Why Australians Will Pay for Queensland’s Floods

Why Australians Will Pay for Queensland’s Floods

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Yesterday I wrote to you about the silly headline in The Age newspaper. It was this:

“Queensland rebuilding will boost GDP”

Look, we love it when we see this kind of nonsense written. Simply because it gives us an excuse to again read Frederic Bastiat’s, “That Which is Seen, and That Which is Not Seen”.

You can click here to read it for yourself.

I won’t reprint it because you should read the entire essay. But in a nutshell, it’s economic nonsense to suggest that a flood will be beneficial to an economy.

Only an economic ignoramus would argue such a thing. Floods destroy things. Floods make no distinction between the destruction of brand new goods and goods that are due for replacement.

The last time we brought up this subject we were told it is good for the economy because money comes into Australia from insurance companies. That this money hasn’t been taken from elsewhere in the economy.

Rubbish.

To borrow from the title of Bastiat’s essay, it only considers that which is seen but not that which is not seen.

Even so KPMG chief executive Michael Andrew is quoted in The Age article:

“This will release a lot of cash from insurance company balance sheets, many of which aren’t in Australia. Many are reinsured offshore in Europe or the US, so the extent to which they have to fund loss-of-profit claims, a lot of money potentially flows into Australia.”

It’s the idea that Australia is getting a free lunch from the insurance companies.

The fact is, Mr. Andrew couldn’t be more wrong if he tried. But let’s run through the argument in more detail…

Think about it, how do insurance companies raise money? They charge premiums. Premiums paid for by Queenslanders and others.

Now, how does an insurance company pay for the claims made by policyholders? It covers the costs from its reserves but would also issue bonds to investors which it will then repay over time from insurance premiums.

Here’s the problem for the insurance company. Aside from the big payouts such as the Queensland floods, or the Christchurch earthquake, the insurance companies also need to pay out other everyday claims.

So, the insurance company will need to rebuild its cash reserves.

How will it do that?

Simple, it’ll need to increase insurance premiums.

And who pays for the insurance premiums? Individuals and businesses. In other words, money that would otherwise have been spent elsewhere or saved will be now spent on increased insurance costs.

Yes, some industries may benefit as claimants buy another item of furniture to replace the item that was destroyed. But it is at the expense of say, the clothing store where someone may have spent money but they are no longer able to do so because of the increased insurance premium.

But what about this idea that foreigners are actually funding the rebuilding as the cash flows in from overseas.

While that may be true, it ignores the attitude of those overseas investors. If a reinsurance company has to fork out more money than expected to pay for a major incident then it will naturally demand an increased return or premium before it invests more money.

That means the Australian insurance firm paying a higher rate on the bonds it issues or on the reinsurance policies. And that means passing on higher premiums to policyholders.

In economics there’s no such thing as a free lunch. If something is destroyed and needs replacing then there will be a cost to replace it. That cost will either be a direct or indirect cost.

Think about it this way. If there really wasn’t a cost, then why wouldn’t you just crash your car and write it off at every opportunity? I mean, that’s the logic Mr. Andrew is using.

The reason you don’t write your car off is because you know there will be a cost to you in the form of an increased insurance premium when you get your next car.

There is no difference between this example and the costs of the Queensland floods. To the Australian economy as a whole, and to anyone who holds any kind of insurance policy there will be a cost.

Claiming that foreigners will pay for the flood damage without any impact on Australians is just another childlike example of the Australian mainstream falsely believing that ‘Australia is different.’

One day they’ll get it through their thick skulls that Australia isn’t different. Australia has benefited from an extraordinary boom in the resources industry which has helped prop up the entire economy.

When that boom stops, the Australian economy will suffer. Only then will the mainstream numpties realize that the Australian economy is no different to anywhere else.

Kris Sayce

Editor

Money Morning

Monday: You’ve got your eye on a stock – but you’re not sure if it’s the right time to buy it… You’re holding another stock that just went up – or down – significantly… but you don’t know whether it’s time to sell… The solution to both of these dilemmas will become a lot clearer once you’ve watched this video (turn on your speakers).

Tuesday: No wonder Diggers & Drillers editor Dr. Alex Cowie looked jolly as he bounded into the office this morning. The “Stock Doc” has been long coal stocks since March last year. Click here for more…

Wednesday: We see the lazy Aussie retailers have launched a media campaign. They were clearly influenced by the success of the miners’ campaign against the Resources Super Profits Tax (RSPT). Except they forgot one very important thing… Click here for more…

Thursday: But speaking of non-robust and flaky, much to our surprise we received a reply to our Freedom of Information (FoI) request from the Reserve Bank of Australia (RBA). Click here for more…

Friday: This ‘George Soros tipoff’ could make you 226% to 389% in 24 months. (Just don’t share it with anyone else).

Kris Sayce

Kris Sayce

Publisher and Investment Director at Port Phillip Publishing

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 editor of Tactical Wealth, and Microcap Trader — where he reveals the best opportunities he’s discovered in the markets. 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.
Kris Sayce is the Publisher and Investment Director of Australia’s biggest circulation daily financial email, Money Morning Australia.Kris is a fully accredited advisor in shares, options, warrants and foreign-exchange investments.

Kris has close to twenty years’ experience in analysing stocks. He began his career in the biggest wasp’s nest in the financial world — the city of London — as a finance broker back in 1995.

It’s there where he got his ‘baptism of fire’ into the financial markets, specialising in small-cap stock analysis on London’s Alternative Investment Market. This covered everything from Kazakhstani gold miners to toy train companies.After moving to Australia, Kris spent several years at a leading Australian wealth-management company. However he began to realise the finance and brokerage industry was more interested in lining its own pockets with fat fees, commissions and perks —rather than genuinely helping out the private investors they were supposed to be ‘working’ for.

So in 2005 Kris started writing for Port Phillip Publishing — a company which was more attuned to his investment outlook.

Initially he began writing for the Daily Reckoning Australia— but eventually, took over Money Morning. It’s now read by over 55,000 subscribers each day.

Kris will take anyone to task — banks, governments, big business — if he thinks they’re trying to pull a fast one with your money! Whether you agree with him or not, you’ll find his common-sense, thought-provoking arguments well worth a read.

To have his investment insights delivered straight to your inbox each day, take out a free subscription to Money Morning here.

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119 Comments on "Why Australians Will Pay for Queensland’s Floods"

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KP
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KP
5 years 11 months ago

Yes! On top of flooding Queensland lets burn Victoria to the ground again and we will be REALLY rich!!

Actually, ACT would be first on my list…

Amazing how stupid most people are, no concept of a market at all.

bb
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bb
5 years 11 months ago
The biggest driver of our micro-economy is building construction. It directly and inderectly employs more Australians than any other. The government knows this and it acknowledges that the $16.4 (and counting) BER ripoff wasn’t about getting value for money or because every school really needed a new hall. It was entirely about keeping the construction sector and the myriad of supply lines that serve it on the boil. This is ending and the cycle which allows the boom bust sine wave of the industry is poised to switch to bust after the biggest taxpayer funded sugar hit it ever had.… Read more »
michael francis
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5 years 11 months ago

bb

Totally correct. By the end of the year, labour costs in the construction sector will be half what they are now. Tradies will fight tooth and nail with lower costs to win jobs, especially cash jobs. ( I bet many tradies have huge debts that need servicing making them more desperate as work dries up.)
Undercutting has already started as the big fall in building permits is beginning to bite.

Drew
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Drew
5 years 11 months ago

Good one KP 🙂

Doesn’t this indicate that there is a problem with using GDP as a measure of a country’s success? We don’t judge how well a company is going based primarily on how much they produce.

Why is it different for a country?

Fitch
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Fitch
5 years 11 months ago

bb / mf – Developers/major builders could the be first to go. Mate of mine (despite my desperate warnings) strapped on a barbwire condom and jumped into bed with the BOQ on a unit development circa $17m.

12 months ago the back slapping could be heard echoing in neighboring suburbs since then constant council delays, pre-sales have dried up and the banks hooked it’s heels in. Can’t get any further in, can’t get out and his suppliers and tradespeople are driving him mad pressuring a start because they need the work.

andy dufresne
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andy dufresne
5 years 11 months ago
Must say I have no sympathy for any of them. Bottom line is, if any of the tradies in particular felt this was going to last forever, whilst strapping on the mega debt noose, they need to taste the medicine. I suspect this probably won’t happen whilst we’re living in an era of politically soft, touchy feely nanny staters. The whole stimulus program was the most pointless and unproductive Keynesian exercise we’ve undertaken as a country. Total knee jerk stuff. But, there is hope and it would seem by the actions of the ATO that some of the liquidity will… Read more »
Fitch
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Fitch
5 years 11 months ago

Hope andy? What do you think they’ll do with all these errant tax dollars when they finally get hold of them?

oysterboy
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oysterboy
5 years 11 months ago

bb @2

Spot on. Some of my builder clients have had a very quiet Xmas . Gravy train not only stopped, the tracks have been ripped up for scrap. All they did was delay the inevitable.

cb
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cb
5 years 11 months ago

So, given all that, which way for rates the next time around?

oysterboy
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oysterboy
5 years 11 months ago

CB @ 9 – to quote Buzz Lightyear “To infinity and beyond”.

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