Profitability Not Governments Create Prosperity

Yesterday’s Money Morning seems to have kicked up a stink. So in a moment I’ll print some of the, erm, “feedback” we received.

But before you get to that, this…

The Super Theft rolls on. A $10 billion Super Theft no less.

The front page of today’s Australian Financial Review (AFR) announces: “Labor to reap $10bn in lost super”.

It explains:

“The federal government is set to collect a $10 billion windfall from unclaimed superannuation as industry executives admit it is almost impossible to track down the owners of the lost accounts.”

Yeah, it’s impossible if you don’t try. Or if you don’t plan for it in advance.

The government is doing exactly as we predicted it would. Last year we revealed that the government was expropriating the super funds of temporary foreign workers. It was set to deliver the government an $800 million windfall.

That’s a lot of money. But clearly not enough.

At the time we warned:

“The next logical step is for the government to grab the superannuation balances of all working Australians. Don’t forget, the government is about to embark on a massive $200 billion spending spree and it’s got to pay for it somehow.”

While the government hasn’t gone the whole hog just yet, it’s edged its way closer.

You see, what will happen is that the $10 billion in unclaimed superannuation will be swept up by the Australian Taxation Office (ATO). In effect it will be taxed at a 100% tax rate.

What happens with it then? Is it stored in lost property next to umbrellas and overcoats?

No, it’s swept from the ATO into the federal government’s consolidated revenue where it can spend it. Naturally enough there will still be a book entry stating that $10 billion of superannuation is owed to around 3.8 million people, but the money won’t actually be there.

It won’t even be earning a miserly 5% interest. Of course the book entry will say the money is there. And the book entry will say it’s earning interest, but the reality is it won’t.

The money will be spirited away and spent.

What the government is banking on is that those 3.8 million people never get round to claiming back their lost property. If they do then the government will need to claw the money back from the taxpayer or through debt.

But look, if you’re a long time Money Morning reader this shouldn’t come as any surprise to you. As I say, it’s something we’ve warned of for some time.

We’ve pointed out that superannuation is really just another tax. That it isn’t really your money, it’s just made to look as though it’s yours.

And that viewpoint was confirmed in an article we read in the Herald Sun this week. The quote was from Stuart Forsyth, assistant commissioner at the ATO. He told the Herald Sun:

“Some people just seem to want the money. They think it’s theirs and they can have it now.”

Says it all really doesn’t it? It isn’t your money. It’s merely being held in your name in trust for future spending by the government.

$800 million last year. $10 billion this year. What’s next? There’s still $1 trillion left for the government to try and get its greasy hands on. Look out!

Anyway, onto the feedback from yesterday’s Money Morning…

We don’t need to delve into the Money Morning mailbag today, we can just pick a few off the top of the huge pile.

To start off I’ll give you the general gist of the responses. This letter from Bill pretty much sums up most of the responses we received. It’s short and to the point:

“You are an absolute idiot!”

However, Money Morning reader Ian put it much nicer. Or should that be nicerer:

“Which of the pantheon of gods inspired this vacuous piece of fluffy nonsense?”

Then there was this from Greg:

“As much I enjoy your forthright writing there are times when you venture into the realm of the absurd. In your article about “blameless BP” you not only entered the realm but you occupied the throne.”

King at last! Although we’d be happy to settle for a Lordship.

While Steve wrote:

“I could not possibly agree less. Disgraceful.”

And John wrote:

“The ocean belongs to the whales and dolphins. The oceans can’t be owned by any person any more than can a slave. To assume that humans rule over other intelligent life through manifest destiny is to retrospectively validate the previous centuries of slavery by the same reasoning.”

Er, owning a fish equals slavery! No it doesn’t. No more than owning a dog or a budgie equals slavery.

It always amuses us how many people take your editors views on liberty and free markets and then twist it around to accuse us of being a Nazi-lover and slavery advocate! The reality is the opposite.

It is the social engineers and power-trippers in government that advocate slavery. Only it’s a more palatable form of slavery because the masses don’t realise what it is. It’s slavery to the government. A government that forcibly takes around 50% of your money in various taxes. You work a full week for your employer but only get to keep half the money because the government takes the rest.

But anyway, there were plenty of other letters, but as usual, this is a family newsletter so we’ll keep it clean.

As it happens, John sent us a second email stating:

“BP is not responsible because it was implicitly assumed by everyone that the government could respond to an emergency and plug a leak. The government was the regulator. The government was happy to sell drilling leases and levy taxes and royalties.”

That’s our point.

However, we’ve got the feeling that this point has been lost.

The point is that due to government manipulation and meddling the result is exactly as Money Morning reader John explains, that “it was implicitly assumed by everyone that the government could respond to an emergency and plug a leak.”

Yeah, and governments have got such a good record of responding to emergencies.

The US government under George W “Gomer Pyle” Bush did such a terrific job of responding to Hurricane Katrina in New Orleans. A response that resulted in around 2,000 people dying.

If you’re from Victoria you’re probably aware about the fabulous response of the government to last year’s bush fires. A response that involved police commissioner Christine Nixon telling the commission into the fires that:

“I went home and then I went and had a meal with two friends, I left very capable people at the centre knowing that the (Emergency Services) minister was arriving. I went home, I watched the news, listened to the radio and checked the internet.”

What a heroic response. In other words she did exactly the same thing that five million other Victorians were doing that evening. You’d have thought that when you’re supposed to be in charge of something like preventing fires from killing people, you’d put in just a teeny bit of extra effort.

And what about the response of government to the economic meltdown in 2008 and 2009? How did they handle that? Like uneducated chimps they thought – “I know, if we print a lot of money and give it to all the crooks that caused this mess then that should solve everything.”

Moral hazard my friend, moral hazard.

The implicit guarantee that Freddie Mac, Fannie Mae, the US banks, the UK banks and, yes, the Australian banks were given encouraged excessive risk taking.

That I’m afraid is absolutely no different to the situation with BP.

And aside from the abuse in the emails we’ve received, nothing, not one email has been able to argue that the ultimate fault is BP’s.

Sure, the oil may be coming from their well. And the oil may be killing animals and washing up on beaches, but BP’s lax practices are merely the effect. The cause is the actions of governments and the lack of property rights.

Just as the banks were prepared to push the boundaries as far as possible in order to make a buck, so is the same for BP. In both cases they believed there would be a bail out.

In the case of the banks they knew they were too big to fail. The banks knew that the Federal Reserve and governments would create money from thin air to stop the whole financial market from crashing.

And in the case of BP, it has known all along that its liabilities would be capped at $75 million. It made a business judgement that it could take more risks knowing that the most it would pay is $75 million.

Unfortunately for BP it seems that the rules are going to be changed. The company has already committed USD$20 billion towards a clean-up fund. $20 billion that will doubtless be nowhere near enough once the government and its agencies start getting involved and overpaying the contractors.

In other words, BP rolled the dice on what it thought the maximum liability would be – USD$75 million. It turns out the dice didn’t fall its way. It turns out that oil companies don’t have as many cheerleaders in Congress as the banks do.

It turns out that pictures of cute rocks covered in oil is just too much for a US congressman to cope with. BP can’t be allowed to get away with it.

But let’s get another thing straight. Drilling for oil offshore is both risky and expensive. Money Morning reader Owen sent us a copy of the letter sent by Congress to BP CEO Tony Hayward.

Amongst other things in the letter it’s pointed out that:

“The Deepwater Horizon rig was expensive. Transocean charged BP approximately $500,000 per day to lease the rig, plus contractors’ fees. BP targeted drilling the well to take 51 days and cost approximately $96 million.”

It goes on:

“The Deepwater Horizon was supposed to be drilling at a new location as early as March 8, 2010. In fact, the Macondo well took considerably longer than planned to complete. By April 20, 2010, the day of the blowout, the rig was 43 days late for its next drilling location, which may have cost BP as much as $21 million in leasing fees alone. It also may have set the context for the series of decisions that BP made in the days and hours before the blowout.”

The Congressmen and women seem incredulous that BP should be thinking about the profitability of the well in making decisions about which processes to use.

That’s natural for a body of people who don’t need to concern themselves with profitability. They can just take money from the taxpayers or increase the national debt to pay for whatever they want.

BP and other private companies don’t have the same luxury. Private businesses need to think about making a profit. Because remember this, and this is important, if private businesses didn’t consider the profitability of their actions then the economy would be a mess.

In fact, if private enterprises didn’t think about or care about whether they were profitable or not there would be no private enterprise. There would be no economy as we know it. Businesses would be unable to survive.

Think about it, if there are no profits there is no enterprise. You’d be whisked back to subsistence living. You’d be back to the days which the environmentalists crave for – a pre-industrial economy where we’re all crawling around in the mud and picking lice from each other’s hair.

As I say, drilling for oil is risky stuff. In our opinion it’s more amazing that there aren’t more oil spills or oil rig explosions.

I mean, for goodness sake look at how deep these guys have to drill. Your editor is barely capable of drilling a hole in the wall to put up shelves let alone sending a drill two kilometres to the bottom of the sea and then another two kilometres through rock.

The last time we looked the longest drill bit Bunnings stocked was about 10 centimetres!

Look, oil companies make decisions based on profitability every day. They have to otherwise they’d go out of business. In 99.9% of cases this crusade for profitability results in oil spills not happening and oil rigs not exploding.

It’s the drive for profitability that encourages oil companies not to spill oil into the ocean. It encourages them to try and prevent an oil rig from blowing up.

For every barrel of oil that goes in the ocean that’s a barrel of oil it can’t sell. That means less revenue and less profit.

And most importantly to you, it’s the drive for profitability that ensures you’re able to drive your car to work, heat your home and that industry can power its machines.

But if you’ve got government interference that creates a moral hazard then you’re bound to see private enterprise taking advantage of it. They’d be crazy not to. Just like property investors can’t help themselves but take advantage of negative gearing.

Or share investors who take advantage of franking credits.

There’s no difference in that they are all instances of government interference and manipulation.

The only difference is that when the stock market bubble or housing bubble pops because of this interference, it doesn’t leave everyone covered in oil.

Make no mistake, it is the desire for profitability that keeps the economy ticking over. Any measures by government to stymie that is bad for you and bad for the economy. And it should be resisted at all costs.

It is government interference (including lack of private property rights) that is the ultimate causes of the problem, not the search for profits.

Cheers.

Kris

Tagged as: investors, property