Before we get into today’s Money Morning, a quick reminder that your editor is speaking at the Melbourne Adam Smith Club on Monday evening.
If you’re interested in coming along to watch and listen as we blather on for half an hour or so, just click here to download the registration form.
Anyway, we liked Dan Denning’s comment in our sibling newsletter The Daily Reckoning yesterday:
“There is something really distasteful and perverse about the amount of attention the Australian press dedicates to analysing the government’s annual budget. It’s obscene in some undefined way, and offensive at some visceral level we can’t quite define. Maybe it’s the implication that state tax and spending policies have such a huge sway in our everyday lives that we have to pay attention to them whether we like or not. Maybe it’s how seriously the politicians take themselves while exhibiting a comprehensive level of stupidity about markets. Either way, the whole thing makes us want to gag.”
We couldn’t agree more.
Yesterday evening we tuned in to the awful show Switzer on the Sky Business Channel. But it wasn’t so much what Peter Switzer had to say, rather it was the usual “Where’s our budget handout” comments from his guest.
In this case it was an interview with Australian Retailers Association chief executive, Russell Zimmerman:
“Well really there was nothing in the budget for retailers.”
[Sob!] The poor little pets. Our heart goes out to them. Maybe we’ll give the Australian Taxation Office a call and ask if we can donate another 1% of our wages to retailers. I mean, the taxpayer clearly hasn’t given them enough money already over the last two years…
Apart from the billions of dollars of taxpayer-funded government bribes which apparently helped to fill the retailers’ coffers last year.
It’s a perfect example of just how distasteful Budget season is. The way that tax cuts are reported as a “cost” to the government is probably the most vomit-inducing of all.
But aside from that it shouldn’t be forgotten that the federal government will spend around $350 billion of your money this year. So what if the retailers miss out, some other vested interest will get your tax dollars instead.
Can you grasp just how big that number is?
As we’ve mentioned before it’s around 35% of Australia’s total economic output. Add in the taxes taken by state and local governments and the figure rises to around 45% of Australia’s economy.
It’s no wonder there’s so much interest in how the government chooses to spend the loot. Page after page of analysis telling you how the government will blow your wages. Most of it of course tends to be critical that either the government hasn’t spent enough, or that it’s spending it in the wrong places.
Seldom do you see any commentary suggesting the government should stop raping and pillaging the dollars from your pocket.
In fact you’re more likely to get the opposite reaction. Such as the tax and spend Keynesian commentary of Kenneth Davidson at The Age:
“The cumulative effect of these deficits is to increase net government debt from $42 billion in 2009 to $79 billion in 2011, peaking at $94 billion by 2013. This is not a problem. Net debt will rise from 5.6 per cent of GDP now to a peak of 6.1 per cent and net interest payments will rise to a peak of $6.5 billion, or 0.4 per cent of GDP. The debt is easy to service and the cumulative increase in debt has more than paid for itself in terms of real economic growth and real jobs, even though the roof insulation and school building programs have been seriously mismanaged.”
It’s funny how the likes of Davidson and others who love government tax theft are keen for the government to take even more tax dollars.
They push this line even while acknowledging the massive waste of money spent on the dud housing insulation and school building schemes.
And as for the idea that government debt has “paid for itself in terms of real economic growth and real jobs”, well, that just isn’t true. How can economic growth and jobs be real if the government had to subsidise the creation of those jobs.
That’s not real jobs and real growth. And they know it.
It’s like saying a runner really ran a marathon even though they finished the last six miles being driven in a car.
Seriously, if the jobs ‘created’ by the housing insulation scheme were ‘real jobs’ then surely the jobs ‘created’ to clear up the mess afterwards are ‘real jobs’ too.
No-one in their right mind would claim that, even the dopey bureaucrats haven’t suggested that… yet.
Real jobs and real growth can’t just be created from thin air by a pen-pushing bureaucrat. Creating work for the sake of work using taxpayer dollars merely results in the misallocation of resources.
It denies capital from being allocated to areas of the economy that actually need it.
But here’s the problem. Real jobs and real economic growth take time. Time is something not on the politician’s side. They want stuff done now before the next election.
That’s why the government insists on spending money on quick fixes such as chucking cash into the building industry and the retailers through government bribes.
Quick fixes that give the appearance of working, but only in the short-term. Like anything else financed by debt it needs to be repaid. And if the government is taxing now to fund its short term projects then it prevents those dollars from being invested by entrepreneurs in longer term and potentially more useful projects.
Real growth and real jobs can’t happen that quickly. New game-changing innovations don’t just happen overnight, they take time. You only have to look at the developments in the technology sector to see that.
And what’s more, it puts paid to the idea that only governments are capable of acting in the long-term interest. That’s most often the argument used by government lovers who say that the free market can’t be trusted to deal with climate change.
That only a coercive government has the long-term vision to act.
The reality is, the opposite is the case. Governments always act in the short term, never in the long term. What else could explain the reason behind the federal government postponing until 2013 its emissions trading scheme (ETS)?
The reason is simple, the government is only concerned with the short term. And the short term involves spending billions of dollars on make-work projects that nobody wants.
We won’t go into too much detail here, because we’ll cover it during our presentation to the Adam Smith Club on Monday, but it’s precisely this short term outlook and the desire to blow taxpayer dollars on quick fixes that ensures individuals are unable to expend their own resources on something which is clearly a concern to them.
An ETS involves people being forced to pay more money for things without any recognisable benefit. That’s not a good idea for a politician who wants to be re-elected.
Yet if solutions to the perceived problem of climate change were provided by the free market, where participation was voluntary, I can guarantee you that the majority of people would choose to take part.
That would weigh up the short term loss of disposable income against the longer term benefit to the environment.
The reality is, contrary to popular belief people are always making decisions about the future. It’s just not true to claim that individuals and business people only think about today and ignore tomorrow.
If it was true that individuals and businesses only thought about today the economy would be a mess. Producers of capital goods would only produce machinery that was ready for sale today and which would only last for one day. They would not bother creating an inventory.
The users of the machinery would only be interested in buying machines that could produce one day’s output. It would be worn out by the end of the day and therefore they would have to purchase a new one-day machine tomorrow.
Shops would only order enough goods to last them for one day’s worth of sales. The following day they would again contact the supplier and order just enough goods for that day.
Individuals would only buy enough food for one day’s use. Each day going to the shops as they had no concept of planning for the future.
You can see how ridiculous that argument is. Capital goods producers produce machinery that lasts for years. And buyers of the machinery want something that will last as long reasonably possible, certainly not for just one day.
A shop will typically re-stock once a week – unless we’re talking perishables – and individuals will do their shopping weekly. That’s all instances of planning for the future. And it’s something – again contrary to what the government lovers tell you – that is natural for humans.
This is just a simple example. But you can apply it to anything. The holiday you’ve planned in advance. Very few people would decide today to just pack their bags and head off for a three-week holiday. Such a trip is likely to have been planned months or even years in advance.
The fact is, it suits the bureaucracy to allow the myth to prevail that only governments and not individuals can plan for the long term. That way the bureaucracy can insist on taking your tax dollars today and claim it is planning for the future.
Unfortunately, while they do take your tax dollars today, all they do is spend the same dollars today, plus a bit more through debt. The kind of debt that the likes of Kenneth Davidson believes is “not a problem.”
I’m afraid it is a problem. Nanny state governments are doing their best to brainwash individuals into believing only the government can plan for the future. And many individuals believe it. Which is hardly surprising considering the government doesn’t leave you with much money with which to save for the future.
What it does leave is the promise of paying you back your superannuation savings. Although as we’ve warned before, that’s likely to be ripped from you when you least expect it.
So while Davidson says that high taxes and debt isn’t a problem it is. But it’s something that won’t become apparent to you until it’s too late.
Cheers,
Kris.
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cb @ 28
Keen states that credit money has expanded to rapidly and its now out of balance with the amount of fiat money in the system. Start at about 4 mins on second interview
This may explain why assets purchased with debt, i.e. houses, have seen rapid growth in prices but incomes that rely on fiat money have not really grown. He says to rebalance we need to print fiat money which I guess means a rapid increase in incomes???
cb..#29…loved Celente’s monologue at the 21 minute mark. I couldn’t have put is better myself.
Fitch… BS surrounds us in every way. I heard on the radio News while driving this morning that a council in Newcastle (most power stations are in this region) is taking the Power companies to task over the exorbitant electricity increases of up to 60%. The council claims that this is “unwarranted, and is causing increased hardship, especially since the COST OF POWER PRODUCTION HAS REDUCED BY 6% ”
A thought came to me after listening to this. I could be way of the mark, however, as cynicism is my specialty, I thought that this may be perhaps a surreptitious way for the Govt to be gaining revenue through an extra tax, via collusion with the power companies. That is, if we paid the government direct then it would be seen as a tax and hence very unpopular. So if it is charged “indirectly” through the electricity companies then we do very little to complain but EVERYONE is a “contributor”.
Nick@31: I think it is financing, rather than straight production costs. As your typical baseload generator is geared to the eyeballs, increases in interest rates add a a lot to the production costs.
Fair comment SV but what was the excuse last year and the year before?
GB – Yes, you are right. Unfortunately, the lingo is confusing. The way I conceptualise money, there are two main types:
1. Real money, which is either intrinsically valuable, or redeamable for something that is intrinsically valuable, such as a commodity, where the commodity could be anything from gold to liquor and cigarettes.
2. Fiat money, which has no intrinsic value and cannot be redeemed for any commodity, but is made legal tender through government decree for the payment of debts, private and public.
Keen seems to talk about credit money vs fiat money, but whatever he means by these two terms, it should be clear that both of them will fall under the second category above. I surmise that the distinction he is making is between:
2a. Fiat money created through credit, which comes into existence as an interest bearing debt, such as our mortgages, business loans and credit card loans, and
2b. Fiat money that is created through mere printing, or what they nowadays politely describe as quantitative easing (QE), which is either paper money or digital money created for the benefit of the government, to be spent and dispersed through and by the government for the payment of various expenditures, rescue packages and (stimulus) programs. This way of creating money should not attract ongoing interest, but is created by the central bank in lieu of a smallish Seigniorage, or fee for the issuing of currency.
Money created through QE is regarded to be inflationary, which it could be if, at the same time, deflation (money and credit destruction through defaulting debts and bankruptcies) were not happening at an even faster rate.
There appears to be a widely held myth that fiat money created through QE can be somehow sanitized, so that it does not have an inflationary effect, such as through the issuing of interest bearing bonds, which turns the 2b-type printed money into a 2a-type interest bearing debt. But this seems a furphy to me, because whether interest is payable on some money just created or not, at least for the short term the effect is that that much more new money is sloshing about in the economy as soon as it has been created and spent, and the subsequent and ongoing payment of a small interest on that new money is minuscule by comparison to capital amount that has just been dumped into the economy.
That is the short term effect, I would contend, which, all other things being equal, would be inflationary, but in the longer run it merely adds to the debt burden in the economy, and especially in a deflationary environment, such as we are struggling with, it merely adds fuel to the fire. This, I believe, why Keen has been saying that sanitising the printed money by turning it into more debt through the issueing of bonds is madness, since the problem already is deflation, the rapid destruction of debt money and credit, and therefore any benefit that QE would have to plug the hole will be lost in the medium to longer term, because all this new money will just become part of the maelstrom that sucks the living daylight, the very lifeblood, out of the economy.
Anyhow, long explanation, but it should all make sense. Cheers.
Nick – Good line of thinking. There is our carbon tax, although the owners of the power companies are the state governments. Some of the generators, though, appear to be privately owned, and some are owned by overseas interests.
Nick – Oh, Yes, Celente is a treasure. Not only does he cut through the crap, but hits a most appropriate tone with his apt disdain of all these crooks and shysters. Here is, by the way, the abbreviated version of all his lines in that video. It is all one should need to know about what’s really going down.
http://geraldcelentechannel.blogspot.com/2010/05/gerald-celente-money-junkies-and-power.html
Daily Show: Rigged Market Hoarders
http://vodpod.com/watch/3614423-daily-show-rigged-market-hoarders
Fitch, SV thanks for the comments. Hopefully this sort of meddling will finish soon but i’m not holding my breath. Cheers
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