A $4 Trillion ‘Big Bang’


The Australian Bureau of Statistics releases its house price index later today. Hmmn. What do you think it will show? More on that tomorrow.

The week begins with a bang, according to the Financial Times. The FT reports that, “The Obama administration is gearing up for a ‘big bang’ announcement within the next two weeks that will combine a bank clean-up with measures to reduce home foreclosures and probably steps to kick-start credit markets.”

Obama as Prime Mover will have to turn the chaos in America’s housing and mortgage market into harmonious order. Then He has to singlehandedly leap a tall legacy of toxic assets in a single bound, freeing up banks to lend by buying all of their dodgy assets.

It’s a big ask. But if anyone can do it, He can. Especially when He’s got America’s credit rating to abuse!

Reordering the financial universe is not cheap. It takes a lot of energy and a lot of matter in the form of new U.S. dollars. Reuters reports that, “Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled mortgage and consumer debt. That number could shrink if the program were limited to only certain loans or banks, but it could also grow if other asset classes such as commercial real estate loans were included.”

How much is $4 trillion? “At $4 trillion, that would be the equivalent of nearly 1/3 of U.S. gross domestic product. If the government had to fund that amount by issuing additional debt, it would intensify investor concerns about massive supply scaring off demand.”

Yes. You can imagine the world’s main owners of dollar-denominated reserve assets (China, Japan, the Petro states) would be intensely concerned about a $4 trillion increase in dollar denominated debt. But wait a tick…

It’s one thing to say you might need to float as much as $4 trillion in debt to fund your bad bank. It’s another thing to sell that debt? Who will buy it? Even these days, $4 trillion is a lot of capital to loan. Maybe that number has been floated to make a smaller number, say $2 trillion, look small by comparison.

Good news everyone! The Bad Bank is going to cost us half as much as we thought!

If the ‘big bang’ goes off this week, what will it mean for Planet U.S. Dollar? Or Planet Gold? Well, as our friend Steve Belmont in Chicago reported on Friday, gold is moving toward a day of reckoning after trading in a range for the last ten months. It will either break out much higher, Steve says, or buckle. We’ll be watching.

While investors hoard cash, companies are looking for capital. Rio Tinto admitted over the weekend that it might sell more of its London-listing to current equity partner Chinalco. Rio can do a rights issue. But it appears to prefer asset sales as a method to retire its $38 billion debt associated with the Alcan acquisition.

Chinalco is in the catbird’s seat, able to cherry pick assets from a distressed seller. This is not a bad position to be in if you’re Chinalco, or if you’re an individual investor who can pick and choose between great Australian resource projects. It’s less good for Rio, which is now in the position of selling the family silver to keep the roof over its head.

Finally, did you notice the obnoxious change in political rhetoric this weekend? You knew Barrack Obama was going to give it to Wall Street, calling executives “shameful” for getting bonuses while their firms received TARP money. Remember, by the way, the TARP money was forced on some firms in an effort to boost confidence in the overall plan.

We normally try to keep a reserved, ironic, and sceptical air when reading the statements of politicians. Most of them are not worth taking seriously. But every once in a while, you get the scent of something so noxious and dangerous that you have to put aside humour and call it what is. Today is one of those days.

Now, the populist shame game is to be expected. That’s not a big deal. What’s more alarming is the bilge and claptrap spilling from Kevin Rudd’s gob and what it may mean for your ability to preserve and create wealth in the coming years.

In The Monthly, Rudd plants a Neo-Marxist flag in the ground of the current debate with the kind of jargon-laden elitist preening that makes academic critics of the free market (who’ve never spent a day in the business world creating value) so nauseating.

Specifically, Rudd writes that, “The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes. Neo-liberalism, and the free-market fundamentalism it has produced, has been revealed as little more than personal greed dressed up as an economic philosophy.”

Why not proclaim, since he is apparently in the position to make such proclamations, that the experiment in paper money and the deliberate policy of inflation it implies is theft? It is bureaucratic lust for power and authority disguised as monetary policy? It’s also, at its heart, the belief that one or a few people in government know better than you how you should lead your life.

Leave it to Rudd and the resurgent global Left to use the present crisis as an occasion to expand their political ideology of government power and wealth confiscation. Despite the fall of the Berlin Wall in 1989, Marxism never really went away. It ensconced itself in Western universities and colleges, and in the careerism of the political class, which believes it is entitled to govern by virtue of its intellectual superiority and the moral justness of its anti-market position.

Their strategy, as always, is to control the rhetorical high ground by framing the discussion in populist terms and making an enemy of “greedy capitalists.” Don’t get us wrong. There are plenty of greedy capitalists to go around, or to go to jail. In fact, many more of them would be going out of business if the government would quit propping them up with taxpayer money. This generation of corporate executives shares plenty of blame for playing fast and loose with the corporations they were supposed to be stewards of. They over-levered, over-speculated, and over-paid themselves.

But Rudd is an ignoramus of the lowest order to say that current events somehow negate the last thirty years of globalisation, or three hundred years of economic growth and the division of labour. Tens of millions have been lifted out of poverty. Hundreds of millions have more economic and political freedom than ever before.

These results can only be the product of a system in which risk taking entrepreneurs have access to capital and savings, allocated through competitive markets where firms that deliver real value to consumers thrive and those that don’t fail. That system has worked for 300 years of Western history to create wealth, choice, and opportunity.

Shame on Kevin Rudd for calling that “market fundamentalism”, as if belief in the institutions that create wealth and liberty is akin to the same kind of religious fundamentalism that permits suicide bombing. If there is a more offensive use of rhetoric to equate two vastly different things, we haven’t seen it.

But the Neo-Marxists are back on the march. And they are probably coming for your wages and pension sometime soon. Make no mistake about it. 2009 is the year the Neo-Marxists have been waiting for.

It is their chance to undo all the perceived evils of Thatcher and Reagan. There would be plenty of those to undo, of course, not least the idea that deficit spending is morally permissible. But the real push by the Neo-Marxists is to use the present occasion to expand the scope and reach of government power into your private life, so they can tell you what to do, what to watch, what to eat, what car to drive, and ultimately, what to think or say.

This will be disguised as better more “parental” regulation to achieve more equality and social justice. But behind the false populist outrage and the elevated language of idealism, it’s just another push for government elites to expand their ability to compel you to live the life they think you should lead.

The simple regulatory response to all this is to reduce the amount of leverage available to financial players. Reduce margin lending in shares. Let bankers get back to making prudent loans in the housing market based on what a buyer can actually repay, rather than letting the government subsidise subprime lending because it’s politically desirable.

There are other sensible regulatory responses to the mess. But they will be discarded in favour of grandiose and over-reaching plans to redesign the entire world in some utopian image. A ‘big bang’? Really. Does that mean they’re going to blow things up and call it a “fix?”

What we’re getting at is that it’s going to be a tremendous challenge to withstand this push in the next few years, mostly because it will have so much popular support from people with no brains who believe in fine sounding speeches and appreciate getting tax rebates/credits/handouts from the government. The first battle in the war on wealth creation is wealth redistribution, whether you like it or not.

It would be more honest if the Left just came out and said something like, “The last ten years have been a huge wealth transfer from the middle class to Wall Street and from the developing world to the developed world. We’re going to try and reverse all that now because we know it’s our best shot in the last thirty years to get some back. So here we come! Open your wallet and shut your mouth!”

Neo-liberalism isn’t the culprit in all this. What does that word even mean? Isn’t Rudd using it because it sounds like Neo-Conservatism? And everyone knows that Neo-conservatism is evil, therefore Neo-Liberalism must be evil too!

The real evil of the last thirty years is the vast expansion of credit in the world that changed personal and corporate incentives. The plunge in the cost of capital-encouraged by governments and Central Banks-set of an orgy of bad risk taking, quietly condoned by regulators and politicians who all benefitted in some way from housing/commodity/trade booms.

But now the credit cycle has turned. The Credit Depression is upon us. And Comrades Rudd and Obama will try and use it for the next great push in the Neo-Marxist dream, one world government with one world currency. More on that tomorrow!

Dan Denning
for The Daily Reckoning Australia

Dan Denning
Dan Denning examines the geopolitical and economic events that can affect your investments domestically. He raises the questions you need to answer, in order to survive financially in these turbulent times.


  1. Relax, Dan.

    Take a big deep breath and relax.

  2. “But Rudd is an ignoramus of the lowest order”. I cannot argue against that statement.

    The sad fact is many Australians will agree with him even though they have no idea of what his latest round of “Ruddish” means. The only reason Rudd’s says or does anything is because someone else does, and lately it seems he just follows the U.S. The U.S handout money to taxpayers, then Rudd does. The U.S. has a plan for the car industry and “me too” Rudd does the same. Obama is a man of change and suddenly Rudd is.

    If Obama blamed the entire crisis on aliens, Rudd would then subject us to a long speech about how Howard’s neo-liberal-free market-capitalist-conservative thinking failed to prepare Australia for an alien economic invasion. I only hope someone can gag Keating..all we need now is that bitter and twisted ex PM to pipe up with how he would have saved the day.

  3. Totally agree with you comments.

    The real evil is easy credit, this drives up values and sends a positive reinforcing message back to the speculator that this is easy profitable behaviour.

    Primary credit should be limited to an assests income earning potential, should this assest for example be a house then any gap between this value (based on potential income) and its price financed from the purchaser with additional equity.

    Dont get me wrong speculation forms and important part of or free market just do it with your own money..

    February 2, 2009
  4. Hi Greg & company. Cheered my self up this morning with another 800 buck buy on a gold junior. There is nothing I can do about my superannuation mother load except to do a bit of (arguably) speculative hedging.

    I agree with Dan’s article in principle. But what weight we should place on political rhetoric? Politicians can say one thing and do the opposite. And as Dan says, they are known to execute atrocious trades. For all I know, central banks will sell gold in September and take out all my gold positions.

    Sarcastically the “me to” politics of the Howard years haven’t changed with Rudd, not withstanding the fact that Australia’s economic situation is in many ways unique. What can I add? I took a 2 minute look at Obama’s economic policy summary and didn’t see much. His problem is that fundamental reforms to areas like health, education and the legal system can take several years resolve and implement. Similarly it takes years to ratchet up new infrastructure projects so don’t expect the multiplier effects to arrive any tome soon.

    Trillions that could be saved if US doctors were salaried UK style – but of course that would reduce the ostentatious spending the politicians say they are trying to encourage. As for TARP with all the trimmings, I think that the cards have been played already.

    My guess would be that Obama and team are anticipating a big balance of trade improvement after the USD drops 30% or so. When politicians can’t (or won’t) say what they think often they fall back on tired rhetoric.

    At least we can all be critical of US and Australian politicians. I don’t generally encourage investment in countries with overly fragile political egos.

    Coffee Addict
    February 2, 2009
  5. I actually had to check the date on the weekend paper to check it wasn’t April 1 when I read about the new manifesto Rudd was publishing. Here’s the same man, who, just over 12 months ago, ran national advertising looking very conservative in front of a building project saying ‘I’m an economic conservative, I’ll maintain the status quo and not endanger Australia’s prosperity’. Not even halfway through his term, the entire rulebook is about to be thrown out and replaced with atrocities like ‘government spending to smooth the economic cycle’, and other marxist, keynesian horrors. The mess is blamed upon ‘free market economics’ when we haven’t had a proper free market in 200 years. If the market was so free, why does the government fix interest rates at an artifically low level? All current ills can be traced back to artificially high asset prices caused by universal access to cheap credit. That Rudd is hoping some obama-ness is going to rub off by printing up a new communist manifesto is shocking even to cynics like myself. I just hope the media don’t let him get away with inventing words like ‘neo liberalism’ and running back to the playsheet that Whitlam nearly destroyed the country with.

    Malcolm Turnbull and the opposition should be replaying his election promises overlaid with his latest comments and pointing out the depth of his hypocrisy and election lies. However I fear they aren’t bright or brave enough to call him at this dangerous game.

    Economic conservative indeed!

  6. It was NULAB led by Hawke and Keating that pulled economic liberalism off the shelf. Crony capitalism was made for Labor because clipping the ticket served their nanny state as well as their personal wealth better than union bbq money, and later it spread thru the anglo field. This was a different branch over libalism compared to Reagan styled debt based military industrial spending and tax cutting growth. Rubins and Bubba (its the economy stupid!) went more the former (with fake govt surpluses and ticket clipping) than the latter but they also got jealous of the Japanese banking balance sheet trickery and let leash a new and improved version like what came out of a liberty bomber compared to a mitsubishi.

    So Rudderless is really only turning on his own in the grand left tradition. They are now so immersed in the NSW Labor right’s version of Orwellian doublespeak that they cant open their mouths without spewing forth a lie. Their fabian propagandist team have been backgrounding with Stiglitz rubbish for a year preparing the ground.

    It won’t be long til Kevin 07 gets signed off because both Howard and the NSW right’s media management trickery and broadcast spending bribery by govt nanny state agencies have tripped the public b/s meter. But there is no better sign of atonement coming from the liberals who lived fat on the hog carrying on the Keating tradition in almost every respect. Opportunists are at every blue blood Liberal party door without a genuine conservative in sight.

  7. Quote: ‘Tens of millions have been lifted out of poverty. Hundreds of millions have more economic and political freedom than ever before.’

    How many will be thrown back into poverty by the financial crisis ? How many already have I wonder ….

  8. Gods, I think you just set my confidence level in the daily reckoning back by a few months.

    I can’t believe someone so obviously intelligent can accuse Krudd of an “offensive use of rhetoric to equate two vastly different things” and in the same post paint the Australian Labour party as marxist.

    Idiots? Maybe. Incapable of understanding a capitalist economy? Probably. But Marxist? It’s been a decade or two since I read the communist manifesto, but Rudd’s a wide-eyed seal pup compared to Marx and buddies.

    And to plow on to say that it’s a giant Leftist conspiracy to control our thoughts and actions… well I laughed, I hope you were aiming for comedy?

    No politician on either side has got the balls to stand up and educate the public on the issue of government intervention in the economy, and Joe Public lacks the brains to understand the truth anyway… that’s what got us into this mess. Idiots do silly things with markets and vote idiots into power.

    Let the idiots do what they always do, and please get back to informing those with a brain on how to profit. Or whatever we’re supposed to do during a global moron party.

  9. hey brc i agree with the last part of your sentiments: “If the market was so free, why does the government fix interest rates at an artifically low level? All current ills can be traced back to artificially high asset prices caused by universal access to cheap credit.” interest rates were artificially low and all the current ills can be traced back to the resulting inflated asset prices, but the government doesn’t fix these rates. Don’t we often hear the mantra of an independent reserve bank? why can’t politicians be open and admit that really they are powerless when it comes to shaping the fundamental monetary landscape? i suppose its because liberals won’t be able to then blame labour for any recessions, and liberals won’t be able to take the credit for so-called booms. cRudd, of course, is a spineless sycophant of the neo-marxists who are indeed waiting to implement a one-world currency. you can bet the central banks will be happy to oblige, as they are ultimately agencies working in the interest of the super-rich banking families (the same interest groups that funded the communist revolution). one-world fractional reserve anyone? sounds good to me, may as well do away with politicians while we’re at it, what’s the point anyway? this crisis is as manufactured as the last depression was, and with same objectives.

  10. Love your work, Dan.
    That grubby little bureaucrat Rudd is way out of his depth, but unfortunately the Australian population will be doing the drowning.

  11. Coffee Addict, glad you made some money, at least someone is :) Now we just need to wait for the RBA today to cover their backs because they could not get off their rear ends and meet in January. Then we will see the Rudd and Swan show in action, I wonder what amazing economic wisdom they will have for us today? Let me recall who they have blamed for the current economic mess so far; Howard, the U.S, China, extreme (bungy jumping) capitalists, greedy bankers and the global economy. Rudd has now added Thatcher, Reagan, Howard (again) and all those other neo-liberal types people. Of course there will be no admission by the powers to be that the RBA totally messed up and raised rates for too far for too long, or that the government delivered the wrong budget in 2008 and were fighting inflation when the economy was heading for a cliff. Also let’s not forget the bungled luxury car tax, the alcopops debacle and the national broadband network mess. Oh well, it could be worse…couldn’t it?

  12. Spot on, Dan. I have a sore neck from nodding my head in agreement. Really enjoyed reading this.

  13. I wonder if Australia will go the way of Greece (violent revolution) or Iceland (peaceful revolution). Prospects don’t look good for either the Liberal or Labor parties.

  14. Greg.

    My gold juniors haven’t made anything much yet (although Pete did OK off one tip). For the record, this is how I judge the plusses and minuses of Australian Gold Juniors.

    Why you wouldn’t buy:

    1. There is no absolute guarantee that the gold floor will remain solid in the long term. Volatility and short term price peaks (of say $2000+) are great for speculators only.

    2. Some key shareholders are in distress – as evidenced by the difficulty in getting rights issues well subscribed. (Luckily there are underwriters willing to extend their exposures to some juniors.)

    3. Some have exposures to countries that fail the Transparency International test. I can cope with a PNG exposure but the costs of working in such environments is high. A 50% cost contingency (above an already very high cost budget) is required for any form of business operation in these countries.

    4. Very long lead times and high cost associated with defining and indicated resource estimate. Bankable studies are looking more and more prohibitive and the time necessary to complete them may, in some cases cause an otherwise good company to miss the bull market completely.

    5. Operational risks for underground operations.

    6. Some governance structures which look OK on the surface just don’t feal right. I avoid companies where the managers don’t sound like they are living, breathing and feeling every aspect of the operation and the market in which their company operates. If they are a tad crazy all the better!

    7. High cost of processing plant. Some juniors believe that the banks will cough up to $50m if a good “bankable” resource estimate but will they?

    Why I do buy:

    1. The price in AUD is in the vicinity of $1400/oz. If the market perceives a long term floor in this vicinity or better, money WILL trickle into the Juniors. A $2000+ AUD price floor would be an upside jackpot and would ( I believe) result in 10 to 50 times price increase for juniors with good reportable resource estimates.

    2. Growing interest by fund managers in the sector is an enormous plus.

    3. Production costs are falling significantly AND there is no longer a shortage of skilled labour. Full steam ahead!

    4. You can select prospects with leases in those areas that don’t have environmental or traditional ownership problems and which are close to all of the necessary infrastructure.

    5. Many juniors have multiple resource prospects to choose from. At worst they can sell some out to the majors & earn a cash flow that WILL fund the remaining prospects.

    6. Share prices are still about 75% below peak for some good prospects. The market fails to appreciate that some of these investments are now a LOW to MEDIUM risk given current economic circumstances.

    7. This form of investment hedges my superannuation “cash” exposure.

    8. Fun.


    Coffee Addict
    February 3, 2009
  15. Coffee Addict, your list of gold juniors pros and cons looks right on the money to me. I have been trying to get my head around gold for some time after having some bad experiences in the past. For me the biggest risk is that the gold price comes down hard once the speculative element is taken out and that might hit some small operators with higher costs hard. From what I can guess the production costs for gold miners varies over quite a large range from the barely profitable even at current prices to making a small fortune. I also wrote a few things about gold prices on the shareswatch.com.au/blog..if you get a chance please have a look and let me know what you think.

  16. Dan,
    Re: Big Bang Article
    I agree with what you say however in this age of globalisation would not a world currency be beneficial?
    Would it not stop the flow of capital from speculative to productive pursuits?
    China would mot be investing its surpluses in American treasuries but rather in real and productive assets.
    The USA on the other hand would not allow the Chinese to build up huge surpluses in the first place. A world currency would highlight ineffeciencies and prompt trading partners to respond accordingly; by increasing competitiveness or by adjusting expectations.
    And this would happen sooner rather than later.
    Is this too simplistic and or am I missing something?
    Regards, Nick

    nick conidi
    February 3, 2009
  17. World currency…look at the Euro!

    A world currency is doomed to failure due to the very nature that governments cannot manipulate it, only a Central bank can (if you have one).

    Can you imagine the US and China living under the same rules?

  18. For the record (and I should have put this my first post). I say the interest rates are fixed by the government. Others say, no, it’s fixed by the reserve bank, who are independent. Independent from the party in power, perhaps, but still part of the government. Government is government : just because an appointed beaurocrat sets interest rates instead of a politician, that doesn’t make it any less government.

  19. Eeeeee, by gum. It’s pot callin’ kettle black.

    Paul Tredgett
    February 3, 2009
  20. Wonderful piece Dan. You might like this Facebook group I’ve set up, Neo-Liberals and Free Marketeers against Kevin Rudd: http://www.facebook.com/group.php?gid=52479051783

    Con Frantzeskos
    February 5, 2009
  21. Well, the greatest achievements by humanity were all underpinned by the Christian Monarchies.

    So get yourself a gold crown, and a purple robe, and proclaim yourself the King of Oz, Dan.


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