- Money Morning Australia

Why Interest Rates Aren’t What They Used to Be

Written on 07 April 2010 by Kris Sayce

This morning we’re still awaiting the first directive from the Supreme Population Tsar. Until such a directive arrives we suggest you procreate, live or die at your own risk. Just be warned that it could be made illegal to die if your death puts in endanger the grand population strategy.

Maybe they’ll call it a Five-Year Plan. Once you’re on the path of socialism you may as well go the whole way, comrades.

UK Prime Minister Gordon Brown has called a general election. Unless we’re mistaken, it’ll be the first-post stimulus election for an incumbent leader of a major economy – Obama’s election doesn’t count as Dubbya was prevented from contesting a third election.

As for the UK election. We’re not sure it matters who wins, whether it’s Labour, the Tories, or a hung parliament. As far as we can see, it’ll be the same muck just a different spreader.

And finally, before we get on to today’s Money Morning, we did have a little chuckle at the misprint in today’s online edition of The Age. It seems that even in retirement, Malcolm Turnbull is having trouble getting his global warming message across:

Malcolm Turnbull having trouble getting his global warming message across


The Age later corrected their mistake to read “Threat of global warming remains.” Bless!

Then again, we’ve long suspected the global warming fear campaign is seen as a treat for those in the public service that get to spend all the expropriated tax dollars.

But today we’ll take a look at interest rates. Before we do, one thing struck us as we flicked through the Australian Financial Review (AFR) this morning.

It was the table illustrating the effect of the “Loan hikes.” In English it means how much your monthly mortgage payments will increase thanks to the Reserve Bank of Australia’s (RBA) 0.25% rate rise.

The thing that struck us was the loan examples used. We’re sure it wasn’t so long ago they used numbers such as $100,000, $200,000, $300,000 and $500,000.

Not anymore. Today it’s $250,000 as a minimum. Followed by $500,000, $750,000 and to top it off a whopping $1 million.

But who knows, maybe it’s been like that for some time and we’ve never noticed. But then again it’s hardly surprising when the median home price in Sydney is over $600,000.

Anyway, back to interest rates.

Quite frankly, the new attitude towards interest rates is perhaps the most troubling of all the issues facing the Australian and international economies.

This quote from an article in today’s Sydney Morning Herald (SMH) pretty much sums it up:

“The marketplace is driven by supply and demand. It’s not driven by interest rates.”

That’s according to Wayne Stewart of the Real Estate Institute of New South Wales. Naturally he doesn’t stop there:

“The greatest problem that we’re facing is the shortage of property. It’s an absolute crisis.”

Heard that one before. We think Urban Taskforce Australia chief executive Aaron Gadiel agrees. He says:

“Each interest rate rise is tantamount to a game of Russian roulette with Australia’s housing supply…”

More like a game of Russian roulette with the first home buyers who were bribed into the housing market on the back of record high property prices and record cheap money. Except in this bizarre game it’s the RBA and government aiming the gun at the heads of first home buyers rather than the buyers doing it themselves – load, aim, fire!

But here’s the main problem with interest rates. And it’s got nothing directly to do with the housing market.

The real problem is the attitude of market participants towards interest rates. It’s summed up perfectly by Mr. Stewart’s comment above. In a nutshell, what he’s saying is that interest rates aren’t that important. Of course, he does say in the same article that “There are people where any increase puts them on the breadline.”

But that plays second fiddle to the furphy about a housing shortage.

It’s the old story about central banks artificially manipulating the economy by fiddling around with interest rates.

But let’s get back to basics. What’s so important about interest rates? The obvious answer is that interest rates represent the price of money. A low interest rate means money is cheap. A high interest rate means money is expensive.

A low interest rate means that saving is discouraged as the returns are low, therefore individuals will look for higher returns elsewhere or they will spend.

A high interest rate means that saving is encouraged as the returns are high. Therefore individuals may not invest elsewhere, and they’ll be less inclined to spend.

That’s all fairly straightforward. But aside from that, interest rates have another function other than just how cheap or expensive money is. Interest rates provide the market with a signal.

As Mr. Stewart above mentions, “The marketplace is driven by supply and demand.” He’s right. In this case interest rates are the supply and demand indicator for money. You can’t ignore this.

Yet, the manipulation of the interest rate and the misunderstanding of interest rates across the mainstream has turned the interest rate indicator upside down.

Whichever way interest rates move it’s seen by the mainstream commentators and analysts as being a positive sign for the entire economy. Or that there’s only one response to both high and low interest rates – spend money NOW!

That’s not the way it should be.

If you can imagine a world without the meddling of megalomaniacal central bankers, the setting of interest rates would be determined by all market participants. Sounds weird doesn’t it? That a market could determine a price level without the interference of a public service mandarin.

But interest rates are no different to how anything else is priced. In most cases in an economy prices are determined by the free market. A can of Coke Zero at the milk bar across the road from here costs $2.40 or $2.50 (depending on whether we’re served by the husband or the wife apparently!)

Yet up the road, a Coke Zero only costs $1.30 at the local IGA.

As far as we’re aware, there isn’t a Coke Zero Tsar employed by the government to set the price of Coke Zero across the country. As strange as it seems, the market is able to set prices for itself. Some prices for similar goods are cheaper than others.

While we’re on the subject, isn’t it amazing how the free market makes goods available without a command from the government? We’re not forced to buy Coke Zero, yet we choose to. The milk bar or supermarket takes a risk on there being a demand for Coke Zero and therefore stocks it in anticipation.

It doesn’t need the government to legislate the supply of Coke Zero or any other consumer product. The free market determines it. Yet when governments get involved, suddenly the market doesn’t function properly – look at the former Soviet Union or Cuba as a perfect example.

Anyway, some days we can’t be bothered making a 10 minute roundtrip walk to the IGA so we make the two minute roundtrip walk to the milkbar instead. The extra $1.10 (or $1.20) that we spend is the cost of the convenience of drinking the Coke Zero 8 minutes sooner than if we’d gone to the IGA.

That’s how markets work. Why should the cost of money be any different? Of course, in some respects it isn’t. Different banks may charge a slightly different rate for a mortgage or a business loan, but the fact remains that the basis for their lending rates is determined by the rate set by the RBA.

Now, you could argue that the rate the IGA or milkbar charges for a can of Coke Zero is determined by the wholesale rate charged by Coca Cola, but the difference is that Coca Cola doesn’t have a monopoly on soft drinks in Australia whereas the RBA does have a monopoly on interest rates in Australia.

Anyway, sorry for the digression. In a free market, the function of the rate of interest is to provide a signal to market participants (you, me and the other 22 million people) that would let them know whether they should be saving or spending.

If businesses wanted to invest in capital goods for instance, they would seek a loan from a bank. If the bank didn’t have enough reserves to lend then it would need to attract more deposits. It would do this by increasing interest rates.

This would encourage individuals to save rather than spend. Or it would encourage them to save in a bank rather than take bigger investing risks elsewhere, such as in the stock market. For the business that needed to borrow to invest in capital goods it could mean that the rate of interest it’ll pay is higher than anticipated and therefore the business owner would need to decide if the higher cost of money still makes the investment in capital worthwhile.

If there is a lower demand from businesses to borrow money then banks would lower the rate of interest they pay savers as the bank doesn’t need to attract more deposits. It wouldn’t want to pay 5% to savers when it was only receiving 3% from borrowers.

In this instance saving is discouraged and instead individuals choose to spend their money now rather than in the future.

And that’s what interest rates should be. But right now that’s not the function given to interest rates.

Instead, the mainstream economists and commentators have turned interest rates into a sideshow. A sideshow as pointless to the functioning of the market as Punxatawny Phil is to the weather forecast – “The RBA hasn’t seen its own shadow, interest rates will go up and the economy is booming. Spend and borrow now before it’s too late!”

So now, rather than interest rate rises being seen as an indicator for individuals to stop spending and to save, the mainstream commentary tells the masses that rising interest rates is proof the economy is strong and therefore you should carry on as you were – spend and borrow.

The sad point is, that due to the manipulation of interest rates and government propaganda, individuals are never given a break from the same message. The message is always to spend and borrow, regardless of where the interest rate is.

When interest rates were forced lower the message was that individuals must spend, spend, spend to prevent the economy from dying.

In a free market where interest rates aren’t manipulated, it would be a fair argument to say that individuals could spend when interest rates are low. Because in a free market the interest rate would have moved lower due to a lack of demand for borrowing.

But that wasn’t the case. Interest rates were forced lower by the RBA, but borrowing continued full steam. Lower interest rates should have indicated a lower demand for borrowing. When borrowing continued to surge interest rates in a free market would have moved higher, but they didn’t.

Only now is the RBA again manipulating rates, this time by moving them higher. But still the message is the same – borrow and spend.

As we’ve pointed out several times, it was a myth that Australians were deleveraging. They did no such thing.

Stats from the RBA show that borrowing for housing in particular has continued to soar. And it continued to soar because interest rates were held artificially low by the RBA. It’s why you had the instance of banks offering savings rates well above the cash rate, as the banks tried to encourage more depositors.

That’s pretty tough to do when everyone is borrowing at record low levels, encouraged by the idea that it’s a perfect time to borrow.

In a nutshell, interest rates aren’t what they used to be. The fact is, interest rates are little more than just another economic indicator. They’ve been manipulated beyond all recognition.

It’s no longer possible for you to use interest rates as a gauge of whether you should spend or save. No more than it’s possible for you to base your saving or spending decisions on whether the NAB Business Confidence survey shows a positive or a negative figure, or any one of the other sideshow indicators.

The message from the RBA – regardless of what the Governor tells Kochie, mainstream commentators and mainstream analysts is that you should spend and borrow whatever the rate of interest, because that’s the only way to ensure the Australian economy never dies.

So, in a way, Mr. Stewart from the REINSW is right when he says the market is, “not driven by interest rates.” It isn’t, but it should be. And for that you can ‘thank’ the RBA and the mainstream commentators.

It’s a very sad state of affairs indeed.


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39 Comments For This Post

  1. SV Says:

    Ah, free market utopia…not in our lifetime I’m afraid.
    We have the money regulator, the population (procreation?) regulator; it does not take a leap of imagination to foresee Coke Zero regulator. In the USSR it was called The State Planning Organisation.
    Amazingly, it still did not alleviate shortage of housing and everything else useful.

  2. discombobulated Says:

    Oh bugger Kris, I think I was a day early. Who saw that coming?
    It’s availability of money, not interest rates.
    When loans are forced down the throats of the gullible [1st, 2nd, 3rd, 4th etc] home buyer, prices must increase.
    Just as when grain is forced down the throats of geese; voila, fois gras.
    And that’s what the borrower is – fois gras for the money suppliers. Plain and simple.

  3. cb Says:

    Richard – Anything, I say, just so long as he stays well away from doing God’s work. We have enough do-gooders on that project already, lol.

  4. SV Says:

    Richard – not that I am “against” free market, but it is just not the direction we are going; that is why we won’t get there. Or, rather, we will get there after making a full circle.

    I am also uncertain about the idea of “us as a nation standing up to the government”. It is our elected government, after all. It represents interests of “us as a nation”. In your own example, those of us who choose to stay on benefits, would not want it to be removed.

  5. Peter Fraser Says:

    Quote “the market is, “not driven by interest rates.” It isn’t, but it should be”

    Actually this will be the first rate rise to bite IMHO, and if they raise the rate again in May as I expect, that will slow price growth in Sydney and Melbourne.

    Other areas may play catch up for a time, but the Aust wide market will slow unless the resources boom kicks in again with some decent wage rises.

  6. The Wolf Says:

    PF, it will be interesting to see if this quarter point rise results in some compound effect of all previous rises that impacts behaviour…IMHO, history has shown that quarter point rises per se are largely ignored and are not taken to be “serious”…

    Now if Saint Glenn was to suprise with a half point rise, then that typically sends a message…

    I don’t think you need to worry about the property market falling this year… Australia has become a sinkhole for large licks of foreign capital, and is held out to be a shining light as the only western economy raising prime rates at present… that akin to pouring chicken blood into the ocean at seal island near Simon’s Town, S Afr… you will attract a crowd…

  7. cb Says:

    It is a widely suspected among gold bugs that vaults around the world store far less physical gold than they claim to hold. A lot of the gold that has been held before has been surreptitiously sold over the years by the bullion banks as part of keeping the price down, but without acknowledging the same. Only recently it has been revealed that the deliverable metal at the LBMA has been sold on paper a hundred times over. And now this:

    The Latest Gold Fraud Bombshell: Canada’s Only Bullion Bank Gold Vault Is Practically Empty

  8. Nick Says:

    The world is getting the jitters about the gold situation cb has been touching on regarding the revelations by GATA about the paper gold fraud.

  9. Nick Says:

    I have often mentioned how we are similar in comparison to the end days of Rome, when the colosseum was built to entertain (or distract) the population, while the empire was crumbling.
    It seems that I am not alone in this assumption. http://usawatchdog.com/imax-on-the-titanic/

  10. Nick Says:

    The old folk who experienced it first hand always, steadfastly, warned that it would happen again. This time the tools are better and easier to apply.

  11. GB Says:

    The Wolf
    I agree, 50bps would be more effective to ‘put the fear of god’ into the masses then 25bps.

    cb – he states that canada’s mint sold 1 bill of gold. I did a quick search a found canada produced about 100 tonnes of gold in 2007 which is over 3 bill worth before costs etc…. Maybe the so called ‘missing’ gold was actually taken possesion of by the buyer and not stored in the vault?

    Honestly, I looked at buying physical gold from the Perth mint and they will store it for me but it will cost me. Now if I buy a house I get rent to cover costs, if I buy shares I get dividends to cover costs but if I buy gold there is no cash flow so I would lose money by leaving it with the mint. Therefore, I planned on keeping it at home. Maybe more people have thought along those lines.

    That doesn’t mean I dont think there dodgy dealings are going on. The banks got their power in the 90’s wasn’t it – when the basell II was recinded (I think that is what it was called). They have since run a mock and I am mistified that the government hasn’t cracked down heavily on it. However, if china slows and unemployment rises, the gold market is found to be a fraud, goldman is found again doing slimy deals then hopefully that will be enough to fix the banking industry. Thats the good side of recession.

  12. PuntPal Says:

    To me the housing speculators have caused this debt trap. Rates were lowered to ensure the debt burden didnt crush Australians and we plunge into recession. So the ease this created allowed demend to be stimulated and jobs not lost.

    Thats all ok…kinda, but the insidious part of it all was that these temporary low rates were used as a marketing tool by the Real Estate spruikers etc… to argue that because rates were low it was a good time to buy a house as it was more affordable!!! haha and now not even a year later we have calls of how this is crushing people who have too much debt!!!

    Like Kris said, lower interest rates (in a free market) would have indicated less demand for borrowing – but in reality, it was a stimulutory measure that was used to lure more people into taking on mortgages and now they are vulnerable to the inevitable rate rises.

    So once defaults start occuring, there will be calls to lower rates again…then the spruikers will be back saying that ‘its never been a better time to buy with rates so low!”

    Its a sick game these spruikers play

  13. SV Says:

    Much has been said about interest rate being a blunt instrument and how difficult it is for RBA to regulate a 2 (3/4/5) speed economy. Yet it seems to me the solution is either entirely in RBA’s hands or somewhere between RBA and APRA.
    Apparently for mortgages banks only need to maintain tier 1 reserve with the RBA of 30-50% comparing to a business loan of the same size, that is , they can leverage their shareholder capital 2-3 times more than with business. If they skim 2% of a mortgage (loan rate less cost of borrowing), a business loan must have 4%-6% margin to be equally attractive to banks.
    This is so because our mortgages are AAA. Why are they? As GS said, because historic default rates are low. Well, looking purely at historic rates in this situation is misleading isn’t it. He could raise the required capital reserve for mortgages to say 70% of the business loans, effectively make the latter more attractive for banks.
    Maybe this is exactly what the RBA will do. Maybe they need a nod from Fitch/S&P first in order to do that. I don’t see any monumental challenges in making such an adjustment.
    Maybe I am wrong altogether – please correct me.

  14. Kevin B Says:

    Sorry, been away for a while trying to sort out the new home mess.

    Finally sorted out that disaster that was my daughter applying for a home loan. The bank finally caught up with her boyfriend’s credit record, apparently a letter dropped off his surname on the defaulted loan. In any case it was an educational experience. The original package started at $306k finally getting to nearly $340k and we hadn’t even seen the building contract!!! Now wonder kids get trapped into large debt situations.

    We are now looking for a more sensibly priced house for the kids in the Melton area, some good ones for around the $230-240k area, much better. The mortgage will be about what they are paying in rent now even taking into account the recently rate rise.

    But gold thing you have been talking about. Is that for real? They actually do not have the physical gold to back up the buy orders? If the article is right about the Canadian Bank is correct it must be. Amazing. You just can’t trust anybody. And you want me to support a free market. Not a chance. No honour no trust.

  15. cb Says:

    GB – Last night I saw an interview with one of SocGen’s analysts. It must have been on one of the ABC programs, will try to find it later, but the gist of it was this:
    Yes, China might be having a problem with rapidly rising prices, but the massive infrastructure spend they are engaged in currently is most unlikely to be abandoned until projects in progress are completed. One of the main reasons given seemed to make good sense, which was that a half-built bridge, or highway, or airport, or dam, or power station is not a usable bridge, a highway, an airport, a dam, and a power station. Hence, abandoning large projects like thsese would mean a dead loss, which a government committed to industrialisation, modernisation and development will try to do everything in its power to avoid. Ergo: Our resources will continue to be in hot demand for at least another couple of years.

    For what it’s worth, I would consider any bets currently placed on an imminent collapse in Chinese demand to be at the very least premature, and quite likely foolish. If China should happen to be a runaway train, which cannot readily be controlled or slowed down, would it be reasonable to expect that the Chinese government is going to order the pulling up of the tracks dead ahead? I wouldn’t think so. If anything, they are going to try to strengthen and straighten the tracks ahead, so that the train does not derail until they figure out a less destructive solution to the problem.

    To make a pertinent comparison, I would not expect the Chinese government to be as mad as Glenn Stevens.

  16. cb Says:

    GB – I have been keeping an eye on the China story in a last little while, prompted by your repeated warnings about an unsustainable bubble in China, and my inclination would be to accept this analysis to be pretty credible, and probably as close to the truth of the matter as we can get.

    China facing ‘considerable’ economic hurdles
    Print Email
    Australian Broadcasting Corporation
    Broadcast: 08/04/2010
    Reporter: Whitney Fitzsimmons
    Glenn Maguire from Societe Generale joins Lateline Business to discuss the economic challenges facing China and the risks to Australia should Beijing get monetary or fiscal policy wrong.

  17. The Wolf Says:

    Isn’t any sort of metals / commodity ETF essentially an oxymoron ?
    Take delivery of actual item, accept no substitutes…
    There has been some subtle reminders over here in the US of A recently of what transpired back in 1933 when Roosevelt declared a two day bank holiday and each bank systematically emptied individuals safe deposit boxes of precious metals, stones, etc.

  18. Peter Fraser Says:

    Wolf @ 7.

    Early interest rate rises can actually stimulate as buyers rush to complete before the loan they seek is deemed unaffordable by the bank. In fact Sayce used my words to that effect to enjoy a laugh when we had our first rise for some time in late 2009. I was right of course, and he was wrong.

    But there is a cumulative effect, and I believe that if we get another rise in May (as I believe we will) then the market will be subdued after that as per my earlier post.

    IMHO I think the RBA would rather send a strong message now and curb house price rises in our two largest cities, rather than sneak it up gradually, as that tends to be overlooked by the market until the mortgage burden is too great. I expect some more doom and gloom predictions from the RBA to go with their actions just to reinforce the overall message.

    Nick – you could be right about the Roman empire. The colosseum was built in the 1st century AD whilst Rome teetered on until it was sacked by the Vandals (robbed actually) in the 5th Century as I recall. Although they won using economic means and not just fighting ability. An interesting tale if you care to research it. Don’t believe the crude versions of warlike ferocious vagabonds, the Vandals were quite cultured, and were harrassed mercilessly by Rome for eons, so they had good reason for some payback.

    Don’t blow your penny whistles just yet Nick, it ain’t over ……

  19. Peter Fraser Says:

    Kevin B @ 15 – hi Kev – good to see you back. I have no idea why kids go for those house and land building packages, it is the hardest way to start in housing, and banks are not attracted to FTB’s with little capital to take care of over budget costs on a build.

    Sounds like you gave good advice. I hope they appreciate it.

    So you also sorted the boyfriends credit file – you have done well. It sounds easy for the uninitiated, but it can be a source of limitless frustration. Well done.

  20. cb Says:

    Welcome back, Kevin B. And well done about sorting matters out for the kids. That is a hell of a difference to what they were looking at, and clearly the sensible way to go. Starting out overstretched, especially at a time like this, could have easily ended in disaster and tears for them.

    Ah, since you have been away, you may not have seen the revelations abut the scandal at the CFTC the other week. See here, and more specifically the interviews with Andrew Maguire, Adrian Douglas and GATA. Note especially Christian’s admission that LBMA good delivery metal has been sold 100 times over!!! What this means is that for every $100 sold on the LBMA, they the exchange has $1 worth of metal on hand for delivery. The rest of the sales, 99% of them, are naked shorts. Talk about being on the edge …

  21. cb Says:

    The latest interview and update on the saga is this one:

  22. cb Says:

    Well, GB – if you listen to that last interview I just posted, it will more than confirm that you had reached the correct conclusion. Would be interested to know what you think, after you have listened to it. Cheers.

  23. cb Says:

    SV – I do not fully understand the ins and outs of banking and lending, but what you are arguing sounds totally plausible to me. Given that we are unfettered by a gold standard, the regulators can tighten and loosen the screws on lending in more ways than one. If, for example, they wanted people to pay down debt, they could change lending and repayment rules accordingly, instead of crushing people and businesses with higher and higher rates, while the rest of the world goes in the opposite direction.

    But, hey, it looks like Glenn Stevens must do God’s work, which, surprise, surprise, happens to have no bearing on what might be in the country’s best interests.

  24. cb Says:

    PuntPal – my impression is that this latest round of madness with the FHOG it was not speculators who got in on the action on the buying side, but young families who simply want to have their own homes. And who can blame them?

  25. cb Says:

    The Wolf – Exactly what are you referring to? What were those subtle reminders? I didn’t know that the banks were ordered to rob people’s safety deposit boxes of their gems and metals. Unbelievable. It just goes to show that not even safety deposit boxes are truly safe. If access to your metal has to be through someone else, you have to wonder whether you might not find a more satisfactory way of storing it. If you cannot access your metal in the middle of the night, or at any time you might want to, then your counterparty risk has not been completely eliminated.

  26. GB Says:

    cb – will check it out later on

    How does the RBA prick the bubble? I think its in two ways.
    1. Removing the ability of people to take on more debt at higher prices to keep the bubble expanding
    2. Removing the ability of people to make repayments

    China is carrying out point 1. 78 SOE’s were just banned from property investment and add on the other measures and they are removing the ability to expand the bubble. All they need to do now is raise rates and bingo we have a winner.

    In saying that its macro economics and it could take years or it could happen next monday – who knows?? If we could work out when these events would occur we could make some serious money.


  27. cb Says:

    A couple of very recent interview with Marc Faber here:

  28. Nick Says:

    Peter Fraser @19….again I remind you that in Roman times there was no laptops or internet. If you fired an arrow it travelled a 100meters or so. Today’s “arrows” cross continents. In those days they didn’t know what lay at the other end of the Earth, I can travel it in one day. In those days they could see the enemy coming and have time to prepare. Today the enemy can bleed us dry in minutes, wiping out a lifetime of work and savings in seconds. I know the history, are you aware of the present?

  29. GB Says:

    Cb – i had a read and a good laugh – i am not saying he is wrong but I don’t agree with him. I picked out some bits and then put my thoughts on it. You may have to re-read the parts to get what I am saying

    1. ” Now we’re starting to get that picture with the release of the March economic data. And that picture is unambiguously strong.” – he couldn’t work out if china was booming because of the GFC and then the Great Recession and then the Lunar New year but he can look at one month’s worth of data and predict an eternal boom??? Based on what – he said all the other data was no good!!!

    2. “That’s even stronger than it was during the 2005, 2007 period.” And he follows on to state the surplus has disappeared.
    i) If China was booming like it was 2005 then why is the Harpex index (a measure of manufacturing exports) at never before seen lows instead of back around 2000 points?
    ii) If China is booming because the surplus has disappeared through imports then again why is the Harpex low and why is the Baltic dry index not even close to being where it was in 2007???
    www . bloomberg . com /apps/cbuilder?ticker1=BDIY%3AIND

    3. “income growth has been extraordinarily strong” just because you have strong income growth doesn’t mean a bubble has not formed and i like the way he compares it over 5 years so that it flattens out to a more respectable 23%. Write to him and get him to calculate it over the last year.

    4. He says the unprecedented stimulus, which will be very very slowly removed is perfectly normal and there will be no side effects??? He hints at exactly what Kris said, i.e. “The economy will be fine because of the stimulus” and then when the stimulus is removed “The economy is fine because the government is removing the stimulus” The economy cant be fine with stimulus and without it – I take $5 on the economy is stuffed without stimulus

    5. Geez I cant believe you made me read this – he swats away a sharp rise in inflation like I shoo a fly!!! He even claims that the 12% growth is because of domestic spending? If it is then god help China because the government certainly cant. Even the Americans can only manage a few percent through consumption and they are the biggest spenders in the world!! Now refer back to point 2 and the figures just don’t back up his statement. Also their massive GDP figure was completely due to their massive infrastructure spending which I believe was 9%, domestic consumption was 2%?? It wont continue into perpetuity

    6. “You can’t generate an economic rent or a future income stream from it” and then you build the airport and you don’t have enough people travelling to cover the interest payments. Just remember they can afford it at super cheap interest rates but what happens when China raises interest rates to combat inflation – OH thats right inflation doesn’t matter….

  30. cb Says:

    GB – thanks for your thoughts. Amazing how differently people can interpret the same information. I should be old enough not to be surprised at this anymore, lol, but here I am.

    Anyhow, the central point which stood out for me, that the infrastructure spend the red commies have committted to is most unlikely to be abandoned over the next couple of years. And if that is more or less right, as I suspect it probably is, then that is good enough for Australia.

    Chinese growth has not been claimed to go on forever, as you suggest. Nothing lasts forever, as we know, so there are no surprises there. We are looking at whether China is likely to stall over the short to medium term, and that does not seem likely to me. If nothing else, the Chinese have Trillions to burn before it evaporates, and seem more than happy to keep our fires going with all those dollars, while we are willing to accept them.

    Ergo: if we are going to see a collapse here in Australia, it is unlikely to come from a collapsing China. Unless, that is, our big bully of a friend decides to beat up on them in the meantime. Our devastation is far more likely to originate from those doing God’s work, who, coincidentally, have their initials in common: GS.
    No prizes for guessing who they are.

  31. GB Says:

    cb – Wen said it is going to slow – he doesn’t say end BUT now add in high inflation, rising wages, rising commodities, rising oil price and rising interest rates and you may find that Wen’s slowdown may be faster than people think (on a macro scale). However, geithner just made an emergency visit to beijing supposedly because the chinese are about to appreciate the yuan. This will help curb inflation but how is that going to help the export industry? A slowdown in manufacturing/exports means they dont need the bridges and new ports. A slowdown in exports mean loss of jobs

    Unempoyment up, costs up, interest payments up, credit availability down….

    Everything happening in China is pointing at a slowdown and not a boom. I have also said before that china wont necessarily collapse but it is going to have to live with 3% growth for a few years


  32. The Wolf Says:


    Reminders from ppl concerned re. the incredible amount of paper money sloshing around, and that using a “bank” to “safeguard” precious metals could be a little contradictory…

    I am not fully versed on how it all went down in ’33, but the Executive Order signed by Roosevelt outlawed privately held gold and silver, declared the bank holiday and “sealed” all safe deposit boxes in banks, and they could only be opened up in the presence of an IRS agent. Extrapolating that out, banks took it upon themselves to “comply” with the order and systematically worked through their vaults, emptying out the gold and silver in the presence of an IRS agent (or not as some of conspiracy theories go). Some believe that the odd scrupulous bank manager might not have had an IRS agent present…and might have taken some of the metal themselves, along with other valuables, diamonds, etc, etc.

    Compensation was around $20/oz. After the confiscation, the dollar flatlined and gold was valued around $35/oz.

    The law is still on the books. The subtle reminders I am referring to are people concerned about what “could” happen…and that banks are not to be trusted to store your PM…

  33. cb Says:

    Thanks for that, Wolf. Fascinating, and very instructive as one starts to grasp the finer details. In fact, I seem to recall that it has only been a couple of years ago that I had seen reports on the internet that in some of the more desperate states people’s safety deposit boxes were being opened and contents sold off because they had been “inactive” for over a year or so. In any event, and as you are saying, and as demonstrated by the latest reports about the empty vaults at Bank of Nova Scotia, leaving your metals in the care of the banks would be like trusting your dinner to a pack of hungry dogs.

  34. cb Says:

    GB – Yes, they should slow down, for sure. But I fail to see the harm in that, and I fail to see how that should translate into a collapse in demand for Australian resources and assets.

    As for an upward revaluation of the Yuan, that is consistent with China shifting its attention to domestic economic development and increasing domestic consumption, and I fail to see how this aspect should represent a threat to us. The stronger the Yuan is, the more affordable our exports to China will become.

    And, finally, the point to which you have not responded, China continues to be worried about the long term purchasing power of its foreign currency reserves, and that includes not only the USD, of which they have trillions (with a T), but now also the reserves it holds in the Euro. If the threat to the purchasing power of all this digital and paper money mountain of savings continues, as it seems most likely to be the case, then China will continue to be highly motivated to spend all this money and continue to buy real things with it before it loses value completely, and the implications to Australian exports and assets would seem pretty compelling, but in the other direction from what you suggest. What am I missing?

  35. GB Says:

    cb – reduced demand from china is bad for us because
    1. LME stockpiles are at historical highs
    2. China already has large stockpiles
    3. Companies are bringing new production online because they believe demand from China is going to increase

    so why is it bad – a national full of debt (raised to bring production online) to supply extra resources to china who actually wants less resources – too much supply not enough demand… You must be able to see this and for some strange reason the mining industry always lives at the extremes

    As china produces everything we buy in the shop then i would guess that a stronger yuan actually makes it more expensive for us to import their products, so insurance is up, energy is up, interest payments up, costs of goods up, commodities up. I wouldn’t call that conducive to growth unless you call growth paying higher prices

    So China has gone an purhcased a whole lot of mines that can only operate profitably when commodity prices are high. All the good mines have been snapped up already. Also, china pouring trillions of dollars in Australia will just lead to higher property prices etc… and a nice big fat bubble for Stevens to pop. Its more likely that china will use their reserves on the bad debts it will see in the future from last years credit binge.

  36. cb Says:

    GB – Hmmm, I understand you better now, but we are still talking past each other a little. The theory goes that, with rising Chinese wages, domestic consumption will increasingly compensate for falling exports, but, and thus, Chinese demand for our resources is likely to continue. So, for the next couple of years it will be current infrastructure commitments, and as that one peters out, domestic consumption may well pick up enough to keep up demand for what we dig up and want to export.

  37. GB Says:

    cb – china’s domestic consumption is not as big as people think. I read it was only slightly larger than France’s. Therefore the chinese have no way of boosting domestic consumption to cover the loss of exports in the time fram required. They need the US and EU consumers to come back to life.

    Not only that but they added to capacity in 2009. So if you look at it logically then china needs the US consumers to come back to spending their incomes, plus take on debt and spend that too AND then somehow take on even more to cover the extra capapcity.

  38. cb Says:

    GB – Gottcha. Thanks for spelling all that out so clearly, not to mention, so patiently. I appreciate it.

  39. cb Says:

    GB – And, should I need to add the obvious: If that analysis is as right as it looks compelling, then the entire world economy is in the pickle. It might take a fair few more years to play out, but – especially in countries like China who have such large foreign currency reserves that they can spend as, and when, needed. Provided, that is, that its value does not evaporate on them before they get the chance.

    I must say, though, that I will have to balance the compelling case you are making against those held on the subject by widely regarded commentators, such as Schiff, Rogers and Faber.


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