[Ed note: the following article first appeared in the US Daily Reckoning on 23rd January 2011]

In Praise of Anarchy
by Joel Bowman

Left alone, good people tend to do good things. And, when unobstructed by coercion, force, violence or any other tool employed by the state in order to foster and maintain a more “responsible,” “socially conscious” citizenship, most people tend toward being good people…all on their very own.

Nowhere was this sentiment better expressed during the past few weeks than in the flood-stricken state of Queensland, Australia (and, more lately, in the state of Victoria, to Queensland’s south).

The rains that inundated an area the size of France and Germany (combined!) across the Sunshine State wrought havoc and destruction upon its people. Lives were lost, property damaged and industry crippled.

When the worst of Mother Nature’s wrath had subsided, Queensland residents were left with a monumental clean up.

To their credit, these individuals, in the face of near-immeasurable disaster, performed admirably. They did what came naturally. Contrary to the patriotic rally cries of politicians, they didn’t do what Queenslanders do; they did what good people do. And it was beautiful.

The general feeling was perhaps best summed up by Wally “The King” Lewis, a retired national football hero, who spent the last week of his holidays helping his fellow Brisbane residents prepare sandbags and to bail rising flood waters out of their homes. (It is worth pointing out here that, for many Australians, there is no higher office to be attained in the land than that of venerated sporting legend.)

Speaking to National Nine News from the waterlogged front yard of a neighbor – whom he had never met – Wally said, “If someone’s doing it tough, I think it’s the right thing to do to put the hand up and ask them if they want any help.”

The interviewer then turned his microphone to another volunteer. “What was your reaction when Wally Lewis turned up?”

Typifying the laid back disposition of the crowd, the young man casually replied, “[Laughs] Yeah, I was a little surprised but…you know…people help out. It’s all good.”

The Australian people appeared to be perilously close to discovering something very important about themselves; something, perhaps, they’ve always known; an instinctual tendency toward human solidarity, the natural urge to help a neighbor in distress, to lend a hand; in short, to volunteer.

Alas, barely had the first piece of debris been cleared away when the media, as it typically does, lost sight of the bigger picture. Alongside inspirational stories of non-violent, voluntary cooperation, the local papers turned their attention to the state’s role in the cleanup. Should the state and federal governments remain focused on returning “their” budgets to surplus, or should they deploy funds to assist those in need of help? In other words, how “best” should the state spend its citizens’ money…as if the only just, honest option had not already expired on point of expropriation in the first place? [The answer, in other words, is not to steal it.]

While sifting through the news reports and reading comments about what the state “should” do, we wondered how people who are so ready to do what is natural, to cooperate freely with neighbors and “mates down the street,” could so miss the overarching lesson in all this tragedy. Why do hostages of the state turn to their captor when it comes to arbitrating issues of freedom, issues they are, individually and through voluntary cooperation, demonstrably capable of resolving for themselves?

Perhaps it has to do, at least in part, with the misrepresentation of the concept of anarchy itself; a misrepresentation that serves not the interests of individuals, but of the state itself. We are taught that “anarchy” means violence, looting and the aggressive form of chaos that all-too-often flourishes in the wake of natural disasters. We are told that this is what happens given the absence of state control. Nothing could be further from the truth. The state IS control. It is the very incarnation of force and violence from which it purports to protect us.

As Murray Rothbard, the man credited with having coined the term anarcho-capitalism, expressed in Society and the State:

“I define anarchist society as one where there is no legal possibility for coercive aggression against the person or property of any individual. Anarchists oppose the State because it has its very being in such aggression, namely, the expropriation of private property through taxation, the coercive exclusion of other providers of defense service from its territory, and all of the other depredations and coercions that are built upon these twin foci of invasions of individual rights.”

We can expect nothing more from an agent of force than that which is its primary, defining characteristic; namely, more force. A mule is no more capable of giving birth to a unicorn than the state is capable of “granting” freedom.

Last night, with all this in mind, your editor telephoned his father. Dad lives about an hour south of Brisbane, where the post disaster clean up continues. In the aftermath of the flood, volunteer posts were set up around the city where groups of concerned individuals could assemble to donate their time and/or resources to help get the place back on its feet.

“Sixteen thousand people turned up to help on the first day,” Dad told us. “They came with their own equipment and made their own way there. In the end, they had to turn people away.

“I put my name down to lend a hand,” he continued, before adding, with sincere disappointment in his voice, “but I haven’t been called up yet.”

Then, as a man who has spent his life helping people, he added, enthusiastically, “but I’ve still got two more days of holiday left, Sunday and Monday. Hopefully I’ll have the chance to get up there and help out then.”

To those who would argue that coercion is necessary to foster freedom, that force is a prerequisite for peace and that the expropriation of individuals’ property on threat of violence is compulsory to fund an agency that, alone, is capable of guaranteeing safety and prosperity, we say: you don’t know the real meaning of anarchy, you don’t know what voluntarism is and, until you do, you will never know what it means to be truly free.

Thank you to all the people in Queensland – and around the world – who do understand these concepts and, through their fine example, prove statists everywhere and always wrong on a daily basis.

Regards,

Joel Bowman
for Money Morning Australia

Today we’ll start with a letter from Money Morning reader Anon:

“First let me say how much I enjoy your money morning commentary.  I feel that my thoughts are very much aligned with yours, although you may not agree by the end of this email.

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

“I have never been a conspiracy theorist until now, but the more I go into it the more credible it seems on so many levels.  You have exposed the banks, the property spruikers and others in your articles and I commend you for it.  I feel that this is just the tip of the iceberg and there is a lot more on a much deeper level that we don’t know about.

“I know that your main focus is to help people like myself to create and protect wealth, so I hope you don’t see me as a ranting paranoid nutter going off at a tangent.

“What I’m trying to get across is my absolute frustration about it all and being so powerless.  The things you write in your articles are so spot on but I feel helpless against the tide.

“I was watching a program on TV the other night about Daniel Ellsberg and the Pentagon Papers back in the 70′s.  Even though I lived through those times I knew little about it and like everyone else accepted what the mainstream media put out without question.  I saw Ellsberg and his followers as hippie, pot smoking traitors, but now I see them as heroes putting the truth out there and questioning these bureaucrats trying to run our lives, just as you do in your articles.

“The most unnerving aspect of it all is that even though Ellsberg eventually got the truth out and everyone agreed with him and were disgusted by the government actions, they chose to ignore it and continued as though nothing had changed.  If Nixon hadn’t panicked and instigated the Watergate Affair, he would have remained as president and Ellsberg would still be in jail (he was originally sentenced to 115 years in jail).

“This is what I fear will happen with Wikileaks and to a lesser degree with the banking debacle and other events that you expose in your articles.  Well I’ve ‘banged on’ or ranted enough for now so I’ll sign off.

“Hope you don’t think I’m a nutter, but I needed to air some of those grievances.  Keep up the good work ‘keeping the bastards honest’.  Kind regards…”

It’s funny, isn’t it?  How conspiracies about government and corporate corruption are often found to be not quite as whacky as the mainstream would have you believe.

Our “conspiracy theory” two years ago about Australia’s banks being weak and needing bail-outs turned out to be spot on.  Even though at the time we were ridiculed, and told that Australia’s banks were the best and safest in the world.

So no, Anon, you aren’t a nutter.

Yesterday we received an email from another reader:

“I sent your articles to a friend of mine who is a bank manager for             , and another who is a finance manager for               , and they said you sound paranoid and deluded, hah hah… a perfect recommendation for me to keep on reading, and you to keep on writing.”

That’s just as funny.  Prior to seeing the email, the bank manager and finance manager wouldn’t have had a clue about the secret loans from the US Federal Reserve.

And even now they’ve read it, because it isn’t anywhere in the mainstream press, they think your editor is “paranoid and deluded”.

Well, here’s an experiment on paranoia, delusion and conspiracy theories.  What would you say if I wrote this: The Queensland government and Bureau of Meteorology may have caused the Queensland floods.

Stick with me here… don’t hang up on this email yet…

I know what you’d say.  You’d probably say I’m a disgrace.  That I’m a lowdown scumbag for trying to pin the floods on government… that I’ve reached an all-time low.

Well, before you think too badly of me, read the article below.  It was kindly sent to us by Money Morning reader Christine.  It’s from the Sydney Morning Herald, dated 8th August 2010:

“A rain-making method developed by Thai kind Bhumipol Adulyadej is set to aid Queensland in battles with drought after an agreement between the state government and the Thai royal household.

“The Queensland government’s access to the rain-making technology, developed by King Bhumipol over the past 30 years, came a year after the state approached the royal household last year.

“As a result, Queensland is set to be the first major region outside Thailand where the rain-making technology will be put into full effect.”

It took our anonymous Money Morning reader above over twenty years to figure out that some conspiracy theories turn out to be conspiracy fact.

But perhaps after reading these quotes from the Sydney Morning Herald, our claim about the Queensland government’s involvement in the floods may not seem, well, so outlandish at all.

Look, I’m not saying the state government has been fiddling about with nature.  I am saying that forty seconds ago you may have called me a scumbag, but now, after reading the Sydney Morning Herald article, perhaps you don’t think I’m a scumbag.

In other words you shouldn’t assume every whacky-sounding theory is the result of a “paranoid and deluded” mind.

And a quick search of the Interweb uncovers more details of Queensland’s rain-making mania…

It turns out the Queenslanders had already been cloud-seeding to try and create rain.  A January 2008 Courier Mail article reports:

“Showers have fallen after the first two flights of Queensland’s cloud seeding trial.

“Paul Brady, managing director of MIPD, the company doing the seeding, said yesterday that the project would be a success.

“’We believe it works but the scientific level of proof is different to ours,’ Mr Brady said.”

According to our pals at Wikipedia (we still haven’t donated!):

“Cloud seeding, a form of weather modification, is the attempt to change the amount or type of precipitation that falls from clouds, by dispersing substances into the air that serve as cloud condensation or ice nuclei, which alter the microphysical processes within the cloud.  The usual intent is to increase precipitation (rain or snow), but hail and fog suppression are also widely practiced in airports.”

Back to the Courier Mail…

The article quotes Queensland Sustainability Minister Andrew McNamara who was planning to spend $7.6 million over four years to test cloud-seeding:

“Successful cloud seeding won’t solve southeast Queensland’s water crisis on its own but would be part of an overall package, including recycling, more efficient water use, desalination and new storage facilities…”

Then he said – in a pre-emptive kick in the teeth to the Queenslanders now suffering from the floods:

“This project will focus on the Wivenhoe and Somerset dam catchments.”

The article states, “Seeding would not end droughts but could boost inflows to dams.”

We underlined that last bit.

That would be the same Wivenhoe dam, that thanks to the inflow of rain reached nearly 200% of capacity.  It required emergency measures to drain off the massive amounts of water.  Drainage that may have increased the flood damage.

Based on these reports and a document from the Victorian Government it seems cloud seeding has been taking place in Queensland since 2007.  The four-year trial isn’t due to end until this year.

The report states:

“The Queensland Government is undertaking a four-year cloud-seeding project in South East Queensland which commenced in November 2007.

“The aim of the project is to find out if cloud seeding is a viable way of enhancing the rainfall over South East Queensland’s dam catchments.  The intention is to determine whether it is worthwhile investing in cloud seeding in the long term to increase water storage.  It is recognised that cloud seeding is not a means for breaking the drought.”

Strangely enough we haven’t heard much from the Queensland Government in recent days about how the cloud-seeding project is going.

But what it comes down to is this.  Wouldn’t it be a terrible irony if the science experts who have warned about the terrible impact of manmade global warming in a hundred years, were part responsible for helping nature make a bad flood even worse today?

This is just more proof of what we’ve said all along.  Even if – and we’re not convinced – global warming is real, who’s to say the pointy-headed science boffins can do anything about it?

I mean, if their efforts involve trying to manipulate the climate in the opposite direction, who’s to say the results won’t be even worse?  That they’ll end up creating more rain and lower temperatures just when nature was moving that way anyway.

The fact is, humankind individually and collectively isn’t smart enough to figure everything out.  That’s what markets are for.  Individuals interacting, each in their own selfish interest will always create a better result than a committee of individuals deciding on a course of action.

That’s the difference between freedom and central planning.  One works, the other doesn’t.

Attempts to manipulate markets, whether it’s financial markets, flea, fruit and veg, or climate markets will always yield the same outcome – unintended and usually bad consequences.

Remember: the science and maths boffins who think they know everything about climate change are the cousins of the science and maths boffins who thought they knew it all about finance.

The market proved that false in 2008 when the global economy crashed… because their failsafe computer models turned out to be as useful as a chocolate teapot.  And soon enough the climate scientists who think they can manipulate the climate could get a taste of their own medicine too.  And they ain’t gonna like it.

As ‘andrew of qld’ wrote on the Courier Mail comments page almost a year ago, “stop trying to play god with the skys you clowns”.

We couldn’t agree more.  But it’s a big wish.  The urge to meddle is built in to most humans.  And unfortunately, it’s government that gives meddlers the perfect outlet to do their worst.

Cheers,

Kris Sayce
For Money Morning Australia

Just a quick Money Morning today.  We’re getting stuck into the January issue of Australian Small-Cap Investigator.

And seeing as it’s Friday, we’ll wrap up an old topic.  Rather than start a new one.

Let’s be honest.  We can’t blame the mainstream economists for claiming the Queensland floods will stimulate the economy.

I mean, they’re just spouting on what university taught them.

And what were they taught?

For a start, they’ve been told the best example of economic stimulus was… the Second World War!

I’m sure you’ve heard the muppets on TV talk about the post-war boom and how fast the economy grew.

How the pre-war world economy was dire.  What with all that Depression stuff going on.

But then, like a bolt from the blue, the Second World War came along and stimulated the world to recovery.

And boy what a boom that was.  If only we can repeat it, we’ll be laughing all the way to economic nirvana.

Let’s compare a few numbers…

So far in the Queensland floods, an estimated fifteen people have died… now compare that to around 70 million who died in World War 2.

In Queensland it’s estimated 12,000 homes have been damaged by floods.  World War 2 wiped out millions of homes.  Not to mention the thousands or hundreds of thousands of work places.

Must try harder Queensland.  There’s just not enough stimulating going on.

We touched on this silly subject last September after the Christchurch earthquake:

“Why Creative Destruction is Good, and Destructive Destruction is Bad”

In it we wrote:

“The Second World War was no more of a positive economic stimulus to America or anyone else, than is the current Iraq War or Afghanistan War or the Vietnam War or the First World War or the American Civil War.”

It seems strange to make an economically positive event out of a natural disaster.  And to then compare it to the Second World War… a non-natural disaster event.

In all our searching of the Interweb, we’re yet to find anyone say the First World War or American Civil War stimulated the economy.

That can only mean one thing.  The Second World War fits nicely into the theory about government spending and economic growth.  Whereas the other two wars don’t.  They say the Second World War is an example of economic stimulus working… but they ignore the other two.

Mainstream economists have taken one data point and used it as the basis for their entire theories.  That’s a mistake according to Sherlock Holmes.

Over the summer holidays we’ve read the adventures of the pipe-smoking and cocaine-injecting sleuth.  In the short story, A Scandal in Bohemia, Holmes tells Watson:

“It is a capital mistake to theorize before you have all the evidence.  It biases the judgment.”

I’m sure your editor has been guilty to this “capital mistake”… but we’ll ignore that! [wink].  We’ll ignore it because we like the quote anyway.

I mean, if the Second World War caused an economic boom, what about the First World War?  Did that stimulate the economy?

Our friends over at Wikipedia tell us:

“The post-World War I recession was an economic recession that hit much of the world in the aftermath of World War I… After the war ended… the global economy began to decline.  In the United States 1918-1919 saw a modest economic retreat, but the next year saw a mild recovery.  A more severe recession hit the United States in 1920 and 1921 when the global economy fell very sharply.”

Hmmm… so much for war stimulating the economy.

These war-mongering economists ignore is that public sector war spending stops the private sector growing.

War sucks resources away from the private sector.  Resources that could be used to make cars and appliances and homes.  Instead the state uses the resources to make fighter planes, tanks and bombs.

War doesn’t stimulate an economy.  In fact, after the First World War it took longer for the economy to recover than it did after the Second World War.

In other words, wars don’t stimulate the economy at all.  Rather, they sedate it.  They delay economic growth.  Which isn’t surprising… I mean, there was a war going on!

Without the wars, the economy would have recovered sooner.  Without the First World War the economy would probably have recovered by the late 1910s.  And without the Second World War the economy would probably have recovered by the early 1940s.

Of course, we can’t prove that.  But we can confidently make the claim.

And in the same way, the floods in Queensland delay economic growth too.

Business that would have happened last week and today, isn’t possible.  The local grocer can’t sell groceries because his or her shop is under ten feet of water.

The local bicycle shop can’t sell any bikes because they’ve washed away.

And the local hairdresser can’t cut anyone’s hair because, well, having a nice “do” isn’t on many people’s mind right now.  Getting to the hairdresser might be a bit tricky too.

Anyway, we checked on the Interweb to see how the Christchurch earthquake has helped stimulate the New Zealand economy.  Turns out it hasn’t.  Funny that.

According to the National Business Review: “Another recession for NZ still a strong possibility – economist”.

Of course, that’s according to a mainstream economist.  So we should take what they’ve said with a grain of salt.  Even so, these are the same mainstream economists that thought the earthquake would boost the economy… yet it hasn’t happened…

And it won’t happen.

Remember: just because an economist says something it doesn’t mean it’s true.

To test this yourself, stop and think about it logically.  If thinking about the impact of a large-scale economic event is too daunting, scale it down a bit.

If mainstream economists are right about economic destruction providing a boost to the economy, just consider how economic destruction in your own home affects you.

Imagine smashing your TV with a hammer.  Sure, it’ll provide a boost to the TV store because you’ll need to buy a TV.  But it’s a drain on your bank account because you’re drawing down on savings.

Simple eh?

Well, it’s exactly the same for the broader economy.

The fact is economies don’t grow due to mindless destruction.  They grow through Creative Destruction.

That’s where new ideas and new technologies improve lives.  Where something new provides a better alternative to something old – like computers replacing typewriters… or cars replacing the horse and cart.

But the destroying a perfectly decent road and replacing it with a similar road isn’t good for the economy.  Just as destroying a home and replacing it with an almost identical home isn’t a boost either.

Both result in a waste of resources.  Resources that could otherwise be used elsewhere.

Get the picture?  I think you do.

Just remember that if something said by the know-it-alls in the mainstream media sounds rubbish, then odds are it is.

If we’re honest, the same could be said for your editor… if you think we’re not making sense just drop us a line to the Money Morning mailbag at moneymorning@moneymorning.com.au or post a comment at the Money Morning website.

Anyway, we’ve said just about all we can on this matter.  Time to get stuck in to the January issue of Australian Small-Cap Investigator.

Regards,

Kris Sayce
For Money Morning Australia

You can’t help but love him… Michael Pascoe of the Fairfax papers.

In today’s effort he comes up with two beauties:

“And now, with all but the hard-core climate change denialists accepting that extreme weather will become more common, there’s no excuse at all. Streets and houses that flooded in 1974 are flooding again now and will flood again.”

And…

“As for the economics of it, yes, there are terrible numbers being bandied around, but while there’s damage and destruction and loss, there’s also massive stimulus in the rebuilding. The economy is as strong as the determination of the people. It’ll be all right.”

We’ve already exposed this economic flood stimulus as – to use the Fairy Ruddfather’s phrase – bunkum.

There is no stimulus.

But Pascoe isn’t the only one spinning this yarn.  Westpac economist Matthew Hassan and St George economist Justin Smirk writing over at Business Spectator provide more detail:

“There would be also the boost to economic activity due to cleaning and rebuilding activity. A rough rule of thumb is that the rebuilding effect is about ½ the size of the output loss. We estimate a 0.1 per cent contribution to GDP.”

At least they admit that the net position is no stimulus to the economy.  The net position is a cost.  That is, it doesn’t stimulate the economy.

For example, point to the stimulus in this photo… if you can:

Source: The Age

No, I can’t see a stimulus either.  I can see a whacking great big clean-up bill though… I can see that a bunch of people will be without a car for a few weeks… I can see that Queensland Railways will need to replace and inspect a whole lot of train rails.

This idea of economic stimulus from natural disaster is ridiculous.

Money Morning reader Graham sent us an email a week ago.  He was responding to our comment in Friday’s Money Morning about how HSBC chief economist Paul Bloxham had claimed the floods would result in a boost to the economy.

Graham wrote:

“Just like the 250 homes rebuilt, out of the 2000+ homes destroyed on black Saturday? Now two years on! I’m one of those still trying to rebuild and get my family back home in Kinglake, and I’ve seen many families fall apart or go under as a result! The only way I can get my family back home is to rebuild my home, myself, nail by nail… Forget the household durable goods! ALL the ‘under insurance’ money goes into rebuilding a roof over your head first…”

We also wrote about the stimulus nonsense in Money Weekend.  You can read that article here.

The way mainstream logic works, the next thing we’ll hear from them is that people dying in the floods is good because it’ll create more jobs for gravediggers!

I mean, seriously.  There’s something wrong with these people.

Not only that, but many readers wrote in to point out that flooding isn’t covered by most insurance policies.

The Australian Securities and Exchange Commission’s (ASIC) website points out:

“Because flood cover is not offered in most house and contents insurance policies, people may find out too late that they are not covered for the losses caused by a flood.”

Oops!  There goes the argument that foreign insurance firms will pay for the flood damage.  Not that we bought that argument anyway.

And the front page of today’s Australian Financial Review (AFR) – just this moment dropped on our desk by Australian Wealth Gameplan editor, Dan Denning – notes:

“More than half of all insured homes in Queensland are not covered for flood damage, and insurers have ruled out making voluntary payments to compensate policyholders.”

Which is fair enough.  If policyholders take the risk that their home won’t flood, it’s hardly fair to ask the insurance firms to cough up for the damage after the fact.

So who’ll pay?  The individuals themselves, or charties, or equally likely the taxpayer.  Now, you may be fine with that.  But let’s not kid ourselves with the pathetic argument that the floods will provide a boost to the economy.

And we’ll guess that in the town of Toowoomba, much fewer than half the households will have flood insurance.  Considering there’s no major river that flows through the town, and having looked at Google Maps we’re struggling to even find the creeks that supposedly exist.

Oh, and the fact that it’s 691 metres above sea level would also make you think flooding isn’t likely.

But it didn’t take long for the Climate Changers to point the finger.  Again, Pascoe wrote:

“And now, with all but the hard-core climate change denialists accepting that extreme weather will become more common, there’s no excuse at all. Streets and houses that flooded in 1974 are flooding again now and will flood again.”

Mr. Pascoe may care to remember that the world existed before 1974.  But listen to him and the other climate changers and you’d think all these floods are a recent event.  That it’s all down to what we’ve done to the planet since the early 1970s.

Fair dues though.  He’s not the only one.  Reuters quotes Matthew England of the Climate Change Research Centre at the University of New South Wales:

“I think people will end up concluding that at least some of the intensity of the monsoon in Queensland can be attributed to climate change.

“The waters off Australia are the warmest ever measured and those waters provide moisture to the atmosphere for the Queensland and northern Australia monsoon.”

David Jones, head of climate monitoring and prediction at the Australian Bureau of Meteorology in Melbourne chips in:

“The first thing we can say with La Nina and El Nino is it is now happening in a hotter world.

“So the El Nino droughts would be expected to be exacerbated and also La Nina floods because rainfall would be exacerbated.”

The Reuters reporter notes that Mr. Jones added – but without directly quoting him – that “it would be some years before any climate change impact on both phenomena might become clear.”

Very convenient.  Say it’s caused by climate change but then push the proof out to some time in the future.

But if all these terrible humans have caused the climate to change and monsoons to increase and floods to worsen… how do we explain the following chart:

Source: Bureau of Meteorology

It’s from the Bureau of Meteorology (BoM) and shows “Known Floods in the Brisbane & Bremer River Basin”.

You can click here to see the chart for yourself.  This particular chart records levels at the City gauge.

A second chart records levels at the Ipswich gauge:

Source: Bureau of Meteorology

I don’t know about you, but can we really say that flooding on the Brisbane River is a new occurrence?

I wouldn’t have thought so.  In fact there were more “major” floods in the Nineteenth century than in the following centuries.

So the idea that the floods are proof of climate change and that we must do something about it now before it gets worse, is just plain nonsense.

As we’ve pointed out before, your editor has no clue whether climate change is genuine or not.  We simply don’t have the brain power to figure it out.

But what we do know is that floods happen.  They happen regularly.  In fact we’ve had a lot of rain down in Melbourne too – although not as bad as in Queensland.

And what we also know is that it’s disingenuous for the climate changers – and non-climate changers – to pick individual weather events and claim it’s proof that climate change does or doesn’t exist.

As far as we can see the Queensland floods provide about as much proof of climate change as they do about disasters being good for an economy… in other words, none.

Regards,

Kris Sayce
For Money Morning Australia

Yesterday I wrote to you about the silly headline in The Age newspaper. It was this:

“Queensland rebuilding will boost GDP”

Look, we love it when we see this kind of nonsense written. Simply because it gives us an excuse to again read Frederic Bastiat’s, “That Which is Seen, and That Which is Not Seen”.

You can click here to read it for yourself.

I won’t reprint it because you should read the entire essay. But in a nutshell, it’s economic nonsense to suggest that a flood will be beneficial to an economy.

Only an economic ignoramus would argue such a thing. Floods destroy things. Floods make no distinction between the destruction of brand new goods and goods that are due for replacement.

The last time we brought up this subject we were told it is good for the economy because money comes into Australia from insurance companies. That this money hasn’t been taken from elsewhere in the economy.

Rubbish.

To borrow from the title of Bastiat’s essay, it only considers that which is seen but not that which is not seen.

Even so KPMG chief executive Michael Andrew is quoted in The Age article:

“This will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia. Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

It’s the idea that Australia is getting a free lunch from the insurance companies.

The fact is, Mr. Andrew couldn’t be more wrong if he tried. But let’s run through the argument in more detail…

Think about it, how do insurance companies raise money? They charge premiums. Premiums paid for by Queenslanders and others.

Now, how does an insurance company pay for the claims made by policyholders? It covers the costs from its reserves but would also issue bonds to investors which it will then repay over time from insurance premiums.

Here’s the problem for the insurance company. Aside from the big payouts such as the Queensland floods, or the Christchurch earthquake, the insurance companies also need to pay out other everyday claims.

So, the insurance company will need to rebuild its cash reserves.

How will it do that?

Simple, it’ll need to increase insurance premiums.

And who pays for the insurance premiums? Individuals and businesses. In other words, money that would otherwise have been spent elsewhere or saved will be now spent on increased insurance costs.

Yes, some industries may benefit as claimants buy another item of furniture to replace the item that was destroyed. But it is at the expense of say, the clothing store where someone may have spent money but they are no longer able to do so because of the increased insurance premium.

But what about this idea that foreigners are actually funding the rebuilding as the cash flows in from overseas.

While that may be true, it ignores the attitude of those overseas investors. If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance policies. And that means passing on higher premiums to policyholders.

In economics there’s no such thing as a free lunch. If something is destroyed and needs replacing then there will be a cost to replace it. That cost will either be a direct or indirect cost.

Think about it this way. If there really wasn’t a cost, then why wouldn’t you just crash your car and write it off at every opportunity? I mean, that’s the logic Mr. Andrew is using.

The reason you don’t write your car off is because you know there will be a cost to you in the form of an increased insurance premium when you get your next car.

There is no difference between this example and the costs of the Queensland floods. To the Australian economy as a whole, and to anyone who holds any kind of insurance policy there will be a cost.

Claiming that foreigners will pay for the flood damage without any impact on Australians is just another childlike example of the Australian mainstream falsely believing that ‘Australia is different.’

One day they’ll get it through their thick skulls that Australia isn’t different. Australia has benefited from an extraordinary boom in the resources industry which has helped prop up the entire economy.

When that boom stops, the Australian economy will suffer. Only then will the mainstream numpties realize that the Australian economy is no different to anywhere else.

Kris Sayce
Editor
Money Morning

Monday: You’ve got your eye on a stock – but you’re not sure if it’s the right time to buy it… You’re holding another stock that just went up – or down – significantly… but you don’t know whether it’s time to sell… The solution to both of these dilemmas will become a lot clearer once you’ve watched this video (turn on your speakers). Click here for more…

Tuesday: No wonder Diggers & Drillers editor Dr. Alex Cowie looked jolly as he bounded into the office this morning. The “Stock Doc” has been long coal stocks since March last year. Click here for more…

Wednesday: We see the lazy Aussie retailers have launched a media campaign. They were clearly influenced by the success of the miners’ campaign against the Resources Super Profits Tax (RSPT). Except they forgot one very important thing… Click here for more…

Thursday: But speaking of non-robust and flaky, much to our surprise we received a reply to our Freedom of Information (FoI) request from the Reserve Bank of Australia (RBA). Click here for more…

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

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

According to today’s The Age:

“Queensland rebuilding will boost GDP”

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

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

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

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

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

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

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

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

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

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

Again, here are the questions we sent them:

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

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

The questions were fairly clear.

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

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

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

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

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

“Thanks. Which regulators?”

Almost as quickly, the NAB spokesperson replied:

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

Still unhappy with the answer we fired back another email:

“Which regulators… APRA, RBA or ASX?”

The reply came… not so quickly though this time:

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

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

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

Surprisingly the spokesperson replied:

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

But we still weren’t happy:

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

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

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

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

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

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

Oh stop it… ha, ha, ha…

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

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

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

But at least it adds another piece to the puzzle…

We bashed back a reply to Westpac:

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

To which they replied, grumpily we think:

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

So we replied:

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

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

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

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

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

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

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

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

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

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

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

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

So, remember what we wrote to you yesterday:

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

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

Gee, and they call us a conspiracy theorist.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Will that ever be revealed? We doubt it.

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

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

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

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

However, Money Morning reader Luke writes:

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

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

Yes. It is.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Cheers,
Kris Sayce
For Money Morning Australia

Australian tax return tips

This year we can expect, on average, a tax return increase of more than $300 based on goverment grants and reductions.

"It’s gone up quite considerably, we reckon last year people got about two thousand dollars, so to be getting $2,300 as a return this year is obviously a big increase,"

See if you qualify for Education Tax Refund for families with kids in school.The type of expenses you can claim include computers, internet, even repairs to computers."

You can claim up to $375 for children in primary school and up to $750 for children in secondary school.

This benefit applies to most parents earning less than $120,000 a year. It’s those earning seven figure salaries that the tax office has set its sights on.

Australian Tax Office Are targeting executives, directors and wealthy Australians this year.

In the past the ATO have only looked at wealthy Australians that had a net worth over $30m. This year the ATO are now able to go down to people with a net wealth of only $5m.

Nearly 12 million of us will lodge a tax return, the tax office will then hand back nearly $20b. It sounds like a lot but with wages being frozen and unemployment set to rise, it might be a while before we have that much cash coming in again.

what look out for  while lodging your tax returns ?

improperly stating income from rental properties; also from dividends, shares, interest and work related costs which shouldn’t be claimed, like clothing.

 

Do check to see if you qualify for claiming on your union fees.

"The Australian Tax Office this week sent out 600,000 letters to mostly rental property owners because they got things wrong like borrowing costs, repairs and maintenance, interest on their mortgages and also in relation to capital works deductions as well," .

Those most likely to be audited by the taxman will be truck drivers, sales and marketing executives and electricians.

When it comes to doing your tax return yourself or hiring a professional remember that accountants’ fees are tax deductible. Also keep in mind that 98% of audited returns done by individuals need some kind of adjustment – almost always down.