A change of plan this morning. As pointed out in yesterday’s Money Morning, I had intended on covering some old ground on government spending. Largely thanks to an email we received from an actuary that implied the amount of debt didn’t matter as long as the money was spent for the “public good.”
But a couple of other items have cropped up that’s caused us to push that idea back into the lap of Money Weekend which you’ll get tomorrow.
Now, before we continue with today’s Money Morning, let’s go through a quick recap of what we’ve covered this week. Especially as we’ve been offline for the last three days due to ‘technical problems.’
So, here’s a brief summary of what you’ve missed and what you can catch up on…
On Tuesday we looked at the latest HIA/Commonwealth Bank numbers that indicated housing was at its most affordable since 2002. HIA chief executive Chris Lamont went so far as to say “In the foreseeable future this is about as good as it’s going to get with the incentives and the low interest rates… with demand being the way it is together with the housing shortage, we’re forecasting an upward trend in interest rates and downward trend in affordability in 2010.”
Not surprisingly, we don’t agree with the HIAs outlook on housing. We discussed what this really means for the housing market, and clear cut proof that distortions to the market affect prices and will inevitably lead to a price crash. Click here for the full story…
Come Wednesday and we were still typing away to no-one as the email servers remained stubbornly un-serving.
But we still had superannuation in our sights. And specifically tax effective investments such as those wonderful timber farms. We drew a comparison between these types of investments and the failed infrastructure funds.
There is little difference between the two. Both offered tax benefits. Both offer “reliable” income streams that would be suitable for super funds, and both were gorged to the hilt on debt.
We did make one concession though. Our previous claim that these type of investments are dead, was probably a little premature. Undead is more appropriate. We’ll guarantee within the next two years a new generation of dodgy, leveraged, ‘tax effective’ investments will emerge.
The first incarnation will be the protected equity or capital protected form of investment. Expect the investment banks to start spruiking those by the end of this year. When they do, keep well away.
You can read full edition of Wednesday’s Money Morning here…
And so we arrived at Thursday. And still we were unable to deliver Money Morning to you. But that’s probably a good thing…
Because your editor was almost in tears with despair as we wrote. This was due to the news item reported in the Australian Financial Review (AFR) that warned of higher interest rates due to a “glut” of government borrowing, and…
Higher inflation due to… government borrowing.
Thankfully it’s something you would have read about in Money Morning months ago. For the poor Australian Financial Review reader it must have all come as a shock as not so long ago they were reading that inflation was dead, and needn’t be worried about for years.
But now inflation is making a comeback, as you’ll read below, suddenly inflation protected bonds are about to become all the rage. But before you read on, you can catch up with the rest of Thursday’s Money Morning here…
Inflation. We continue to be amazed at how this destroyer of wealth has been embraced by the mainstream commentators, analysts and economists. Almost everywhere you turn you can hear some boffin talking about a “desired level of inflation” or a “necessary level of inflation.”
In fact, they would prefer any kind of inflation as long as it isn’t the evil deflation. You know the one, that crazy old deflation where consumer items become cheaper. How terrible is that?
Imagine going shopping and discovering your shopping bill was 5% less this year than it was last year. How could you cope?!
Ah, but of course, deflation is the enemy. It’s the enemy of debt. But I’ll get onto that in a moment.
This morning’s The Age newspaper has run an article by Robert Leeson, “a visiting fellow at Standford University.” It’s typical of the backward thinking among so many in the mainstream.
You see, rather than genuinely trying to combat inflation with anti-inflationary policies, most of the boffins would seem to have a preference of harnessing inflation to their advantage and we dare say, using it for the common good.
Of course, that’s not possible. Encouraging inflation and then trying to benefit from it truly is playing with fire. Those that try it will get their fingers burnt.
So, what’s professor Leeson’s idea?
TIPS – Treasury Inflation Protected Securities. Again, we’re not sure why they are necessary if inflation is dead, but we’ll amuse the argument anyway.
Rather than paraphrasing what the good professor wrote, I’ll reprint the ‘best’ two paragraphs here:
“Infrastructure Australia is apparently looking to access the $1 trillion pool of superannuation savings to plug the $58 billion hole in its nation-building program. We therefore need to increase national savings and develop new savings-into-capital instruments. We could add to our capital stock dollar-for-dollar with a pre-tax Treasury Inflation-Protected Security (TIPS).”
“If the average TIPS buyer saved 20¢ of income tax per dollar invested, and the loss of tax revenue was 2 per cent of GDP, this would produce a capital fund of 10 per cent of GDP: a fivefold bang per buck. These TIPS funds should then be auctioned to financial intermediaries on a contractual basis (every auction dollar borrowed must either be lent to finance investment projects, or returned). It would also be possible, although not essential, for Parliament to specify the sector-specific proportions to which the funds should be allocated (business, residential, commercial property etc), thus rendering redundant the Australian Business Investment Partnership (the “Rudd Bank”).”
For a start, do you need any further convincing that government and quasi-government agencies are after your super money? We’ve taken quite some flak in the Money Morning mailbag for claiming that your super money is not safe from the grasps of government…
But I tell you what, as each day passes, and more hare-brained schemes come to the fore, it makes us even more certain that we are right.
Anyway, back to the TIPS. You’ll remember how we’ve used the rubber ball analogy before – how attempts to manipulate the shape of a rubber ball lead to distortions in the shape, and further attempts to get rid of those distortions just lead to even more distortions.
It’s the same with an economy. And that’s exactly what professor Leeson’s TIPS proposal would do. Rather than saying inflation is bad and let’s not have policies that encourage inflation, Leeson and others prefer to claim that using inflation and increasing the attractiveness of governments to lend will actually be good for the economy.
But it’s not surprising inflation is embraced when you look at the level of indebtedness. Not that we are opposed to debt, providing it is manageable.
One of our favourite publications is the Statistical Tables released by the Reserve Bank of Australia (RBA). It almost always never gets any coverage. Correction, nothing of relevance gets any coverage.
You’ll have read in the press yesterday and today about the banks raked in $1 billion in bank fees last year, and how terrible that is. Personally, we have no problem with banks charging a fee to “look after” our cash.
Providing they are looking after it. Trouble is, we don’t think they are. And the RBA’s stats back that up.
Take a look at this gem from the stats. You can download the spreadsheet by clicking here. What does it show? Well, look at the number in cell O90… it’s expressed in $millions.
It shows the bank’s total off-balance sheet business is $13,624,580,644,261.50
That is, hehem… $13.6 trillion.
Over half of that number is made up of interest rate contracts – over $8 trillion.
Yet if you take a look at this spreadsheet which highlights the total deposits held by the banks from domestic and overseas investors, you’ll find there is only $2.4 trillion of deposited funds.
In other words, the banks aren’t looking after your money at all. And the reason is all down to the fractional reserve banking system. You’ll have seen Dan Denning write about it many times upstairs at the Daily Reckoning.
We don’t have the space to go into the details today, so we’ll leave it for another day. But, in effect the banks are using your deposits as capital and then creating up to ten-times that much cash from ‘thin air’ in order to lend out and increase their revenues.
That’s what the mainstream press should be concentrating on. As we say, we’re happy to pay the banks to safely store our spare cash, but we’re not happy if they’re leveraging it up to $13 trillion worth of off-balance sheet exposure.
Another reason to never invest in a bank again.
We’ll be back with Money Weekend tomorrow.
Other Stuff on the Markets
The S&P/ASX200 fell by just 10.7 points yesterday, although it looks to be heading lower this morning following the weak leak from Wall Street where overnight the Dow Jones Industrial Average lost 129.91 points.
Meanwhile, Standard & Poor’s downgrade of the UKs economic outlook helped push the FTSE100 down by 2.75%.
The price of gold in Australian dollars strengthened to $1,225.86, while in US Dollars it’s trading at USD$953.60.
The Aussie dollar continues to hold up against foreign currencies. This morning it was trading at USD$0.7786 and JPY73.61.
Crude oil holds steady at USD$61.05 despite the lower growth expectations for the US economy.
Biggest movers on the market yesterday were…
No major news events on the economic calendar today
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