There is something suspicious about changing the rules after the game has already started. We’re not saying that you shouldn’t be flexible. If something isn’t working as you thought it would, then why not move in a different direction?

It makes sense.

But it only makes sense if the change is happening for the right reasons. If you’re making a change to cover up for a previous stuff-up then odds are it will back fire. Two wrongs most definitely do not make a right.

I refer of course to the two major developments from overnight: the suspension of mark-to-market accountancy rules, and the proposal for the International Monetary Fund (IMF) to sell off a bunch of gold.

First the mark-to-market changes. Think about what it means. It means that the value of your exposure is valued each day in the market. It’s common in futures trading and even margin lending against shares.

It’s typically used to make sure that you have sufficient liquid capital to cover your position if the trade moves against you.

The US based Financial Accounting Standards Board instituted ‘mark-to-market’ (MTM) accounting for corporations in the early 1990s as corporate use of more complex financial derivatives increased.

So before we address the abandonment of MTM, we have to ask whether it was worth enforcing in the first place?

The answer is probably not. The problem with creating ad hoc rules is it provides more opportunities to either break the rules, or to use the rules to actually lower standards. We could use road speed limits as an example. When you see 100km/h as the limit on the freeway, most drivers will view that as the speed to travel at, not the maximum speed.

Without a speed limit you may be comfortable driving at 90km/h, but because the limit is 100km/h you feel the need to drive upto the limit - and rumour is, some people even drive over the speed limit.

It’s the same with accountancy standards. That’s been proven time and time again. And it happens even though regulations are in place. In fact you could argue the regulations allow dodgy accounting practices to bottle up even further as companies interpret various rules for themselves, pushing each one to - and even over - the limit.

It creates complacency. Everyone automatically assumes that because these standards are there that they are being adhered to.

Names such as Enron, Worldcom and HIH spring to mind.

But the problem with ditching MTM now is that they are now targeting the wrong problem. Introducing MTM was wrong in the first place and it has created a whole bunch of problems. Now they are withdrawing it, it will still leave the problems it created, and guess what, it will create even bigger problems.

This is what we mean when we rail against over-regulation and interference. It tends to make things worse.

So now, all those crappy ‘assets’ - or are they liabilities? - sitting on bank and company balance sheets can be priced at whatever level they like. It doesn’t matter that they aren’t worth the space they take up on the hard drive, if the bank says they are worth $500 billion then they are worth $500 billion.

And no bank is going to spoil the party by differing with valuations. Because they know that an asset on their balance sheet is a liability on someone else’s, and vice versa.

It’s just going to create a new bubble.

Remember during the dot-com years how tech companies would charge each other for millions and millions of dollars worth of advertising space on their websites? Of course it was all fake. No money ever changed hands, yet they booked the revenue and the expense.

“Gee” everyone said, “Look at the revenue, if only they can get the costs down we’ll be millionaires.”

Of course, they couldn’t get the costs down because that would mean reducing the revenue as well. Eventually 90% of the dot-com boom was exposed as a fraud and it collapsed - the Nasdaq is still down about 70% from its all-time peak.

The same thing will happen with the crappy bank assets/liabilities, they’ll wash around on each other’s books for as long as they can possibly keep them there, but eventually something will give.

A Trillion More Problems

The other sign that things could get worse is the nonsense coming from the G20. “The financial support packages announced at the gathering of world leaders in London overnight totaled USD$1.1 trillion” the Wall Street Journal said.

What’s another trillion between friends? Why $1.1 trillion? Why not $990 billion? Or are we now at the stage where unless you’re spending a trillion you might be seen as a ‘do nothing’ government?

So, the plan is as follows, there will be a “tripling of the lending power of the International Monetary Fund to around USD$750 billion.” Aw, not a trillion? Oh, hang on, get the calculator out… that works out to about AUD$1 trillion. Phew!

But it gets better than that, the IMF are jumping on the printing money bandwagon as they will dish out USD$250 billion (that’s gotta be a trillion in some currency) in Special Drawing Rights to “boost liquidity in the global financial system.”

Special Drawing Rights, or SDRs is really just a weighted basket of currencies used when the IMF makes loans so the borrower isn’t exposed to the exchange rate of just one currency.

Not only that, but the IMF will sell gold to help poor countries. We rather think they would be better off just giving them the gold if they’re have to do anything at all. But at least private gold investors will be happy.

The news has already pushed down the price of gold slightly. And doubtless the IMF and other countries will be selling off more and more of the shiny tangible asset in exchange for floppy, ever-depreciating paper money. Nice move.

We could be wrong, but unlike gold we expect the shine of the ‘historic’ measures at the G20 to become tarnished very quickly.

Other Stuff on the Markets

Gold drops and oil rises. For gold bugs, buying in on weakness from IMF selling could make a lot of sense.

The Aussie dollar surges to above USD$0.70, so much for the declining Aussie dollar. Further weakening of the US dollar can be expected.