Where’s-That has any problems… but even that’s fixable.”

In other words, the word whitewash springs to mind.

The reality is, the stress test means nothing because you can see from yourself just by looking at the Tier 1 capital how insolvent the banks are.

According to the comments by Reuters above, “The ECB wants to see if the ratio of this capital to assets stays above a minimum benchmark of 6 percent of assets in the tests.”

In other words, for every $100 in assets (loans, etc) held by banks, the European Central Bank is happy for banks to have just $6 on their books. And considering Tier 1 capital can include government bonds and other securities, the actual cash reserves held by the banks is much less.

For example, as we pointed out with the Commonwealth Bank several months ago, the CBA only has around $2 of cash in reserve for every $100 deposited by customers. Despite that the banks tell their customers that all at-call deposited funds are available immediately.

Now you know the real reason why banks set daily maximum limits on things such as ATM withdrawals and bill payments and why you need to notify them if you intend taking out a large amount of cash from the bank branch.

They’ve got to make sure they can jiggle the books so there’s some cash in the till when you come a-callin’.

But already the markets are looking on the brightside on the prospects of a positive outcome from the stress tests. Quite frankly, as far as we see it, it’s just another false dawn.

It’s doing little more than adding to the volatility in the markets, and delaying what is inevitable – the collapse of an unsustainable and insolvent banking system.

The European stress tests are a sham just like the American stress tests were a sham.

We can only hope that when the banking system eventually collapses, it’s replaced by a system of sound money rather than an attempt to revive the failed experiment of fiat currencies.

Cheers.

Kris Sayce
For Money Morning Australia

As the oil leak in the Gulf of Mexico looks to slowly coming under control, thanks to a temporary plug, I thought we might take a quick look at something that was only brought to our attention this week.

While it’s been kept pretty quiet in the mainstream media, there are a few articles doing the email rounds that suggest that the reason the oil spill took so long to fix was because of American legislation.

Basically, government interference slowed this repair down. Way down, if this report is anything to go by.

See, apparently way back in 1920, a particular Marine Act was established to protect jobs the US marine merchant industry. And, as with all well meaning government interference… it has actually caused more problems.

It seems that within two weeks of the ‘incident’ occurring, many countries including Canada, Holland and even Korea had put their hands to help clean up the mess. All offers of help were met with a ‘thanks, but no thanks’ from the US government.

It’s becoming clear that it is because of this Marine Act that these offers of help were refused. Now, this Marine Act had very strict rules about the sharing of information and technology as well… all in the name of protecting American workers.

However, because the industry had basically sealed itself off from the outside world, it fell greatly behind in the world of technology.

Many European countries have vast experience in offshore and subsea drilling, where America has more of an onshore drilling experience. By enabling this act, the government has in effect made the crisis worse because they did not seek help from the countries that actually know more about subsea drilling rigs than their American buddies.

Recently, Kris wrote an article that attracted an enormous response from you. See Kris suggested that if the ocean’s had been privatised that it would give companies more incentive to prevent these problems occurring.

At the risk of spending another couple of days cleaning out the Money Morning mailbag, you can re-read the article here, and then you can send any strongly worded email here.

But you have to admit, that maybe Kris has a point.

Think about it. No company wants to see million of barrels of their most precious asset being lost. For months on end. And no company wants to watch their share value decline over 50%.

But because of the US government insisting that only US companies and US workers are employed in their oceans, the ability to fix the crisis has been slowed down dramatically.

Over three months it has taken to repair the leak because the government insisted they’ll take care of the problem themselves, rather than seek much needed expertise from other countries that actually know what they are doing.

Maybe this adds just a little more weight to Kris’ thoughts. Had this small part of the ocean been privatised it would have been entirely BP’s problem to fix.

Chances are that BP would have accepted any help it needed to have the problem repaired as quickly as possible. It wouldn’t have cost the American people however many millions, it would have cost the company. And guess what? Repairing the problem quicker would have saved all that wildlife too.

And just before we move on, the US government in all their wisdom, decided to make it a crime for any journalist or photographer to come within 65 feet of the spill site… punishable by a USD$40,000 fine or five years prison, or both.

This is why after a couple of weeks after the disaster you never saw a more current picture of the damage from the leak.

There ain’t nothin’ like printing money…

Now we all know that the American media has blamed for Alan Greenspan, former chairmen of the Federal Reserve Bank for the current crisis gripping America, but soon, we may have to start pointing fingers at Ben Bernanke.

That’s if you already aren’t wagging you’re finger at him.

Some economists are actually starting to believe that America will experience a double-dip recession. It seems that they are finally accepting that a recession, will be followed by a short lived recovery, and then followed by another recession.

As this article points out, America can only be facing a double dip recession.

While Greenspan’s policies are being blamed for the housing bubble bursting in the States, rather than the ’soft landing’ that Greenspan was hoping to engineer.

But just before the name Greenspan becomes a punch line, let’s consider one this. After the dot com crash, Greenspan lowered rates to 1% and expanded the monetary base by 22% over a three year period.

Bernanke, with his doctorate and Nobel prize supporting him, has smashed the cash rate to 0.25%, which I’m sure you know. However did you know that he has expanded the monetary base by 94%? All within one year?

So why are people only too happy to blame Greenspan for the current problems, when Bernanke has decided not only to follow his lead, but has decided to show his country how bad a boom and bust cycle can really be?

And finally, the Reserve Bank of Australia (RBA) is trying to prove that they can’t be controlled by the government.

Unless you only watch the Annoying Devil on youtube, you must know that Australians are heading to the polls on August 21.

Yep, the RBA have said that no matter what the pollies promise, they will raise or lower rates as they see fit. You might remember that during the Howard / Rudd election campaign the RBA increased rates, much to Howard’s disappointment.

But at least you know that no matter how many times Tony Abbott promises low interest rates under his government, the RBA will focus on the figures affecting Australia.

Like the inflation figures due out next week.

However the RBA have backed tracked a little now, saying it’s it will be the underlying inflation figure that will be the basis decision for a rate rise in August.

While it’s well known that the recent tax hike in cigarettes is likely to bump up the consumer price index (CPI) – also known as headline inflation – underlying inflation is a measure that excludes volatile items, for example a recent tax hike on smokes…

Now let’s have a look what happened on the market’s yesterday…

Yesterday the S&P/ASX 200 closed lower by 38 points to 4,374.70. The Aussie market has opened nearly 70 points higher this morning, thanks to the rally last night on Wall Street.

The Dow Jones Industrial Average closed higher by a massive 201 points, ending the session at 10,322.30. Strong earnings data from 3M [NYSE: MMM] helped to boost the market. The world’s largest packing company, UPS [NYSE: UPS] which is often considered an indicator of consumer and business demand, reported a 90% profit for the second quarter.

The FTSE ended in the black, closing to points higher to 5,313.81. Most major bank stocks finished stronger, ahead of the European bank ’stress test’ results which will be released late tonight our time.

There was some positive economic data, as retail sale volumes for the month of June were higher, which is mostly attributed to extra spending from the World Cup.

However a senior trader from IG Markets warned, ‘Strong rallies have not been scarce over the past couple of months but they have ultimately come to nothing.’

The Nikkei lost 57 points, closing at 9,220.88.

Gold may have ‘…formed the short term bottom’ according to analyst Jimmy Tintle at Transworld Futures, with ‘bargain buying’ supporting the gold price.

The price of spot gold in Australian dollars is trading at $1,338.54 while in US Dollars it is trading 1,196.30. The price of silver in Aussie dollars is $20.26 and in US Dollars it is $18.11.

The Aussie dollar has climbed nearly two cents this morning thanks to the positive outlook the RBA has painted for Australia, compared to the gloomy outlook Bernanke gave the American economy.

The Aussie dollar versus the US dollar was USD$0.8943, and gained against the Japanese Yen JPY77.95

Oil jumped overnight from a tropical storm threat. Crude Oil closed at USD$79.15.

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

I mean, by now we would have expected the global economy to be in full swing considering how much taxpayer money has been spent bailing things out and propping things up.

After all, that’s what we were told.

That the bailouts and stimulus were required to ensure markets and economies wouldn’t collapse. That afterwards it would be all blue-sky.

But almost three years after stock markets topped out and nearly two years after markets hit rock bottom, that’s not the message we’re hearing now.

“Canada lifts rates, cuts growth outlook”, advises today’s Australian Financial Review.

While BHP Billiton [ASX: BHP] said earlier this week that it “continues to be cautious on the short term outlook for the global economy.”

And retailer Country Road, when announcing a 15-20% expected drop in full year profits said “the immediate economic outlook remains challenging but the business remains cautiously optimistic for the year ahead.”

Well that’s alright then.

But that was before US Federal Reserve chairman Ben Bernanke stuck another fly in the economic recovery soup:

“Of course, even as the Federal Reserve continues prudent planning for the ultimate withdrawal of extraordinary policy accommodation, we also recognise that the economic outlook remains unusually uncertain.”

Oops!

Naturally our friend at the New York Times, Dr. Paul Krugman is still saying that the economy needs more stimulus not less, “The best way for Mr. Obama to have avoided an electoral setback this fall would have been enacting a stimulus that matched the scale of the economic crisis.”

And in today’s The Age, Robert Skidelsky of Warwick University in the UK quotes John Maynard Keynes:

“An act of saving means … a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence. … Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”

We’ve spent enough time being bored rigid by Keynes’ General Theory, so we’ll take Lord Skidelsky’s word for it that he’s provided an accurate quote.

The fact is Skidelsky and Keynes have got it completely wrong. And so has Krugman who Skidelsky claims said about Keynes’ revelation: “Getting to that realisation was an awesome intellectual achievement.”

“Awesome” isn’t quite the word we would’ve used. We would have picked “awful” instead.

Think about it. Keynes says “An act of saving means… a decision not to have dinner today. But it does not necessitate a decision to have dinner or to buy a pair of boots a week hence… Thus it depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”

While it’s correct to say that not buying something today doesn’t necessarily mean that someone will definitely buy something in one week, it also doesn’t necessarily mean that they won’t buy something the week after, or the week after that.

You see, saving money today simply means preferring to have the money in your pocket or bank account rather than buying goods or services.

It’s what Austrian economists call “value scales.”

Consciously or subconsciously, whenever you choose to buy or not to buy something you’re making a choice between either having money now or having the good or service now.

If you spend then you’ve made the choice that you’d rather have the good or service than the money.

If you save then you’ve made the choice that you’d rather have the cash than the good or service. But it doesn’t mean you won’t change your value scale next week. Next week you may take the opposite view and prefer to have the good or service rather than the cash.

Even if you’re spending on frivolous items such as putting money in one of those claw machines that you see at an amusement arcade, you’re still using a value scale.

You’re making the decision that $1 spent on trying to pick up a cuddly toy with a flimsy claw thing is more value to you than keeping the $1 in your pocket. Maybe that’s because you like your odds of winning a $10 gift for just $1.

Or it could be that you think $1 is a good price to pay for the entertainment value and the enjoyment you get from trying to win something.

Naturally enough, if you spend that $1 today on the claw machine and received your enjoyment, it means that you won’t be able to spend that same dollar on similar amusements next week.

But, providing you continue to work productively over the next week you should have earned another $1 which you can also choose to spend on amusements.

However, if you choose not to spend the money on amusements today then you’ll have this week’s dollar plus next week’s dollar to spend. You’ll have twice as much.

Here’s the point, ultimately you save for a reason. Few people save just in order to build a massive pile of cash just for the sake of having a massive pile of cash.

The reason most people save is so they can spend in the future. In other words saving is just another way of expressing future spending. For instance you may be saving for retirement or to buy a new car or saving for a holiday.

That’s what saving is, building up your future spending capacity.

But according to wise-guys like Keynes, Skidelsky and Krugman, if you don’t spend today but instead save, the money just disappears. Because apparently it “depresses the business of preparing today’s dinner without stimulating the business of making ready for some future act of consumption.”

They couldn’t be more wrong. Because “stimulating the business of making ready for some future act of consumption” is exactly what saving does.

If Keynes was right, then as we’ve pointed out before, businesses wouldn’t bother with a stock inventory. Machinery makers would build machines that lasted for just one day. Imagine what a ridiculous and unsustainable economy that would be.

In actual fact it’s the act of stimulating an economy through quantitative easing, excessive government borrowing, and credit that does what the Keynesians claim saving does.

It encourages people, businesses and governments to spend today to stimulate the economy. All of which has the consequence of robbing money from the future.

So that when the future arrives the people are so overwhelmed by paying back the interest that they can’t afford to consume.

Yes, not spending today may depress spending today, but bringing spending forward simply creates the kind of boom and bust cycles that created the problems we’re going through now.

The massive expansion of credit – which the boffins want to recreate – is just like taxpayer funded stimulus spending. There’s little difference.

Both involve taking future income and spending it today, leaving nothing for the future. Hence the boom and bust cycle.

But that’s only half the problem. Perhaps the biggest problem created by stimulus spending is the impact it has on creative destruction.

It’s a pretty tough sounding phrase isn’t it?

The kind of phrase that should be said with a deep and booming voice. An Orson Welles type voice if you like.

But just what is creative destruction?

Well, simply put, it’s a fancy economic term to describe the occurrence of new innovations replacing older innovations.

It involves new companies replacing old companies. Old companies getting shoved aside by bright new companies and ideas.

Obvious examples are the typewriter losing out to the word processor, and then the word processor losing out to the personal computer.

Or horse drawn carts being replaced by motor cars, and sail ships losing the battle against steam ships.

I’m sure you get the picture.

The key message is that creative destruction is what drives progress. But creative destruction can only occur if there is investment. And that includes savings.

It enables entrepreneurs to finance and bring to life the new idea that could change the way individuals or businesses do things.

Incidentally, creative destruction is what I try to look for when tipping stocks in Australian Small-Cap Investigator.

Most of the time I’m looking for a stock that is out of the ordinary. A stock that holds the key to a game-changing technology or a new approach to its chosen market.

But it can also mean looking at companies that aren’t necessarily innovative in what they’re producing but rather that they’re innovative in how or where they do it.

Last month’s tip is a good example. However, I won’t give away any clues here though as even the smallest clue could give the game away, and that wouldn’t be fair to paying subscribers.

Anyway, back to the point. As I mentioned above, creative destruction drives progress. Or to be more precise, the entrepreneurial activity behind creative destruction drives progress.

Without it you’d still be foraging and hunting for food, and probably still mulling over the problem of how to easily move things from A to B.

That’s why when you see or hear a vested interest – such as a corporate executive or trade unionist – tell you that a particular change or the lack of a subsidy or bailout will destroy jobs and harm business, you should consider what the real full implications are, not just the immediate impact of the change.

I mean, if we take one of our examples from above, horse drawn carts, it goes without saying that it’s not just the pilots (or whatever they were called) of the horse drawn carts that would have lost their jobs as the motor vehicle took over, but those in allied industries as well.

Such as hostlers and blacksmiths, wheelwrights and tanners. Many of them would have been dumped out of their job. Years of apprenticeship and on-the-job training would have been lost.

But imagine if hostlers, blacksmiths, wheelwrights and tanners had received a massive bailout or subsidy by governments. What impact would that have had on progress?

Sure, odds are that eventually the motor powered vehicle would still have pushed the horse and cart aside, but it would have made the development of the new technology much harder.

It would have taken resources away from new innovation and given it to an industry that was about to die.

It would have made it harder for consumers to afford these new machines as they would have been funding the subsidy to the horse and cart industry through their taxes. And it would have made it harder for the bright new industries to compete.

Anyway, that’s just an example, I think you can see the point we’re trying to make.

We’ve seen exactly that happen over the last couple of years, especially in the finance industry. But it will have flowed through to other industries as well.

Right now they will be millions of entrepreneurs worldwide being denied access to investment funds because governments are too busy using taxpayer dollars to prop up corrupt and insolvent banks.

Entrepreneurs being denied capital because governments are more interested in propping up the construction industry with taxpayer dollars rather than allowing new industries and ideas to flourish.

The problem as we see it is that Keynesians and their like actually have no concept of the future. They only see the present. They see less spending today as a lost opportunity. They have no consideration for tomorrow until tomorrow arrives.

They are stuck in their own Groundhog Day, believing that yesterday’s actions will have no impact on today. And because tomorrow will be just like today there’s no reason to save or prepare for it.

It’s that attitude which not only causes boom and bust cycles and the gradual impoverishment of the individual, but just as importantly it impedes creative destruction and therefore impedes progress.

Cheers.
Kris Sayce
For Money Morning Australia

The Dow Jones Industrial Average closed at 10,120.53, lower by 109 points.

The US markets dropped when Dr Ben Bernanke of the Federal Reserve Bank was speaking in front of Congress, calling the outlook on the markets ‘unusually uncertain’.

Bernanke’s comments weighed the market down, with investment officer Maury Fertig at Relative Value Partners saying these comments from Bernanke confirmed that the Fed isn’t as confident in their forecast as they first thought.

Fertig said ‘The fear of a double-dip recession is so great that anything that smalls of that at all has got investors completely running for the hills.’

The FTSE ended the day higher by 75 points. While it didn’t do much to drive the US markets, Tuesday’s earnings reports from the States helped push the Footsie higher. BHP Billiton [LON: BLT] added 2.5% to its share price after iron ore output reportedly jumped 16% for the quarter.

The Nikkei closed lower by 21 points to 9,278.83.

The price of spot gold in Australian dollars is $1,351.58, while in US dollars it’s $1,185.39. The price of silver in Australian dollars is $20.09 and in US dollars it’s 17.62.

The Aussie dollar versus US dollar is AUDUSD 0.8764 and against the Japanese Yen it’s AUDJPY 76.17.

The price of oil weakened on the back of Bernanke’s comments and data showing that inventories increased last week. Crude Oil closed at USD$76.36

For the biggest movers on the market yesterday click here…

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

Shae.