Why Flood Levy isn’t a Drop in the Ocean

Your editor’s thoughts are a bit distracted today.

We’ve got the weekly update and the monthly issue of Australian Small-Cap Investigator to complete within the next couple of days.

So we may be all over the place today.

First up, last week I gave you a link to Murray Rothbard’s “A History of Money and Banking in the United States: The Colonial Era to World War II”.

Over the weekend your editor managed to get half-way through the book.

If you haven’t bought it or read it online yet, I strongly recommend you do.

In our opinion it provides concrete proof of how government and central bank interference in markets distorts the economy.

And furthermore how it is the same interference that creates inflation – rewarding those with power and influence, and punishing those without power or influence.

It also bangs on the head the argument that the gold standard caused the Great Depression.

That’s a fairly popular argument made by the statists and interventionists.  They claim the Gold Standard not only caused the Great Depression, but made it worse because governments couldn’t print money to spend the economy out of depression.

Of course that’s nonsense.

The reality is that it was manipulation of the Gold Standard by governments and banks that caused a mispricing of gold and silver, along with the determination of the banks to print more paper notes than they hold gold to back them.

This caused the credit boom thanks to the misallocation of capital.  The bust (depression) was simply the consequence of the boom.

But not only that, it highlights how government and bankers are in cahoots to line their own pockets at the expense of the general population.  As Rothbard notes:

“This provision deliberately tied banks and bank credit expansion to the public debt; it meant that the more public debt the banks purchased, the more they could create and lend out new money.  Banks, in short, were encouraged to monetize the public debt, state governments were thereby encouraged to go into debt, and hence, government and bank inflation were intimately linked.”

Ah, monetizing the public debt.  That rings a few bells.  The new Basel banking rules ensure government debt is institutionalised even further by requiring banks to hold a certain amount of government debt as capital.

The more government debt held by the banks, the more money the banks can create from thin air.

It’s a similar reason to why banks are keen to lend for residential mortgages.  These are considered to be lower risk than business mortgages and therefore the bank is able to carry less capital on its books.

The upshot is that bank capital requirements are just as much about syphoning money from the individual into the hands of the government as it is about supposedly keeping banks strong.

The fact is, the requirements weaken the banks as it allows them to create more money, while at the same time weakening the private individual as more money is taken from them and given to the government.  Plus the inflationary consequences of money creation impoverishes the individual further.

On a similar subject we noted a neat little graphic put together by one of the guys over at Crikey.com.au:

Source: Crikey.com.au

There you go.  What’s all the fuss about?  $1.8 billion is barely a drop in the GDP.

Of course, comparing the size of the flood levy to GDP by itself isn’t relevant.  GDP is supposedly the economic output of the economy, whereas the flood levy is a cost to the economy – taxpayers.

So what you really need to do is compare GDP to the amount government steals from taxpayers.

In that case, based on the 2009-10 budget, the Federal Government spent $339 billion of taxpayer money.

That’s compared to the 2009 Australian GDP of USD$924 billion (roughly the same in Aussie dollars):

Source: Google

Or to put it another way, 36 cents of every dollar spent in the economy is spent by the Australian federal government.  Another way of looking at it is that for every dollar earned by private individuals or enterprise, 36 cents is taken by the government.

Add on State and local government taxes and you’re looking at north of 40 cents in every dollar earned ending up in government hands… which it then dishes out to its buddies.

So heck, what’s another $1.8 billion?  Who cares?  You should care.

$1.8 billion by itself may not seem much, but it’s $1.8 billion on top of the $339 billion the government already takes.

By the same argument, if $1.8 billion is fine, what about another $1.8 billion after that… and then another $1.8 billion… and so on until you figure out all the money is in the hands of the political despots in Canberra and none remains in your pocket.

So if you take that into account, the same graphic would look something like this:

Source: Moneymorning.com.au

The red area comprises the amount of tax the federal government steals in taxes.  The green area is our guess at the taxes paid to State and local governments.  And the yellow area is the approximate cost for the national broadband network… that’s “only” $43 billion after all.

If you look at the graphic now you’ll see that private enterprise – including you – has a much smaller amount of blue area remaining.  That tiny blue rectangle doesn’t look so tiny in comparison now does it?

Next add in our old favourite, mortgage debt.  According to the latest numbers from the Reserve Bank of Australia (RBA), at the end of December 2010, residential housing debt stood at $999,668,904,000… or simply $999.6 billion…

Or, $331 million short of the magic trillion.

So if we say the average interest rate is 7%, that equals around $70 billion each year paid in interest by households.  Let’s colour it purple and add that to the graphic to see what it now looks like:

Source: Moneymorning.com.au

Wow!  The blue area is getting smaller by the second.

Now take out groceries, fuel, heating… and heaven forbid some entertainment expenses so that you can actually enjoy yourself, what are you left with?

Well, let’s work that out.  According to the Association of Superannuation Funds of Australia (ASFA), a retired couple who want a modest lifestyle – not including housing costs – will spend about $530.75 per week.

That works out as $27,599 per year.

If we multiply that across the roughly eight million households in Australia it equals $220 billion.  Now, granted that figure isn’t entirely accurate, in fact our guess is it’s an underestimate seeing as most households would earn more and spend more than the typical retiree.

And by the way, these aren’t extravagant items.  It includes fuel, travel, and leisure expenses.

Let’s add these living expenses to the graphic in a kind of browny colour:

Source: Moneymorning.com.au

Oops, we seem to have overshot there!  I don’t know about you, but there doesn’t seem to be any blue left… apart from that tiny little rectangle that is the $1.8 billion flood levy.

Now perhaps the folks who say the flood levy is nothing to the economy may care to think again.

Sure, on its own $1.8 billion is nothing, it’s just a drop in the ocean.  But it’s $1.8 billion in addition to the $339 billion in federal government taxes, the $43 billion to be spent on the national broadband network, the $70 billion spent on mortgage repayments…

And the $220 billion that Australians need to spend just to live a moderate lifestyle.

It all makes us think the Egyptians had the right idea.

Regards,

Kris Sayce
for Money Morning Australia

Tagged as: banks, credit, flood, GDP, government, levy, mortgages, tax