- Money Morning Australia

Wayne Swan and the Damage the Stimulus is Doing to the Economy


Written on 18 December 2009 by Kris Sayce

Wayne Swan and the Damage the Stimulus is Doing to the Economy

It seems that not only is our friend Michael Pascoe unable to see the value of gold, but he is obviously quite incapable of working out a basic sum – that 1 + 1 = 2.

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!



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Kris Sayce
Kris is never one to pull punches when discussing market developments and economic events that can affect your wealth. He’ll take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money. Kris is also the investment director for Australian Small-Cap Investigator, Diggers and Drillers and Revolutionary Tech Investor. If you’d like to more about Kris’ financial world view and investing philosophy then join him on Google+. It's where he shares investment insight, commentary and ideas that he can't always fit into his regular Money Morning essays. Read more about Publisher and Investment Director Kris Sayce.

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Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.

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2 Comments For This Post

  1. etch Says:

    u cant blame Pascoe etc only -everyman & their dog in the street wants/ed the stimulus package

    people probably dont care bout national or global economics

    although it will have to be paid back one way or another

    they only worry bout their wallet backpocket economy

  2. Sandra Says:

    spot on again Kris!

    great piece



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