“Economists were therefore left scratching their heads when it was revealed only 36,000 jobs were added but that the unemployment rate had plunged to 9.0%.  Snow or not, it just didn’t add up.  Was the result good or bad?  The answer seemed to be bad, which actually means good because it means QE2 is well and truly here to stay.  Thus Wall Street closed higher.” – Greg Peel, FNArena

There’s something rather perverse going on in the markets right now.

Good news is good for the market.  And bad news is good for the market.

In fact it seems like bad news is better for the market than good news.  Because it means the US Federal Reserve will pump more fresh cash into the economy.

The Fed is tossing a double-headed coin and the market is calling heads.  It can’t lose.

The real problem is markets have become hooked on stimulus.

Which isn’t really a surprise. Markets and investors become hooked on things all the time.

The dot-com boom is a classic example.  Out of the hundreds of dot-coms that came to the market in the late 1990s only a few remain.

But at the time punters were hooked.  They saw one stock climb a gazillion per cent and so they wanted to find the next one.  When the same thing happened, the search started for the next… and on and on it went until the punters woke up and realised they were buying nothing.

They were buying pets.com and other rubbish.  Companies that had minimal revenues and no prospect of ever returning a profit.

But when you’re hooked you can’t see that.  All you can see are huge returns.  And you don’t want to miss out.

The mortgage securitisation boom got the punters hooked again.  It may have started out as a good idea to earn an income from mortgage payments, but it morphed into something completely different.

Rather than investors buying into the kind of mortgages they wanted, the demand for mortgage securities became so huge that the banks and investment banks couldn’t keep pace.

Because there weren’t enough physical mortgages on the market the banks had to create derivatives to mirror the performance of real mortgages.

And when yields became so low – due to demand and low central bank interest rates – the investment bankers started bundling in higher-risk ‘subprime’ mortgages.  But they still marketed them to investors as triple-A credit!

Even after inventing subprime mortgages out of thin air, the banks still couldn’t keep up with demand for mortgage securities.  So they had to convince those who didn’t have a mortgage to take one out – “Hey, house prices always go up, you can sell for a profit in a couple of years anyway.”

To give you an idea of the size of the demand, here’s what the recently released report from the Financial Crisis Inquiry Commission (FCIC) had to say about it:

“From 2000 to 2007, Moody’s rated nearly 45,000 mortgage-related securities as triple-A.  This compares with six private-sector companies in the United States that carried this coveted rating in early 2010.  In 2006 alone, Moody’s put its triple-A stamp of approval on 30 mortgage-related securities every working day.  The results were disastrous: 83% of the mortgage securities rated triple-A that year ultimately were downgraded.”

That’s what happens when you create a false market to meet demand.  It’s similar to the mad Australian house prices.  A house should be a low-risk stable investment.

But when you get banks offering 95% or 100% loans, and then telling people house prices always go up, the risk profile of housing changes.  It moves from low risk and stable, to high risk and volatile.

And it’s not just me saying it.

Look at the historical return on house prices over the past thirty years.  It’s comparable to the stock market.  That tells you both have a similar risk profile.

That’s not the way it should be.  Shares are high risk.  And so is housing.  But housing should be low risk.  The availability of cheap credit from banks has helped create this mispricing of risk in Australian housing in just the same way the mispricing of risk caused the collapse of the global economy.

Anyway, back to the FCIC report.  Not that we’ve got much time for its opinion.  After all, the report states:

“As our report shows, key policy makers – the Treasury Department, the Federal Reserve Board, and the Federal Reserve Bank of New York – who were best positioned to watch over our markets were ill prepared for the events of 2007 and 2008.  Other agencies were also behind the curve.  They were hampered because they did not have a clear grasp of the financial system they were charged with overseeing, particularly as it had evolved in the years leading up to the crisis.”

But now these same people who were “ill prepared” and who “did not have a clear grasp of the financial system” are the ones you’re supposed to trust to put things right again.

In fact on the same page of the report, just after calling them “ill prepared” and not having a “clear grasp of the financial system”, the FCIC pours praise on them:

“In making these observations, we deeply respect and appreciate the efforts made by Secretary Paulson, Chairman Bernanke, and Timothy Geithner, formerly president of the Federal Reserve Bank of New York and now treasury secretary, and so many others who labored to stabilize our financial system and our economy in the most chaotic and challenging of circumstances.”

You what?  The FCIC highlights how inept the three government-sponsored departments were in identifying the problems… And then praises the three men who were in charge of those departments as the crisis took hold!

It’s thanks to Paulson, Bernanke and Geithner that the markets have continued their addiction.  It’s just that the market has switched drugs.

They were hooked on credit from the 1980s through to the 2000s.  When that blew up, a new addiction was needed.  Step in Paulson, Bernanke, Geithner and their buddies.

Now the goal isn’t for the economy to improve by itself.  The goal is to maintain the current situation… so the Fed prints more fresh cash.

As I wrote in Money Weekend:

“The US Fed prints a lot of money. This devalues the US dollar. The devaluation of the US dollar increases in US dollar terms the foreign-earned income by US companies. This is reported as higher revenues and higher profits by US companies.

“But here’s the problem. Those US dollars are actually worth less than before. While the immediate impact shows an increase in revenues and earnings, when those same US companies need to reinvest in their business – buy more supplies, machinery, etc – they’ll find costs have risen.”

And why wouldn’t executives and bankers want the Fed to print more money?  It boosts share and asset prices, and it makes the exec’s look good.  All this extra money flowing into the tills and they don’t have to work for it.

It’s no wonder the unemployment rate is still so high in the US.  Corporate America wouldn’t want to go spoiling things by hiring more staff.

Because if the unemployment rate falls, there goes the excuse for the Fed to print new money.  And if the Fed stops printing, share prices will stop rising, people will stop spending, and the recovery sham will be revealed to all.

And so, as central banks tend to do, the Fed has signalled to the market what it considers to be its number one target – unemployment.  As long as unemployment remains high, the Fed will keep interest rates low and print more money.

Knowing that, why would any debt-laden business hire more staff?  If you know the Fed will raise rates as soon as unemployment falls, the last thing you’ll want to do is start hiring again.

As Mr. Bernanke outlined in a speech last week to the National Press Club in Washington, DC:

“In sum, although economic growth will probably increase this year, we expect the unemployment rate to remain stubbornly above, and inflation to remain persistently below, the levels that Federal Reserve policymakers have judged to be consistent over the longer term with our mandate from the Congress to foster maximum employment and price stability.  Under such conditions, the Federal Reserve would typically ease monetary policy by reducing the target for its short-term policy interest rate, the federal funds rate.  However, the target range for the funds rate has been near zero since December 2008, and the Federal Reserve has indicated that economic conditions are likely to warrant an exceptionally low target rate for an extended period.  As a result, for the past two years we have been using alternative tools to provide additional monetary accommodation.”

He continued:

“…The fact that financial markets responded in very similar ways to each of these policy actions lends credence to the view that these actions had the expected effects on markets and are thereby providing significant support to job creation and the economy.”

Only they haven’t.  Sure, stock markets have risen, but unemployment is still high. Which is why…

“My colleagues and I have said that we will review the asset purchase program regularly in light of incoming information and will adjust it as needed to promote maximum employment and stable prices.”

In other words, the stock market is going up so the money printing must be working.  Yet firms still aren’t hiring so that means more money printing is required.

That’s the trouble with addictions, they’re hard to break.  Companies are addicted to cheap credit from the banks and stimulus from the government.  As long as unemployment remains high the credit and stimulus drugs will keep flowing.

We could be wrong.  But don’t expect the US employment problem to be fixed any time soon.  That means more stimulus and higher asset and commodity prices.

But be warned, this is one risky bet.  The asset price good times won’t last forever.  When the market addiction is finally broken the outcome for markets will be much worse than that of 2007 and 2008.

Simply because this time they’ve got much further to fall.

As always, the biggest problem is knowing exactly when that’ll happen.  When I figure it out I’ll let you know…

Regards,

Kris Sayce
for Money Morning Australia

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

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

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

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

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

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

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

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

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

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

But it didn’t.

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

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

On with today’s Money Annoying…

The Emperor is Dead… May He Remain So

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

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

Cue the snivelling tributes:

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

Swan went further. According to The Age:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

What a guy. What a performance. What a…

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

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

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

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

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

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

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

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

“Taxes are what we pay for civilised society.”

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

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

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

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

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

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

Who is or was HC ‘Nugget’ Coombs?

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

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

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

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

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

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

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

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

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

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

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

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

The original ‘Champagne Socialist’ perhaps.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Coombs wrote in 1990:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Regards,

Kris Sayce
For Money Morning Australia

Yesterday the stock hit the skids following news that the company expected profit for the current half to be 25% lower than the same time last year:

The shares closed at $35.25, and today are trading another 1.5% lower, meaning the company’s shares are now trading 40% below its 52 week high from October last year. And over 60% lower than the all-time peak in early 2007.

Of course, on the bright side, if you’d bought in when the shares were trading well below $20 early last year then you would have doubled your money by today… which just goes to show there’s always good news to come from bad news.

And what better news can there be for an economy than an earthquake:

“[I]t could actually be positive for growth. You will probably see a massive lift to the construction sector, which has been dwindling in recent quarters… It’ll create tens of thousands of jobs, most of which will have to be sourced from outside of Christchurch… It should give a pretty big lift to household spending, and should have some knock-on effects throughout the economy.”

[Your editor weeps]

The above quote is attributed to Helen Kevans, economist at JP Morgan in Sydney. We’re sad because Kevans always seemed to your editor to be one of the few sane mainstream economists.

Yet the above comments have just undone all her good work. And now Kevans joins the team of other mainstream economists who we simply cast aside into the basket of Keynesian irrelevance.

You’ll have to excuse our naivety. When we wrote about the fallacies surrounding natural disasters in yesterday’s Money Morning we focused on the misplaced urge among commentators to get the government involved.

However, we didn’t mention how many people will consider the Christchurch earthquake to be a positive for the New Zealand economy. We didn’t mention it because in our naivety we’d assumed that no-one believed in that stale old chestnut anymore.

But apparently they do. Kevans at JP Morgan for one.

And Michael Janda, so-called business reporter at the ABC is another. He notes:

“[O]ver the next year or two, the earthquake looms as effectively a giant stimulus package to New Zealand’s struggling construction industry.”

Oh dear.

But Janda doesn’t leave it at that. He moves on to address a number of other economic fallacies not worthy of someone called a “business reporter”.

Take this comment, “You see, in capitalism, someone’s misfortune often registers as someone else’s gain. A company’s surging profit is usually reported as a positive, although it often comes at the expense of redundant employees, cut wages, or customer price gouging.”

Oh dear again.

Words that could only come from a poor soul who has been subjected to years of learning economics at Australia’s statist-loving universities. Probably the same economists who wrote the open letter lauding the government stimulus programmes.

In that letter they wrote:

“Just as a major corporation goes into debt to invest in its stock of capital, so does a government. Just as many householders have a debt to a band or a mortgage company, so does a government. A government has a budget deficit and a government debt, but it also has capital assets (roads, ports, better equipped schools, Broadband, etc).”

To which they should have added, none of which produces a positive cashflow to the government. Take a look at the open letter using the link above, you’ll see every one of them is a university lecturer or professor.

Not one of them we’ll guess – without having done background checks – has any experience of earning a living in the private sector, free from government grants and awards.

If they’d bothered to think just for a second, a business goes into debt because it believes the extra investment will generate additional cashflow or capital growth. A household goes into debt because of the same reason, or because they believe the debt will somehow improve their lives in other ways.

The point is, both businesses and households generate an income so they can repay the debt. Government doesn’t. Government debt is different and a burden because it is paid for by others.

Government is not a profitable enterprise. Increasing government debt does not ever lead to an increase in government “profits”. It simply means the government needs to take money away from the private sector.

For these Profs to argue that government debt is similar to private sector debt is a nonsense.

But anyway, back to Janda’s comment. While it’s true that misfortune for some can mean a gain for others, as we wrote yesterday. That’s not what you’d call the driving force of capitalism or free markets.

The reason capitalism is so successful is that, contrary to Mr. Janda’s belief, in almost all instances both sides of a voluntary transaction gain.

It’s only when a transaction in involuntary that you have winners and losers – taxation, compulsory healthcare, etc. In those instances the consumer is left with no choice. The winners are the firms and government bodies lucky enough to receive the money that has been expropriated from the consumer, while the consumer loses out.

In a voluntary exchange, both sides win. Using yesterday’s example, you buy a ham sandwich from a sandwich shop and both sides win. You get to eat, and the shop owner gets rewarded with cash for correctly anticipating that consumers desire ham sandwiches.

Janda talks of what is really a half-baked argument around the multiplier effect from spending on construction to rebuild Christchurch, yet ignores the real benefits of capitalism.

Instead Janda suggests that profitable businesses are only profitable because they sack people, enslave the remaining workforce or stitch up the consumer.

A more illiterate understanding of free market economics we’ve yet to come across.

Has it not crossed Janda’s mind that companies who pursue profitable ventures actually provide a benefit to the economy. That those companies with capitalists who are prepared to put their money on the line may actually employ more people the more profitable they become.

That workers may achieve higher wages as a result of increased skills thanks to the employment they’ve received from the capitalist.

And that the more profitable a business becomes the greater the ability for that same business to cut prices, or for competing firms to charge lower prices.

Yet you read the arguments by Janda and others and they seem to believe the only way to economic growth is through destruction – and I don’t mean Creative Destruction either, that’s where new technologies or new ways of doing business result in an improvement of product or service to the consumer.

Creative destruction is a positive for an economy.

But what Kevans and Janda are referring to is what can only be described as the opposite to Creative Destruction, and that is Destructive Destruction. And if you’re an English language expert, we’re aware of the tautology – if that’s what it is…

Anyway, not only are they lauding the earthquake as a boom to the New Zealand economy, but as can only be expected, a reference is drawn to what the Keynesians seem to believe is the greatest economic stimulus of all time – World War 2:

“Perhaps the greatest historical example of tragic economic stimulus is the Second World War, which many economic historians credit far more than Roosevelt’s New Deal for lifting the US out of the Great Depression.”

It’s an argument we’ve seen repeated on countless occasions. So Janda isn’t the only economic amateur to get it wrong.

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.

We only wonder why the Second World War that is championed as the saviour of the American economy. Why not the other wars? If war is an economic booster then surely that would be the case for all wars.

You only have to look at current US defence spending and the mess they’ve created for themselves in the middle east to see how war is anything but a an economic booster.

So let’s get something straight. Destructive Destruction isn’t a positive for any economy. Destruction is only positive when it’s creative. An earthquake and a war most certainly aren’t creative.

The fallacy of it can easily be compared to an individual household. If you accept that WW2 was a great stimulus for the broader economy, then you must also accept that if you smash your television, DVD player and stereo to bits with a hammer then it must be great news for your household economy.

The reality is it isn’t is it? Because now if you want to enjoy the same level of entertainment you’ve got to use your savings to buy a new television, DVD player and stereo.

Sure the likes of Harvey Norman or Dick Smith might benefit from this destructive destruction, but you lose out. You lose out because you now have fewer saving. Savings that you may otherwise have spent elsewhere.

It’s exactly the same principle with the so-called ‘War Stimulus’. Building things in order to destroy them or use them to destroy other things isn’t a positive stimulus to an economy.

As several posters to Janda’s article suggest, a reading of Frederic Bastiat wouldn’t do him any harm in understanding the “broken window” fallacy.

Anyway, this kind of destructive destruction merely takes scarce resources from other industries that may need them in order to build bombs, tanks or fighter planes.

Just ask anyone who lived in Britain during the Second World War whether they thought that the war was a stimulus. Sure the economy produced a whole bunch of stuff, but it also starved the economy and the consumer of things they really wanted – such as food and clothing.

While resources were being tied up with fighting off the Hun, resources couldn’t be used elsewhere.

Being issued with ration books so that you can only eat as much as the government tells you to eat is hardly the sign of a flourishing economy.

Perhaps Janda would prefer a life without capitalism and see how that looks. If he’s lucky he could try out Venezuela where president Hugo Chavez plans to introduce what he calls a “Good Life Card”.

According to the Miami Herald, Chavez said:

“‘I have called it a Good Life Card so far,’ Chávez said in a brief statement made on the government television channel. ‘It’s a card for you to purchase what you are going to take and they keep deducting. It’s to buy what you need, not to promote communism, but to buy what just what you need.’”

You buy what you need based on what the shopkeepers are told to stock.

We’re pretty sure that Venezuela is an economy where private companies aren’t making the kind of surging profits Janda bemoans.

We may grumble about the government encroaching more and more into the lives of Australians (you noticed have you?), but at least for now Australia still operates a broadly market-based economy.

How much longer that will be the case is anyone’s guess.

But with the foolish Keynesian economic viewpoint appearing to gain more ground by the day, and the impotent mainstream press prepared to cheer for more not less government intervention in the economy, Australia is most certainly on a slippery slope to socialism.

Cheers.
Kris Sayce
For Money Morning Australia

If you’re not a subscriber yet, then why not take a few moments to read how you too can become what I like to call a Disaster Profiteer…

Anyway, on with today’s Money Morning. While the scumbags in Canberra squabble like spoilt brats over who gets to tax and spend your income, we’ve been cruising the streets of the interweb to see what humbug and nonsense we can uncover.

And boy, have we come across plenty of it.

Take for example a paper by Phil Hagen and Nicholas Gruen titled, “Repaying the fiscal stimulus”.

You can read the full paper by clicking here.

We knew we weren’t going to like what was in the paper when we saw the quote on the front page by Keynesian fan, Joseph Stiglitz:

“If you hadn’t spent the money [Australian stimulus], there would have been waste… You would have had high unemployment, you would have had capital assets not fully utilised – that’s waste. So your choice was one form of waste verses another form of waste…”

And so the quote goes on for another mind numbing eight lines or so.

But it’s once you get into the guts of the nine page report that the real nonsense begins. It’s crammed full of everything the Keynesians and other interventionists would have you believe is true.

However, it only takes a small tap for their argument to collapse.

Before I go through the details, in a nutshell the paper argues that the Australian stimulus programme is self-funding. Simply because whatever money was handed out by the government eventually comes back to the government as tax receipts.

Here’s how Hagen and Gruen put their case:

“Thus for each dollar Australians received from the cash payments of late 2008 and early 2009, they only increased the Australian governments’ debt that must ultimately be serviced and/or paid back by around 77.5 cents with the other 22.5 cents being the tax windfall from additional employment. Australians received nearly $30 billion in one off transfers but will need to service and/or [pay back] only around $23.2 billion in state and federal taxes.”

So, is what Hagen and Gruen claim true?

I mean, it sounds reasonable enough doesn’t it? If we accept the argument that the stimulus payments kept people in jobs then it must be true that those people paid taxes on the income they otherwise wouldn’t have received.

Therefore the tax paid has gone straight back to the government helping to reduce the debt incurred as a result of saving the jobs.

At first glance you could be forgiven for thinking they’ve got a valid case. Let’s put their case in simple terms for them…

The government hands out $1. The people who receive it then spend it. That money helps to keep people employed. They pay 22.5 cents of every dollar they earn in tax back to the government.

Hey presto, the stimulus programme is partially self-funding. And isn’t the Australian government fabulous for having come up with such a great idea.

But as is usually the case, it doesn’t take much effort to cast the self-funding argument aside.

For instance, why didn’t Hagen and Gruen extend this scenario for future years?

If the debt was funded by taxpayers who didn’t lose their jobs this year, then surely those same taxpayers won’t lose their jobs next year and they’ll repay more of the debt. So that in just over three years from now those grateful taxpayers would have fully paid everything back.

It’s the logical extension isn’t it?

Perhaps they didn’t extend the argument that far out because they know it doesn’t stack up.

You see, the main problem with claiming that the stimulus is self funding is that it treats the stimulus programme in isolation from everything else. But you can’t do that.

Whichever way you look at it, it has to be remembered that governments don’t have their own money. Whatever money it has it has taken from individuals. It has either taken it from them now through taxation, or it has taken it from them in the future via debt which must ultimately be repaid through taxation.

So the idea that the government has paid out $1 and then received straight back 22.5 cents without any negative impact on the economy is nonsense.

For a start, it needs to be remembered that the government would already have allocated that 22.5 cents of tax revenue to other projects. Hagen and Gruen themselves argue that these are people who otherwise would be out of work.

Therefore if they were in work they would have been taxed and the government would have already anticipated receiving those tax dollars when it formed its budget.

Let me put it this way, the $30 billion in taxpayer handouts was additional government spending over what it had budgeted. As we recall – without looking to check – the Australian federal government spends around $330 billion per year and raises taxes of roughly the same amount.

Hagen and Gruen argue that the tax receipts from the stimulus programme equalled around $6.8 billion. But for the argument to hold that these were jobs that would have been lost then surely the $6.8 billion of tax revenue is revenue that was expected as part of the $330 billion budget.

So if the $6.8 billion from the stimulus job saving has gone to pay back some of the stimulus debt then it must surely mean that the budget ex-stimulus is now short by $6.8 billion.

In other words, there is still a $30 billion shortfall that the government needs to cover.

Whichever way you cut and dice it, it’s not possible for a stimulus programme to be the self-funding scheme that the Keynesians and interventionists would have you believe.

Take the argument further. Using their theory, why doesn’t the government spend $100 billion today to save/create even more jobs knowing that $22.5 billion will head back to the government’s coffers next year, with the whole thing being paid for three-and-a-bit years after that?

Or why not $1 trillion? That would be even better wouldn’t it? Imagine all the jobs that could be saved and created that way.

It doesn’t take a PhD from Harvard to figure out that whether it’s $30 billion, $100 billion or $1 trillion, that money has to come from somewhere. And if it comes from somewhere it has to be repaid.

And that either means increasing taxes or keeping them higher than they otherwise would have been.

But not if you’re a mainstream economist. In the media release for the paper, Gruen claims that the tax receipts from the stimulus are a “free lunch”:

“So for every dollar the government spent, tax revenue to Australia’s governments rose by around 22.5 cents, leaving just 77.5 cents to be repaid. The total windfall to the budget – and to the community – of the additional tax revenue from the cash transfers is around $6.7 billion. This money and the production of all those people and all that capital kept in employment are the riches of good economic management – the only kind of free lunch we know of.”

Sorry, wrong. There’s no “free lunch” and it’s crazy to believe there is. There’s no free lunch because there’s no such thing as a self-funding government stimulus programme.

The Australian government’s stimulus is no exception to that. The fact is, the stimulus programmes have increased the tax and debt burden on Australian citizens to a greater extent than if the stimulus wasn’t there.

That’s inarguable. No amount of flimflammery can turn a tax and debt increase into an economic windfall for the economy. Taxes and debt are a detriment to an economy, regardless of what the tax and spend brigade would have you believe.

Cheers.
Kris Sayce
For Money Morning Australia

That’s what we thought after reading the following headline from Bloomberg News yesterday: “China Said to Test Banks for 60% Home-Price Drop”.

Ooh, imagine that. Surely that would have to be pretty painful.

And it puts to shame the Australian Prudential Regulation Authority’s (APRA) stress test that used a 25% drop in house prices in its scenario.

Considering how housing is funded in the respective nations you’d think they’d have those numbers the other way round.

According to Michael Klibaner, head of China research at Jones Lang LaSalle, China’s housing market is “cash-driven” rather than debt driven.

We’ll have to take his word for that. But we know one thing’s for sure, the Australian housing market is anything but cash-driven. It’s debt driven. Debt driven to the tune of about $1 trillion.

Or to put it another way, roughly one-third of the entire value of Australian housing is in hock to the banks. And that’s based on the current inflated values too.

Even so, Dr. Luci Ellis at the Reserve Bank of Australia (RBA) doesn’t believe Australia has a “credit-fuelled” housing boom. In that case it must be a cash-fuelled credit boom then.

But even cash-driven housing booms aren’t immune from a crunch. According to Klibaner, “We actually expect a very healthy correction, something in the order of 15 or 20 percent in terms of price correction.”

[Spits coffee across table]

Sorry about that! [Wipes keyboard] A “very healthy correction… of 15 or 20 percent.” If that’s what you get with cash, imagine the carnage with a credit-fuelled housing market… which apparently Australia doesn’t have.

Look, we don’t even take Dr. Ellis’ comment about the lack of a credit-fuelled boom with a pinch of salt. We just disregard it. It’s a daft comment. One that further encourages the idiotic rationale that Australia is somehow different.

Take a look at the chart below and tell me that doesn’t look like a credit-fuelled boom to you:

Just between 1998 and today there’s been a nearly five-fold increase in the size of the housing debt.

And yet still the RBA boffins say there’s no bubble. Bless ‘em.

But that’s not the only bubble you’ve got to watch out for. There’s the stimulus bubble too.

That’s the one where the government takes all your money in order to spend it on stuff no-one really wants or needs. Or if they do want it, it’s something they’ve been quite able to live without.

But when the stimulus bubble pops, as it has done in the US and UK, the results are terrible.

All the money that’s been spent and wasted now has to be repaid. Only because the money was wasted on projects that don’t generate a profit, there isn’t a new income stream to repay the debt.

The result is that governments are forced to inflict even more paid on their citizens. Again, such as that which is happening in the US and UK where taxes are increased while government spending remains largely unchanged.

As an aside, I hope you haven’t fallen for the spin about the new ConLib coalition in the UK and its plans to cut government waste and spending. Rearranging deckchairs on the Titanic would be a better way of looking at it…

What then happens is that the economy collapses. A stimulus bubble is like any other bubble. It inflates, causing the economy to expand in all the wrong spots, and then once the stimulus flow stops, it slumps.

Unless the likes of Joseph Stiglitz and his Keynesian cronies get their way and the stimulus spending continues. Of course, all that does is make the problem worse and the resulting crash even bigger…

Anyway, the local Australian press has gone gooey-eyed with the presence in Australia of the aforementioned Nobel Prize winning economist Joseph Stiglitz. Especially the Fairfax owned newspapers.

Last week we suffered through an interview of Stiglitz by Chris Zappone at The Age, and today we opened the Australian Financial Review to an article by Alex Millmow, senior lecturer in economics at the University of Ballarat.

Stiglitz is praised as being an “outspoken critic of market fundamentalism” who “favours more, not less government intervention in the economy.”

This is the same Stiglitz who told Bloomberg News yesterday:

“It’s absolutely clear that you need a second round of stimulus. It needs to be better designed. It needs to be focused more on returns on investment, education, infrastructure, technology. And if you do those kinds of high-powered investments, the long-term national debt will be actually lower and the growth in the future will be higher.”

It’s the classic argument from the interventionists. That government spending leads to a lowering of debt and longer term growth of the economy.

The reality is that it does no such thing.

Simply because government spending is always misdirected. Here’s a perfect example. Stiglitz is a big fan of the Australian government’s stimulus packages – the insulation programmes, the school building programmes, the $900 bribes, and the home buyers bribe.

Now, let’s see which of those caused a lowering of debt and an increase in economic growth…

Call us an old stick-in-the-mud, but none of them have decreased the debt, and none of them will contribute to economic growth. In fact debt has increased. It’s increased in two ways, first off by taking the government debt from around $50 billion to above $150 billion in the space of a year.

And secondly it has increased private debt. Because that’s gone up by $113 billion during the same period.

Of course Stiglitz does say the debt is reduced over the long-term rather than short term because of these measures. Well, let’s look at them again and see if we can figure out how that works.

We can’t see how using taxpayer money to pay for private homes to have housing insulation helps decrease a national debt. It certainly doesn’t help the economy. All it does it help those in the insulation business at the expense of those not in the insulation business.

The same for the school building programme, that has cost billions and they’re still not done. It’s going to cost more money to complete, but where is the payback? How will building new school halls, gyms and libraries decrease debt?

How does that generate a net income? It doesn’t, it generates an additional cost.

Now that all those buildings have been completed they’ll need to be furnished – that’ll cost money. They’ll need to be heated or cooled – that’ll cost money. They’ll need to be maintained – that’ll cost money.

So, schools will either need to cut costs elsewhere in the school, or they’ll need to ask for more money from the government (taxpayers) or by asking parents to contribute more directly.

Either way it hasn’t done anything to boost the economy. All it has done has taken money that taxpayers and parents could have spent or saved elsewhere.

None of them reduce debt at all. Yet every last Keynesian will trot out the line saying that increased government spending helps to reduce debt. Even the most simple of people could see that’s not the case.

All that really happens is that the debt is shifted. Even if the government pays off its debt – $150 billion at the moment – how will it do that?

That’s right, through increased taxes.

Remember, the government doesn’t have or generate any money independently of what it takes in taxes or levies or any other form of burden on the public.

Even the $300 million dividend the government received from Medibank can’t be counted as a genuine profit because the public is coerced into buying private healthcare. Private health insurance is just a tax through the back door – front door actually, now we think of it.

If you don’t take out the insurance and you earn above a certain wage then you have to pay the Medicare surcharge. So either way the public is coerced to make a payment to government that they may otherwise not have chosen to make.

Anyway, the cost of stimulus programmes is never good in the long run because the government can’t allocate the resources efficiently. It can only give favours to those it believes it can influence more than others.

So while there is all the talk about Australian government debt being small and not a problem, and an example to the rest of the world, the reality is different.

The reality is that the debt burden has just been shifted on to individuals. Individuals who have been encouraged to spend, and who have been forced to go into debt will now have the added burden of paying back $150 billion of wasted government spending.

That’s on top of the more than $1 trillion individuals are already in debt for. How are either of those numbers a good thing?

It means that taxes will therefore be higher than they otherwise would have been, and individuals may be forced to increase their debt levels even further in order to pay for it.

Here’s a good exercise for you. Take a look at the total amount of debts you have outstanding – home, car, personal, credit card… now take a look at your latest group certificate to see how much tax you and your family have paid during the last financial year.

Now add in all the other taxes that you’ve paid, such as GST, that don’t show up on your group certificate.

And now consider how much better off you’d be if you didn’t have to hand over 20%, 30% or 40% of your hard earned cash to the government.

The nonsense about Australia’s debt levels being fine because it is private debt rather than public debt really needs to stop. And furthermore, the misinformation about government stimulus spending and it’s supposed positive impact on the economy has to end too.

But it doesn’t help when you get the likes of Stiglitz coming to Australia and praising the government for what has been a monumental waste of money.

Cheers.
Kris Sayce
For Money Morning Australia

Greece on the verge of default – [whistle].

China trying to engineer a soft economic landing – [whistle].

US Federal Reserve increasing interest rates – [whistle].

Australian property bubble bubbling – [whistle].

Millions of your taxpayer dollars wasted on home insulation stimulus – [whistle].

But funnily enough, it’s the mainstream response to the last one that baffles us the most.

After four insulation installers have been killed – and doubtless tens or hundreds of others have been injured – and at least 87 fires have resulted from the installations, Environment Minister Peter Garrett has abandoned the scheme.

Of course, already, billions of taxpayer dollars have been spent on this monumental waste of money.

But here’s the thing we don’t get. At the time all these whacky schemes were announced, the mainstream told you that it was necessary to spend money because spending money was good for the economy.

You remember that don’t you?

Well, if spending money is good for the economy, then surely the disastrous outcome of the housing insulation scheme is an unexpected boost for the economy.

Because if simply spending money is good, then surely spending more money is even better.

The government now has to fork out hundreds of millions of dollars more to arrange for inspectors to make sure the work on at least 48,000 properties has been done properly.

Doubtless it hasn’t – hence the four deaths – so those inspectors will need to arrange for the work to be fixed up. That will cost more money.

Then we’re sure that just to be on the safe side, the government will send inspectors out again to make sure the fix-ups are safe – there’s even more taxpayer dollars spent.

According to the lame thinking of the mainstream that should all equal a boost to the economy, as more taxpayers dollars are spent.

Not surprisingly, the mainstream press haven’t mentioned any of this. Either because they’re too thick to work it out, or because they realise how illogical the idea of stimulus spending is, but they don’t want to admit it. After all, spending other people’s money is fun!

Aside from the wasteful spending, the 6,000 job losses suffered in the home insulation sector is another perfect example of how the misallocation of resources can permanently damage the economy.

As Paul Howes, national secretary of the Australian Workers Union points out, “77,000 jobs went in manufacturing, and the knock-on of that will be felt for years and decades ahead as factories were shut that will never re-open.”

Of course, what Mr. Howes fails to point out is that it’s the unions that help to ensure there are job losses. Their push for higher minimum wages guarantees that Australian businesses will either go bust or have to ship the work offshore.

And he doesn’t mention the millions of other manufacturing jobs that have vanished over the years thanks to the trade union movement.

But here’s the bigger problem. All the excitement about the stimulus programmes ‘creating’ new jobs masks the fact that those jobs which didn’t benefit from direct stimulus spending – such as manufacturing – lost jobs.

Not only that, but once a factory has closed down, as Mr. Howes correctly points out, they “will never re-open.”

If it was uneconomical to maintain a manufacturing business, it will be ten-times more uneconomical to try and re-start one from scratch.

Yet, all those jobs that were ‘created’ by the government to install insulation, what’s happened to them? Oh, that’s right, the programme has been cancelled. So the billions of dollars spent on ‘creating’ jobs have not only destroyed 77,000 manufacturing jobs, but it’s not even benefited the industries that were supposed to gain.

As we wrote a year ago on 4th February 2009:

“The government economic stimulus package will have no positive impact on the broader economy whatsoever. None.”

Yet again we’ve been proved right, and the mainstream press proved wrong.

At the time we also quoted some of the shrill headlines from the mainstream press:

“Rudd throws $42bn at economy” – Australian Financial Review

“Schoolyard blitz to avoid recession” – AFR

“We’re all in this together: except Turnbull” – AFR

“Rudd and the Reserve free up billions to beat recession” – The Age

“Rudd splashes the cash” – The Age

Every last one of them cheering for the government to spend your money to save the economy. Not a single journo was capable of expending one brain cell to figure out what the terrible consequences for the Australian economy would be.

An economy that believes the best solution to national wealth is to build, and then buy and sell houses between each other.

But there’s the consequence for you. One industry gets a bunch of stolen taxpayer money to keep prices sky-high and the credit bubble growing. The other industry gets swamped and ravaged by trade unions and minimum wage legislation which forces it to close down forever.

The upshot is the Australian economy hasn’t benefited one jot from the billions spent in the stimulus programme. All it’s done is allocated resources to prevent a bubble from popping – for now – and ensure thousands of people have received training for an industry that can’t possibly sustain them without the presence of taxpayer money.

Because if it could, then they wouldn’t need the stimulus to begin with – it’s not rocket science.

Despite the complete failure of stimulus spending we’ve little doubt the spin doctors will continue to call for more taxpayer dollars to be thrown at the economy – especially the housing sector.

And as long as that happens then we’ll continue to see headlines such as this:

“Housing debt in overdrive” – News Ltd

According to journalist Anthony Keane, “Total housing debt is set to reach $1 trillion within a year. The figure itself is not a worry, but there is concern the pace of borrowing is exceeding household income growth.”

“Not a worry”! Is he mad?

Nearly $1 trillion isn’t a worry? Oh Lordy. We’ve heard it all now.

But anyway, we’ll end today on that note. As we’ll get stuck into housing again tomorrow.

Cheers.
Kris.

And his unwavering faith in the ability of the Reserve Bank of Australia is commendable, yet completely mad. After all, the RBA is the same crowd that’s overseen the destruction in the value of your money over the last fifty years.

And here’s the proof courtesy of the RBA’s website:

They don’t even hide the fact that they’ve singularly failed in one of their main aims, to provide a stable currency.

As their inflation calculator shows you, if you had $1,000 in 1966, in today’s money it would be worth the equivalent of just $100. In other words, the RBA has overseen a 90% reduction in the value of the Australian currency in just 43 years.

And these guys are considered to be heroes by the likes of Pascoe and his fellow mainstream cronies!

But look, we shouldn’t really pick Pascoe out from the crowd. He’s not the only mainstream journalist or analyst to have neglected mathematics over the last couple of years.

If you’ve read Money Morning for a while you’ll remember our attack against government stimulus programmes late last year and early this year.

While fair-weather capitalists swiftly jumped from the “get government out of the way” camp into the “we love you government, come and help us” camp, we argued strongly that the last thing the economy needed was a whole bunch of wasteful government spending.

As you can gather, our opinion was largely ignored. The spending efforts went into overdrive. Government was begged to ‘fill the gap’ vacated by private enterprise.

If people and businesses weren’t going to spend then it was up to the government to organise things.

First there was the cash bribes. When that didn’t seem to be helping enough there was the government infrastructure spending. When that didn’t do as much as they’d hoped there were more cash bribes.

Free money and free housing insulation for almost all. Then there were the shovel ready projects. All those plans the federal government and state governments knew they couldn’t afford were suddenly vital to save the economy.

It’s obvious really, if something is unaffordable or unnecessary when the economy is booming then it must be affordable and necessary when the economy is heading for a slump.

Hmmm, that doesn’t sound right. It’s like saying, “I couldn’t afford the 75 inch plasma TV when I had a job, but now that I’m out of work this is the best time to buy one.” But never mind.

Anyway, there’s all those school buildings and hospital wings to build. Only a Scrooge would oppose the public funding of a school gym or a new hospital wing for the kiddies.

Looks like we’re a Scrooge then doesn’t it.

Only we’re not. Because if you take a look at the research Pascoe is referencing and also take a look at the front page of today’s Australian Financial Review (AFR), then you’ve a perfect example of why the stimulus programmes have been nothing short of a disaster.

But before I get onto that, we need look no further than the architect of the stimulus programmes – Treasurer Wayne Swan – for confirmation of the damage the stimulus has done and is doing to the economy.

Yesterday’s Sydney Morning Herald (SMH) had the headline: “Stimulus will still be needed next year: Swan”.

The report was on the back of the lower than expected GDP number which came in at 0.2%.

The most telling part of the GDP numbers was this:

“The growth was driven by a 0.7% increase in household expenditure and a 6.2% increase in public investment, offset by a 0.9% fall in private investment, and a strong fall in net exports. The fall in net exports was due to a 2.3% fall in exports and a 5.8% rise in imports.”

A 6.2% increase in public “investment”! However, remember that a government never invests, it only spends. An investment is where you expect to get a return on your money.

Governments don’t give a return on their “investments” because they have no profit motive. They’re given a budget and they spend it. It’s as simple as that. Everything they do is a cost to you as a taxpayer.

The fact that governments have increased spending just when the economy was attempting to contract isn’t a positive sign for the Australian economy, it’s merely a disaster waiting to happen.

The report from the Reserve Bank of Australia (RBA) that Pascoe sings about shows that business investment is up. Yes, we can see that. In fact, here’s the chart to prove it:

So now we have to ask, “Why is business investment up?”

That’s right, 1 + 1 = 2. Or in other words, ‘Free Money’ + Business Tax Break = Spending.

Now, that’s trumpeted by the likes of Pascoe and others as being proof of two things. One is that the Australian economy is much more resilient that other developed economies. And two that the government stimulus programme worked.

But as we’ve pointed out during most of the last twelve months or so, nothing comes for free. ‘Free’ money given out by the government isn’t free at all. In effect they’re just giving you a short term loan.

Eventually they’ll have to swipe it back again.

Which brings us to the front page of today’s AFR, “Business tax cuts vanish as WA budget blows out.”

What you have there is the ugly side of the stimulus programme. The handing out of cash last year and early this year was all done in the guise of Gold Coast Meter Maids, “have this lovely money and spend it for the sake of your country.”

The ugly side is where the government gets itself into a mountain of debt and has to rape your wallet and purse to get the money back. So rather than a blown kiss from a Meter Maid, it’s more like a snog from Marilyn Manson – “No it’s alright, just take the money!”

If you look at the important number in the WA budget forecast, its expenses are expected to grow by 9%. Clearly they haven’t heard of tightening the belt during a recession.

But then they didn’t have to because everyone wanted governments to spend money to avoid the recession.

And then there’s the hammer blow for WA taxpayers, and the realization that the ‘Free’ money wasn’t free. As the AFR details, the WA government has delayed the following tax cuts and benefits:

• Defer abolition of transfer duty on non-real property – $355 million
• Defer harmonization of payroll tax grouping provisions – $156 million
• Defer royalties for regions – $130 million
• Change timing of seniors cost of living rebate – $26 million
• Friend in need emergency scheme deferral – $8 million

Not that we’re in favour of government handouts. We’d rather see government keep its mitts off your wallet in the first place, rather than grabbing it and then throwing the cash around like a drunken sailor.

If there’s one thing you should have learned from recent events and history, it’s that government’s only succeed in making recessions and depressions worse. That happened during the Great Depression and it’s happening again right now.

In fact, contrary to popular opinion, much of what governments are doing now is a carbon copy of the disastrous mistakes of the 1920s and 1930s.

Granted, we’re pretty lucky not to be in the same position as the US and the UK where their governments are increasing taxes and committing the taxpayers to billions and trillions of dollars of unnecessary socialist style spending programmes.

But you shouldn’t think things here are that different. Federal and state governments have embarked on a massive spending binge despite seeing a drop in the proceeds from their tax theft.

Just how the mainstream press can believe the economy has grown on its own merit and that everything is going to be just fine, is extraordinary.

But we guess this over optimism is the reason why the same people are so happy for the government to push ahead with the billion dollar Climate Change tax. After all, with such a strong and robust economy, surely we can afford it!

Cheers.
Kris.

60-Second Market Round Up
by Shae Smith

The S&P/ASX200 had a pretty flat day yesterday, up by only 8 points to 4,670.30. However thanks to the lead in from the overseas markets, the Aussie is down 1.20%.

The Dow Jones Industrial Average took a tumble overnight, in what is normally a quiet period for the markets. The Dow ended at 10,308.26, lower by 132 points. Read more about the US market here.

In the UK, the FTSE ended the day at 5,217.61, down by 102 points or 1.93%. The major banks dragged the Footsie down showing concern for the proposed new rules regarding higher capital requirements for banks.

The Nikkei finished the day down slightly, to 10,163.80 lower by 13 points.

The price of spot gold dropped on a strengthening US dollar. The downgrading of Greece has spooked the Euro which pushed the greenback higher has well.

The price of spot gold in Australian dollars is trading at $1,237.50 while in US Dollars it is trading at $1,097.17. The price of silver in Aussie dollars is $19.33 and in US Dollars it is $17.14.

The Aussie dollar versus the US dollar is trading at USD$0.8868, and against the Japanese Yen JPY79.76

Crude oil closed at USD$72.70.

For the biggest movers on the market yesterday click here…

So, that’s the market wrap for a Friday. For the reader that is in wind down mode leading up to the Christmas break, have bit of fun with “Talking Kev”. You can “create” his climate change speech using some of his more popular phrases. Fair shake of the sauce bottle I say!

Your editor is now back on the ground in Sydney, waiting for the flight back to Melbourne.

Today we’ll wrap up our coverage of the Agora Financial Investment Symposium. We’ve got a brief summary of our own presentation – we’ll try to be fair and balanced with the critique of our own efforts – plus some of the closing comments from Daily Reckoning founder Bill Bonner.

The master of ceremonies, ‘Chip’ Wood told us the first session back after the morning coffee break on the last day was the worst time to present – so that was nice confidence booster!

Anyhow, as it happens our audience swelled from about 300 at the start up to about 600 by the time we were half way through telling the audience that small caps are the best investment in Australia and whatever they do, don’t buy any Australian banks.

The content pretty much went over most of the stuff you’ve read about in Money Morning during the last ten months, so I won’t go through every part of it now.

Instead, I’ll cover the five main themes of the presentation:

1. The Australian government is doing bad things too
2. Australia has a Chinese ‘Get-Out-Of-Jail-Free’ card
3. Chinese stimulus spending isn’t any better than Australian stimulus spending – it’s just different
4. Buy into Australia’s new energy gold mine
5. Don’t diversify!

These are all things that may be covered at the Debt Summit we’re holding in Melbourne this week.

Your editor didn’t give the audience an extensive list of the Australian government irresponsibility – we didn’t have the time. But we did cover some of the most obvious.

Cheques being sent to dead people.

‘Free’ money to buy houses. We gave the example of first home buyers in country Victoria being given nearly $40,000 to build a house. And of course all this can be done with no deposit.

It reminded us of some of the tactics the homebuilders use to help people manufacture phony savings. Such as offering to pay buyers rents as a loan so the buyer can deposit the ’savings’ in an account. Most banks only want 3-6 months savings record anyway, so it’s not that hard to fake.

Home insulation for free, and the build ’stuff’ brigade. Build a bridge, roads, schools, sheds… something… ANYTHING!

Then there was the Chinese ‘Get-Out-Of-Jail-Free’ card. We’d titled our presentation, “The Greater China Co-Prosperity Sphere and How to Join it – Mate.”

Alluding to the Greater East China Co-Prosperity Sphere from the 1930s and 1940s.

We quoted from the joint declaration at the Greater East Asia Conference of 1943 as follows:

“The United States of America and the British Empire have in seeking their own prosperity oppressed other nations and peoples. Especially in East Asia, they indulged in insatiable aggression and exploitation, and sought to satisfy their inordinate ambition of enslaving the entire region, and finally they came to menace seriously the stability of East Asia.”

The statement continued with:

“The countries of Greater East Asia… undertake to cooperate toward prosecuting the War of Greater East Asia to a successful conclusion, liberating their region from the yoke of British American domination, and ensuring their self-existence and self-defense, and in constructing a Greater East Asia.”

We also wondered whether the new map of the world may be something similar to George Orwell’s vision of Nineteen Eighty-Four. Except with Australia joining Eastasia rather than being part of Oceania.

OK, perhaps it’s a stretch to compare today’s Asian economies with that which existed during World War II. But the point is that it is the Asian economies – mainly China – that are looking to exert their influence over the world.

In this case it is China instead of Japan that is leading the rest of Asia away from US economic dominance towards Chinese economic dominance.

While we’re on the subject of China, what about their economic stimulus. “Why,” we asked “is Chinese government spending good, but Australian and US government spending bad?”

We had a simple answer for that. The Western economies are spending money they don’t have. In fact, in order to pay for it, the governments have to in effect steal the money from your future earnings through higher taxes.

Surely that’s the same for China right? Not quite. Don’t forget, they’ve been saving because they have produced. And yes, they’ve still taken money from individuals by way of taxes, but now the Chinese government is giving some of it back.

It may not be perfect, but we liked it to the Chinese population getting a tax refund in the form of a TV or a fridge, rather than Western populations who were just being given a future tax debt.

Towards the end of the presentation – and also in the workshop later – we made sure the audience knew exactly where to invest if they’re serious about reducing their exposure to the US dollar and want investments that will turn in double and triple digit percentage gains.

We’ve been banging on this drum, and whistling the LNG tune since late last year both here and in Australian Small Cap Investigator.

So far it’s paid off. In fact, as you may have seen, we recently sent a recommendation to subscribers to sell Bow Energy at 95 cents which was 458% higher than the 17 cents we tipped it at.

But that’s just for starters.

Already our remaining three LNG picks are showing big gains with plenty more to come. In fact I’m convinced that one of the stocks has the potential to get to $7. Today it’s trading for less than 80 cents.

Not only that, but the LNG stock we tipped last month has already more than doubled. But again, that’s not enough. I’m hoping for a fivefold increase on this stock from where it is today!

That’s right, it’s currently trading for less than 50 cents, and it really could make it over the $2 mark by next year.

Finally, we wanted to make sure our American brethren weren’t being fooled by the biggest, fattest propaganda lie propounded by the funds management industry.

You know the one, about how you should “diversify your portfolio.” Yeah, sure let’s diversify into a whole range of different shares and assets and just leave it there.

Hasn’t performed too well in the last ten years has it?

The fact is, fund managers need you to believe that diversification is good. The more you diversify, the harder it is for you to manage your investments and therefore the greater the need there is for someone else to manage them for you – say, a fund manager perhaps?

All diversification does is lower your returns.

The reality is if you are serious about building your wealth you need to actively manage your own investments. That means you need to have a risk management programme in place, and…

It also means you need to shrewdly pick your investment and then back yourself. If you really do believe that gold is going to AUD$2,000 then why wouldn’t you back yourself and invest 20%, 30% or 50% of your portfolio in gold.

If you believe shares in supermarkets offer the best return, why wouldn’t you just invest 80% or 90% of your portfolio in Woolworths or Metcash?

Fund managers have been spreading this rumour around for years that you need a diversified portfolio. However, the opposite is the case.

Sure, it does mean you have a greater exposure if the investment moves against you. That’s where your risk management strategy of using stop orders should come into play.

If you’re serious about actively managing your investments then investors need to move away from the myth of diversification and instead back your convictions.

But it wasn’t all about your editor. There were other speakers too.

Bill Bonner, founder of the Daily Reckoning, wrapped up proceedings in the main Ballroom with a thirty minute summary of the 2008 global financial bailout fiasco.

Bill started out with “As you all know the depression is over!”

The crowd loved it, with Bill saying that “You know something is over when a bank declares it.”

The comment was in response to a recent news item that had quoted a Wall Street banker telling reporters that the recession was over.

As Bill pointed out, not so long ago, these were the same bankers that were laughing stocks. They were pariahs. Now the same news networks that failed to predict the crash are now relying on the same bankers that caused it!

Madness.

A sampling of Bill’s other comments painted out how the economic picture really looks. You know, the one that the mainstream press isn’t telling you about.

“If we calculated unemployment the same way as during the Great Depression, unemployment would be 20%, not 10%.”

He went on later with this comment about politicians and economics:

“1971 was a critical point… [President] Nixon didn’t know whether he should interrupt an episode of Bonanza to announce the closure of the Gold window.”

And then there was this about inflation and stimulus:

“Caesar Augustus got the slaves in the silver mines to work night and day so they could produce more silver. That was a stimulus. They got more silver and it created inflation.”

“Then Nero worked out he could put less silver in the coins so they could make more coins. 300 years later there was no silver at all in the coins. That was a stimulus, and it created inflation.”

“In Spain… they brought Gold back from the new world and spent it. The increased supply of Gold was stimulus. It created inflation.”

It’s amazing how many of the knuckleheads in the mainstream media and mainstream economists somehow think this time things will be different.

So, that’s it. The Agora Financial Investment Symposium is over for another year. Your Money Morning will resume normal service tomorrow.