Australian baby boomers have never experienced a "rainy day" - so they've never planned for one.

But then why would you?

Over the last 20 years, virtually everything has gone up... and up...

A generational bull market has lifted the stock market, property values and commodity prices to dizzying heights. Most of us have felt the benefit of this in some way or other.

It's certainly made us feel a lot wealthier than we are. And when you feel wealthy, you tend to act wealthy.

And that's just what we've been doing - in some style... We've bought bigger houses, newer cars, nicer TV sets - and in the process, we've racked up more personal debt than the Americans were in just before the U.S. sub-prime crisis hit.

How deep in debt are we?

According to the Bank of International Settlements (BIS), during the 1980s, the ratio of household debt to disposable income for Australian households was around 45%. For every dollar an Aussie earned he owed 45 cents. Not ideal - but manageable.

Since 1990, the BIS reports that this ratio has risen rapidly, reaching an incredible 157% in December 2007. That means for every dollar the average Aussie earns, he owes $1.57.

In an October 2008 article, The Australian reported:

"By 2008, Australian households carried 35 per cent more debt relative to their income than Americans. The great Australian middle class has become more addicted to credit and more spendthrift than the US, the home of consumer capitalism."

We all know what happened in America after their debt bubble exploded...

But despite that warning, and despite debt far in excess of their incomes, Aussies are STILL spending money like it's going out of fashion.

In June 2009 the government handed out $900-a-piece to low and middle-income earners as part of a $23 billion stimulus package. By August, Australian National University economist Professor Andrew Leigh found that 40 per cent of those who'd received that cash had spent the lot. That's some stimulus for the economy!

"This is approximately twice as high as the share of United States residents who reported that they spent the tax rebates handed out in 2001 and 2008," noted Professor Leigh.

We all love spending free cash - who doesn't? - But every dollar you fritter away now is a dollar your future self will have to find when there's no regular money coming in.

The fact is, despite the overwhelming warnings, many of us spend more than we earn without any thought to the consequences... we believe that house prices will always rise... that high asset values equate to "true" wealth... and that we don't have to save any of our income because our super will provide us with a comfortable retirement.

But hang on a second - How often do you audit your super?

How regularly do you check to see whether your nest egg is still growing... or, at the very least, well protected against the economic downturn? Every month? Once a year? Never?

Have you checked it recently? Maybe you should...

Many Aussies opt for their company approved super fund and then forget about it, expecting to be handed a huge cheque at the end of their working life.

Granted, it's convenient: no research, no hassle, no worries. There's usually a big name behind the fund, and the glossy brochure your HR Manager hands you makes you feel cosseted and reassured.

It's the easy choice so you take it. And you stick with it - because you never physically see the money... it's just another deduction on your pay slip. It's not as if you're actually handing over piles of notes to someone to safeguard and nurture for you.

According to a recent report by superannuation research firm Chant West, the majority of retail super funds (i.e. yours) are classed as "growth" funds; defined as containing between 61 and 80 per cent of their allocation in assets such as shares. Even if you're invested primarily in a "balanced" fund, 40-61 per cent of your retirement cash will still be held in "growth" assets, says Chant West.

Growth assets are great when the market is going UP... but you want to limit your exposure to these assets when the market goes DOWN. And that's the problem: in the same report Chant West states that the average 'growth' super fund fell by 13% in 2008/09.

This is the worst return since the introduction of compulsory superannuation in 1992.

The worst return in the history of super.

That's a real kick in the teeth.

And the thing is, unless you've been paying attention, you may not have even noticed it. Rest assured, it'll smart pretty badly when you're still doing that early morning commute five... or even ten years after you'd planned to retire.

Please understand: sticking with the 'default option' of your company super allows someone you don't know to make all the crucial decisions that affect your financial future.

In terms of committing crimes against your future self, this is just about the worst thing you can do. Believe me - you may as well jump forward in time to the day you retire and punch yourself square in the face.

Kris Sayce
for The Daily Reckoning Australia

• Your Average Australian Super Fund
• World of Super Collides With World of Credit Crunch
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
• European Governments of the Eurozone are Separately Responsible for Their Euro-debt
• Your Actively Managed Superannuation Fund Cannot Beat the Market

Maybe we'd interpreted her submission incorrectly. Comments left on the Money Morning and Daily Reckoning website suggested we had.

That's the thing with publishing a daily newsletter. We've got a quick turnaround time on researching, writing and then sending it out.

We arrive at our building on Fitzroy Street by around 8am each morning.

We then quickly head for the Editorial Office - avoiding the 'roundhouse' and 'spinning crescent' kicks from our black belt Taekwondo kicking assistant publisher Joanne Ha.

Once planted at our desk looking out onto the neighbours' balcony we settle in to two full hours of reading, typing and editing. Needless to say, we're not immune from making the odd mistake.

Of course I use my best efforts to make sure we publish error-free.

But, if an error does slip through, that's the beauty of the comments section on the Money Morning website. If you think I've got it wrong, the best way to highlight it is to post a comment. As you'll notice, there's no censorship.

Providing you keep the wordage clean I won't edit your comments. The only other thing we ask is to try and keep your comments relevant to the subject, but that's all.

Anyway, back to Michelle But's submission to Lord Emperor Henry of Canberra. If you click here you can read it for yourself.

We read it countless times yesterday evening. Maybe she didn't support an effective 30% compulsory super contribution after all. Time for some humble pie we thought.

And then we 'un-thought' the idea of eating some humble pie.

It seems that rather than coming to the wrong conclusion, instead we made a schoolboy error by quoting the wrong part of the submission.

We should have referred to the summary on page one which makes it clear:

"(5) increasing compulsory employer SG contribution from 9% to 15% by 2012;

(7) establishing gradual and compulsory 15% personal superannuation salary sacrifice contributions (from gross pay taxed at 15%) by 2014."

You can't get much clearer than that. There's no ambiguity there. "Employer" contributions to be increased to 15% by 2012, and "Employee" voluntary contributions to be made "compulsory" and also at 15% by 2014.

That in our books, makes a proposal for 30% of your salary to be expropriated by the government by 2014.

The idea about "voluntary" contributions being made "compulsory" is enough to make any defender of freedom and liberty cry!

Look, we're not really interested in singling out one person here based on their submission to the enquiry. There are plenty of other hare-brained and mad-cap ideas from others too.

But frankly, if someone is lobbying the government to take 30% of your salary by force then you should probably know about it.

So in that respect we make no apology for highlighting this one submission in particular.

The fact is, almost every submission to Emperor Henry is advocating ways to slice, dice and mince your money.

But while we appear to have made a schoolboy error in quoting the wrong paragraph, it seems Ms. But - like many others - has made a schoolgirl error of assuming "employer" and "employee" contributions are unconnected.

We received this email from a Money Morning reader yesterday:

"The wage earner doesn't care how much super goes up because it's the employer who HAS to provide that amount. It could be argued that it comes from their wage... but it doesn't technically. If the super amount was increased to 12%, the boss wouldn't cut their take home pay, he would have to find the difference as it is added on after the wage is paid."

It's a common mistake made by many people. The government propaganda with superannuation has been mind-blowingly effective.

It seems very few employees consider superannuation as a tax on their income. A tax which reduces your take home pay by 9%. A tax which reduces the average worker's pay packet by $465 per month.

If the super guarantee is lifted to 15% then that's $9,300 per year or $775 per month you're missing out on. And if compulsory super is lifted to 30% then the average worker will be out of pocket by $18,600 per year or $1,550 per month.

All because there's a chance you could "squander" some of it.

Superannuation is treated as a mystical and magical entity. "It's the boss that pays for it, not me."

Wrong. Someone does pay for it, but it's generally not the boss.

Where does it come from then?

Well, that's where you have to take one step back and look at what isn't seen. Everyone can "see" the super contribution on their payslip, but few equate it as a tax, or a pay cut.

You see, superannuation is paid for from one of three places:

• A cut in your wages
• An increase in unemployment, or
• Increased prices

There is a fourth option, and that is for the business owner to reduce his/her profit. Although possible, this is less likely. Besides, why should a business owner who has put his/her own capital at risk take a cut in profit just to subsidize the government?

Make no mistake about it, in most cases, an increase in superannuation contributions will result in a decrease in your take home pay over time. When the employer employs you, he/she will naturally try and pay you as low a salary as possible in return for you providing as much productivity as possible.

That's just how it works. And that's how it has to work. If the employer tries to pay too low a salary of course, then he/she will not attract the appropriate staff and will therefore lose out.

If he/she pays too much then they will not get as good a return on the investment, especially if the worker's productivity does not justify the higher salary.

The market therefore, helps to determine the 'price' (salary) at which an employee is to be paid.

But what happens if suddenly the government decides to impose an arbitrary 6% increase in costs per employee? Will the business owner take that from his profit?

Not a chance. And neither should he/she be required to just because a government is implementing an arbitrary redistributive incomes policy.

So, the employer will look to take the money from the employee. Doubtless it would be made illegal for an employer to cut wages to an employee directly, so they would have to find another way of doing it.

Such as a freeze in pay increases. Inflation will have taken care of the 6% impost after just two years anyway. If an employee doesn't like the sound of that they can look for another job, but chances are the pay being offered will be lower to take into account the increased superannuation expense.

And when the employer advertises a replacement he/she can factor in the lower pay.

Another unseen option for the employer is to cut the workforce. If they have 20 staff on similar pay scales doing a similar job then it's fairly easy to get rid of one, or let attrition take its course and then not rehire - one less person on the payroll, but same cost to the employer.

That's a simple example of how government contributes to increased unemployment.

The other option is for the business owner to increase prices. We're not talking rocket science here. Trade unions would have you believe there's no connection between pay (especially when they talk about the minimum wage) and prices to the consumer.

That's twaddle. It does have an impact.

Again, it's the individual that loses out at the expense of incompetent government policy.

As I've quickly shown above, the business owner will want to rightly preserve their profit margins, and therefore will try to achieve this in one of three ways.

So when these submissions are made to Emperor Henry's enquiry using throw away numbers such as 12% or 15% or even 30% for compulsory superannuation contributions, just remember that the money to pay for it has to come from somewhere.

That somewhere my friend is from your pocket.

You shouldn't forget that.

Kris Sayce
for The Daily Reckoning Australia

• Proposals Inviting Government to Take Money from You and Give it to Someone Else
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
• World of Super Collides With World of Credit Crunch
• Actively Managed Superannuation Funds Have Not Had a Stellar Few Years
• Your Average Australian Super Fund

Our property mumblings are a perfect example. We take a massive bite and just can't let go. Eventually one of us gets bored and so we move on to the next thing.

As for property, we'll come back to it at some point. We're just waiting for something big and juicy to turn up before we do.

Yesterday we spent most of the day researching for the next issue of Australian Small Cap Investigator. There are two stocks we've got on the radar, and unless something turns up which we don't like then we plan tipping both of them.

According to our assistant publisher, Joanne Ha, this month's edition should be completed and mailed out to subscribers by tomorrow...

But according to your editor, it will be completed and mailed out next week.

We're not normally game enough to argue with our Taekwondo-kicking assistant publisher, but now that we occupy separate rooms in our office on Fitzroy Street there's less chance of us receiving a kick to the head if we're late! [Closes office door]

So, if you subscribe to Australian Small Cap Investigator, stay tuned, and you should get your September issue by early next week.

Anyway, our point is, yesterday while taking a break from poring over presentations, balance sheets and income statements we couldn't help but pay a visit to the Tax Review website.

I know, I know... we've got a fab office in Fitzroy Street, just a two minute stroll from the beach, and I'm looking at submissions to the tax review.

Well, before we get stuck in to the September issue of Australian Small Cap Investigator again today we decided to have another look at the website. If you haven't looked yet you can do so by clicking here.

As you can imagine, it's not exactly a barrel of laughs, but it does - in our opinion - make for a number of interesting reads...

And a few worrying ones too.

In a moment we'll take a look at one of the submissions. But based on all the ones we've looked at they have a striking similarity.

That is the belief they've discovered the 'magic bullet' for tax and pension reform.

Look, there's nothing wrong with looking for the perfect solution to something, we try to do that all the time. There is one difference though. We favour getting rid of regulations, taxation and compulsion and letting free enterprise and dare we say it, the individual make their own choices.

Who am I to say I know how to do anything better than someone else? I reckon I'm pretty good at picking small cap stocks, but I don't force you take out a subscription to Australian Small Cap Investigator.

If you want to, then great, welcome aboard. If you don't, then no hard feelings.

Yet the coercive sector (government) forces you to pay a subscription to their services through taxation. Even if you don't want to use it, or can get a better service elsewhere.

Take education for example. Whether you like it or not, a portion of your taxes go towards paying for government schools. Even if you don't have kids. But even if you do have kids and you choose to send them to private school, then you're still paying for the government schools.

How does that make sense? Imagine being forced to pay for Australian Small Cap Investigator even though you didn't want it. Would that be fair?

It would be great for us of course, but it wouldn't be good for you.

But, the submissions to Dr. Henry's expert panel all seem to want to make decisions for everyone else.

Several times we've seen promising statements in the submissions which support abolishing a tax rate, only for our hopes to be dashed by the suggestion of an alternative tax rate which is just as bad - or worse.

Above I mentioned this was all very 'worrying,' well, it's sad too. Because the idea that individuals should be controlled and manipulated by government and special interest groups has filtered down to the youngsters as well.

That's right, it's not just the nutters in Canberra that think they know best.

Take these excerpts from a submission by tertiary student Michelle But:

"As a tertiary student and a member of the public, I am honored [sic] to contribute my submission based on the topic of "Retirement Income System" to the Review Panel, which is led by Dr Ken Henry, Secretary to the Treasury. I welcome and look forward to future improvements on the Retirement Income System made by the Australian Government."

"Honored" - your editor is speechless. Perhaps we should now all bow when Emperor Henry enters a room!

Michelle's submission continues:

"Australia's retirement income system plays a pivotal role on financial security and retirement welfare. Currently, not every retired Australian in receipt of Centrelink Age Pension can afford to have the lifestyle they want, not every working Australian qualifies for the 9% compulsory employer superannuation and not every Australian has sufficient voluntary savings at retirement. If, however, the Government acts NOW through the implementation of specific changes to the superannuation rules, then 'YES, WE CAN' alleviate these issues in the future."

Those are Michelle's bolds and caps, not ours.

Of course, Michelle has a solution, which is, "increasing compulsory employer SG contribution from 9% to 15% by 2012."

The funds management industry couldn't have put it better themselves.

But young Michelle goes one step further. She has an idea that not even the fund managers or the unions have dare come up with. But we're sure they'll jump all over it when they see it:

"Australians can voluntarily contribute their before-tax income into superannuation through the super salary sacrifice scheme (taxed at 15%). However, the Government needs to enforce gradual compulsory superannuation savings at 15%."

Got that?! Based on this proposal - if we've got it right - 30% of your salary would go towards superannuation. Take off tax, levies, surcharges, etc... and you'll be left with about $5 in your pay packet by the end of each week.

Look, we had to read that part of the submission again to make sure we read it correctly. We're almost tempted to give her the benefit of the doubt. Can she really be arguing for a 30% superannuation contribution?

Look, this is an extreme proposal that Lenin would be proud of. We're not sure that even Comrade Rudd would go that far. But maybe he would.

In fact, long term we'll probably find Michelle's proposal to be not far from the mark.

But it's not just Michelle, look at any one of the submissions on Dr. Henry's website. They all have similar proposals. And that is pleading with the government to rob you blind.

Every single submission we've read advocates taking money from your pocket and giving it to someone else.

Somewhere in the mind of these people they believe that you're incapable of looking after yourself and your own money. As Michelle puts it, "to avoid squandering."

What a cheek. Here's some breaking news. If someone wants to squander their money let them do it. If they know there is no government bail out them odds are they won't squander the money to begin with.

If they still go ahead and blow it all, well, tough luck. Arguing that your earnings should be taken by force just on the off chance you may make some bad decisions is ludicrous.

Besides, there's no guarantee you'll ever see that money again anyway. By the time the government has frittered it away, and fund managers have taken their slice, and inflation has munched at another portion, the New Age Pension won't be worth waiting for.

In fact, the more government gets involved and the less control you have over your money, the greater the chance is that you never will get your hands on it.

The problem as we see it, is the entirely false belief that people's behaviour can be controlled. It can't. Many people can't control themselves from doing irrational or compulsive things, let alone other people.

But that's not a bad thing. It's good, and it should be encouraged.

The problem is, centralists and government-lovers believe they can control every aspect of people's lives and the economy as a whole. They can't, it's impossible.

People make all sorts of decisions on a daily basis. Some of them aren't rational, and some of them aren't logical. But that's just the way it is.

The sad thing is when you have some individuals pleading with control freaks in government to steal more money away from other individuals. And it's always done in the belief that a centralised government bureaucracy knows how to do things better than an individual.

But the evidence is firmly against this. Everywhere, without exception, where government is involved, things are a mess and the individual is disadvantaged:

Health care, education, roads, public transport, telecommunications, legal system, etc...

There's not one thing the government does better than could be done by the private sector. Not one single thing.

The fact is - yes, fact - that no-one can manipulate anything without it having unforeseen consequences elsewhere. More money being stolen from individuals to go into superannuation and government coffers means less money remaining with the individual.

What's the consequence of that?

You guessed it, a greater reliance by the individual on the government. Which means?

You guessed it, an increase in services to be provided by the government, which means higher taxes, and even less money remaining with the individual.

And most important of all. If the government controls the supply of money to the public then they have almost unlimited power over them.

As I mentioned above, I encourage you to take a look at the submissions to the Tax Review website. You may not like what you read but you should know what other people are planning to do with your money.

Kris Sayce
for The Daily Reckoning Australia

• Attention Dr. Ken Henry: Government Could Make Employee Voluntary Contributions Compulsory
• Is Kevin Rudd Planning to Steal Your Superannuation and Bankrupt Your Retirement?
• NAB Says Big Four Can’t Refinance Property Debt Without Government Help
• The Best Time to Invest in the Market in 5 Years
• A Look at Debt and Super

Apparently the current set-up of having the US dollar as a reserve currency isn't working very well.

They're quick learners at the UN obviously!

Their report makes some of the right noises, "The dollar-based reserve system is increasingly challenged." Hmm, a slight understatement there. If "increasingly challenged" is a euphemism for "dead" then we'd agree.

But we don't think that's what they mean.

So, what do they plan replacing it with?

Special Drawing Rights, or SDRs. If you've got no idea what that means, it's simple.

An SDR is something made up by the boffins at the International Monetary Fund (IMF) to act as an "international reserve asset."

The rationale for the creation of the SDR was that "the international supply of two key reserve assets - gold and the US dollar - proved inadequate for supporting the expansion of world trade and financial development that was taking place."

Look, your editor won't pretend to be a grade 'A' student of monetary theory, but to us the creation of the SDR is part of the reason the global economy is in the current mess.

That gold was deemed to be inadequate for "supporting the expansion of world trade and financial development" tells you that's when the Western world begun its massive spending spree.

Back in 1969 with the creation of the SDR.

A spending spree that couldn't be achieved just through stealing money from citizens through the tax system, but one which could only be kept going by the creation of more money.

It was, you could argue, the beginning of the 'consume, don't produce' Western economies.

The problem that SDRs 'solved' was the ability to crank up the printing press. Of course that didn't happen straight away. There's always a transition with these things.

First, as it happens, like the US dollar, the SDR was backed by gold. But if you're creating a new reserve that you want to be more flexible than gold (ie. You want to print more money and spend it), then backing it with gold isn't going to work.

Because backing a currency with gold helps to maintain the value of the paper currency. If you know that your $1 note is redeemable for a set quantity of gold then it will maintain value.

It means the banks can't - or shouldn't - create more paper money than the reserves they have in gold to back it up.

Simply put, it creates and requires discipline. Something that bankers and governments in the 1960s weren't happy with. The 'inflexibility' of gold makes it harder to for governments to spend and makes it harder for banks to lend.

Therefore the creation of the SDR was a stepping stone to abandoning the reserve status of gold. And sure enough, four years after the SDR was invented, US President Richard Nixon closed the gold window at the Federal Reserve and there was no longer any obligation for US dollars to be exchanged for a fixed weight of gold.

Instead the US dollar was backed by nothing, and so the SDR was backed by the US dollar and other currencies which were also backed by nothing.

Yet it is this 'worthless' SDR which is being touted as the new reserve currency.

But why should the SDR make any difference? It won't. An SDR is just a weighted basket of other currencies. Unless it is backed by something tangible, such as gold, then it will prove to be equally as worthless as the US dollar it is replacing.

Perhaps, bankers and governments will see the error of their ways and make a call for these new SDRs to be back by gold...

Not a chance.

There are several reasons for that. One, as I mentioned above, is that gold forces a government and its central bank to be disciplined. It cannot circulate more money without having a corresponding increase in its gold reserves.

If it were to do so then the paper money - or certificates - would not be fully backed by gold. This would cause the value of the paper to decrease - the greater supply of one thing relative to another devalues it.

If people got wind that the central bank was printing more money without increasing its reserve of gold, there would be an increased demand for physical gold. There would be a run on the banks.

The other problem gold has is an image problem. Take this comment from a recent article by Alan Kohler over at Business Spectator:

"But while there's no doubt the gold will continue to be underpinned by the demise of the dollar, it is not a currency. I can't go into JB Hi-Fi with a lump of it and buy a TV."

"Central banks around the world own about 26,000 tonnes of it, which represents 8.5 per cent of total reserves, but it's not legal tender. It's just a commodity they got stuck with because it used to be a currency a long time ago and will never be again."

It's fairly common of the attitude the mainstream press has to gold. They don't understand that it is a store of value.

Kohler claims you can't go into JB Hi-Fi and buy a TV with a lump of gold. He's quite correct on that score. But it wasn't so long ago that is effectively what consumers did. Maybe not for TVs but for other items.

Under a gold standard where your dollar was backed by gold, consumers were exchanging a gold backed dollar for goods. It was an exchange of gold for goods, only that a paper note was used as a proxy.

What's so crazy about that? Nothing.

But if you look at Kohler's other comment about 26,000 tonnes of gold being only 8.5% of total reserves it gives the game away for the real reason bankers and governments don't want a gold backed currency.

Inflation.

It's no coincidence that since the early 1970s global paper currencies have lost about 90% of their value. Virtually every currency you name is worth significantly less today than it was thirty-odd years ago.

That's not because prices have risen, it's because currencies have become devalued.

As Kohler, perhaps unwittingly admits, central banks and governments have embarked on a massive money printing exercise.

If paper money still had the backing of gold then global economies would not have one-tenth of the current problems we are currently facing.

The fact that the UN and other government organizations are proposing to replace one currency backed by nothing with another currency backed by nothing signals they are either ignorant or are intentionally pursuing policies guaranteed to deliver economic destruction.

And more importantly to you, to guarantee the continued devaluation of your money and wealth.

Kris Sayce
for The Daily Reckoning Australia

• US Dollar Declining as China’s Currency Rises
• Special Drawing Rights Used as the World’s Reserve Currency?
• An International Currency Not Just on Paper
• A Gold Standard, Without Gold
• The U.S. Dollar vs Inflation, Americans Vote for the Dollar

We weren't surprised to see the Money Morning mailbag bursting at the seams here at the Old Hat Factory yesterday.

Within minutes of yesterday's email going out the replies started flooding in.

Perhaps the most remarkable response was from the property bulls.

Look, let's be fair about it. When we asked on Friday if readers had authentic research to back up the 'housing shortage' claim, it was probably the busiest day of the week for property bulls.

After all, there's all those 'open for inspections' to prepare for over the weekend.

So it's not surprising that we received less than a handful of emails from property bulls, offering opinion - which is fine - rather than the real evidence for a housing shortage.

We've no problem with people expressing opinions - we've done that once or twice ourselves.

But roll forward to yesterday and 'BANG!' The property bulls have woken from slumber. The responses were enough to split the Money Morning mailbag.

Unfortunately, there was a distinct lack of hard evidence in the responses. In fact it was the usual stuff - not enough houses being built, too many immigrants, not enough 'quality' housing.

So, rather than getting into a "yes there is, no there isn't" argument, we should probably follow the lead of Money Morning reader Jason:

"The resilience, stupidity and arrogance of the 'property' crowd is incredible. I no longer even entertain them with a discussion any more. When I hear them say 'Property prices always double every 7 yrs' or 'Housing shortage', I reply with. ' I completely agree now is the perfect time to buy a house, I'd get in while it's still cheap'."

We couldn't have put it better ourselves. Hats off to Jason.

But despite Jason's example, we will stick with property for today. But we'll take a slightly different tack.

Regularly we receive emails into the Money Morning mailbag asking us for advice on whether the reader should buy a home now, or sell their home now.

Our response is always the same - no response. That's because unfortunately our licence prohibits us from offering personal financial advice. All we can do is keep things nice and general in these emails.

But the reader emails do have a striking similarity. Almost always - when asking if they should buy - the phrasing is the same: "I can borrow $500,000" or "I can borrow $700,000."

We don't recall ever seeing an email that states, "We've seen a nice house in X suburb, with three bedrooms. It's a nice area and the price is $450,000. Do you think we should buy it?"

Obviously, our non-answer would still be the same.

For all the talk about property being excellent value and a great long term investment, we'll make a bold claim - that property buyers actually don't have any interest in the property they're buying.

In fact, I'd go so far as to say that property buyers are not buying property at all.

Rather, they are 'buying' a loan and using the house as security.

Why would we make such a claim? And what point are we trying to make?

Well, it just seems that the actual house is a secondary consideration. Sure, we see plenty of comments about a lack of 'quality' properties, but as soon as the property loses its 'quality' it seems to become a 'renovator's delight' or a 'demolition job.'

Then even though it's only land value, the price of the land suddenly becomes the value of adjacent properties less the cost of building a new house. That may be obvious, but is it logical?

But back to the buying 'psyche' for a moment. The fact that property buyers see property as an investment rather than a dwelling is precisely the reason why there will be a property price crash.

It's no different to the stock market. If investors were always rational and approached the buying of shares as though they were buying the whole company, then share prices would be unlikely to rise to such extreme levels.

But that's just how a market works. Speculators add liquidity to the stockmarket through buying and selling. They don't buy because they believe the company has strong cash flows or because they like the net profit after tax forecasts. They buy because they believe the price will rise - nothing more, nothing less.

Property investing is the same. Many people buy a house because they want to live in it, and because they prefer ownership to renting.

However, more and more, property buyers and home owners have been brainwashed by the 'location, location, location' mantra. They are buying not because they want a place to live, but because they believe the price/value will rise. They buy not because it is close to the train station for their own benefit but because they are told it will 'add value' when they sell.

They don't buy because it is close to the shops, but because it will 'add value' when they sell. Even though the buyers are just as likely to drive a car to the station or the shops. But that doesn't matter, it's all part of the 'location.'

Take a look at this brief news story from News Ltd: "The average price of a Sydney home could rise by $100,000 in the next two years, according to an [property] investment group."

The article states, you guessed it, "A shortage of homes and a growth in population will cause the property boom."

See what we mean? Not a single mention of an actual property or a type of property, or the benefits of owning rather than renting, purely that the price will go up because there isn't enough supply and too many immigrants.

As I mentioned above, property buyers are not buying homes or houses any more. They are taking out the biggest possible loan to buy the most expensive property they can, because, well, the more you leverage the bigger your returns.

Why buy a $200,000 loan against a house that will only be worth $400,000 in ten years after it doubles, when you can buy a $400,000 loan against a house that will be worth $800,000 when it doubles in ten years?

As for the other issue I mentioned above about land value, look, your editor is aware there are economic studies and theories that could fill entire libraries on the subject of land and rent. So we'll state here up front that we have no intention of competing against such learned thought.

We'll just write what's on our mind, whether it's right or wrong.

So what we say is this. Why, for example, should the land value in Richmond be X times greater than the land value in Dandenong?

What extra value does the land in Richmond have that the land in Dandenong does not?

The cost of building a home on the land should be the same.

Of course, the simple answers could be that land in Richmond is more desirable than land in Dandenong. That inner city types typically have more disposable income than outer suburban types and therefore they can bid the price up higher.

But is the land any more useful or productive in Richmond than the land in Dandenong?

Here's our point. A house in Richmond is no more productive to the economy than a house in Dandenong. Yet it is X times more expensive, and most probably requires a debt that much larger.

So, the only things that can have driven the price is supply, demand and price. Which brings us to the final point. How reliable is price as an indicator of supply and demand?

This is perhaps the real reason the property market and property prices have taken off.

One of the comments we regularly receive is that: "There must be a shortage of houses because house prices have gone up. If there was a surplus of housing then prices would fall. Simple as that."

Well, it's not quite that simple. Let's use an analogy to make our point and round things off for today...

Imagine that someone announced, "There is a shortage of apples, buy apples now."

And then assume many people started saying it, almost every day. It would most likely have an impact on the price of apples.

You could quickly go to the local orchard and buy apples from the apple grower and he may charge you 50 cents, because that's the current market price.

The apple grower is happy because business has been slow so he'll sell them for 50 cents each. But then he notices an increase in business. More people are going to buy apples from him.

Within days queues are forming at the orchard door. The apple grower realizes he can charge extra because of the demand. So he raises the price to $1. But there is still demand because people believe there is an apple shortage.

So the apple grower raises the price further to $2. There is still demand... but not quite as much. But the apple grower doesn't notice the queues are getting shorter, or if he does he doesn't care because he's making four-times as much money as he used to for the same apples.

So he cranks up apple growing production.

Eventually, the apple grower takes a look at the millions of apples that he has in the barn and works out if he can charge just an extra 20 cents he will be a multi-millionaire, so he raises the price to $2.20.

Unfortunately for him, when he opens the barn door, all the buyers are able to look inside and see there is not an apple shortage at all. There is an apple surplus. Buyers no longer feel have the same urgency to pay $2 per apple.

They figure the apple grower will need to lower his price to get rid of all the stock. The buyers are happy to come back tomorrow to see if they're cheaper.

The price of apples plummets.

You see, supply, demand and price do not necessarily mean that all three are at the correct level. Levels or supply, demand and price change all the time. Therefore, just because prices are high it does not necessarily mean there is a shortage of supply.

Sometimes it is just the belief that there is a shortage which creates the high prices. And can you blame the majority of people for thinking there is a housing shortage?

Of course you can't. Not when you read day after day in the mainstream press news items telling you there is a housing shortage, and telling you there are too many immigrants who are buying up all the property they can eat.

In summary, there is no difference between the application of supply, demand and price in the housing market to its application in any other market.

Strip away the distortions and the untruths about a shortage of property and the whole thing crashes around your ankles...

Of course, we could be wrong, and house prices could continue rising forever!

Kris Sayce
for The Daily Reckoning Australia

• Property Spruikers Claim Australia Suffers from a ‘Chronic Housing Shortage’
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We assumed there must be such research in existence. After all, it is the main basis the property bulls make to support the idea of continually rising property prices.

They further argue the shortage is magnified due to immigration and natural population growth, so that there are not enough houses being built to accommodate everyone.

That should make you think that data supporting the argument is easily available.

Well, you're right. It is easily available.

However, we can only think that no-one has ever read it.

Because if they have, they could not possibly conclude that there is a 'chronic' housing shortage.

The numbers which represent the entire basis for the 'chronic' housing shortage just don't add up.

Shortly, I'll show you once and for all that Australia does not have a 'chronic' housing shortage. Further, I'll show you that as soon as government runs out of ways to manipulate the housing market, prices will collapse.

To be honest reader, your editor is almost speechless. For years we've heard the argument about demand being far in excess of supply.

We've lost count the number of times the likes of Christopher Joye, Rory Robertson and the Housing Industry Association (HIA) have told us about the shortage and how this is the reason why property prices cannot fall.

But the one thing that always struck us was the lack of referenced evidence. We've hardly ever read one of these 'experts' point towards ironclad proof.

Sure, plenty of times we've read vague numbers being thrown around. As if merely saying there's a shortage and then applying a number to it is somehow proof enough.

Well, last Friday we decided enough was enough.

On a whim I wrote to Money Morning readers to ask for help:

"Aside from yourself, there are now about another 40,000 people who receive Money Morning every day. I know for a fact there are property bulls and bears among the audience.

Therefore if you have access to authentic research which identifies the 'chronic' housing shortage in Australia, please email to the Money Morning mailbag at: moneymorning@moneymorning.com.au

I would be glad to read it and I'm happy to publish the highlights."

I soon wondered what kind of response I would get. I also wondered why I hadn't simply 'Googled' for it. Was your editor being lazy? Or could we just blame it on being a Friday?

Well, the responses we received made us realize the following...

First, it was laziness. A simple search on Google would have given us the information we needed in a flash.

Second, we thank Money Morning readers Laurie and Rob. Both of them provided the link to the research that is the basis for the 'chronic' housing shortage argument.

Here's the link to the report.

It's 193 pages long, so you may want to brew a cup of tea and tell your receptionist to hold all calls for a few hours.

But even before you get out of the Executive Summary on page xiv you're hit with a giveaway to how unreliable the data in the report is:

"The Council stresses that projections beyond two years are speculative..."

Two pages later:

"The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008... The Council acknowledges the crudeness of this estimate and also points out that there were some 830,000 vacant dwellings in Australia at the time of the 2006 Census."

There's the source of the 85,000 shortage. I've actually removed a sentence that followed because I want to highlight it separately.

But before I do, remember, this report is the basis for every single argument made by property spruikers.

So, how have they come to the conclusion that there was a shortage of 85,000 dwellings in Australia in 2008?

This is the part that left me speechless...

"The Council estimates that a minimum of around 85,000 dwellings is the gap (unmet need) in the supply of housing in 2008. This is based on the incidence of homelessness and the low level of vacancy rates in the private rental market."

The underlining is my emphasis.

There you have it. The housing market will always rise because of the 'chronic' housing shortage, a 'chronic' housing shortage being measured by the number of homeless people.

According to the report, the dwelling gap, which is the difference between the demand for housing and the supply is made up of:

Dwellings required to address homelessness - sleeping rough = 9,000

Dwellings required to address homelessness - staying with friends and relatives = 35,000

Dwellings required to house marginal residents of caravan parks = 13,000

Dwellings required to increase rental vacancy rate to 3% = 26,000

Now, the human calculators out there may think, "Hang on, that's only 83,000."

You'd be right. But in true statistician fashion, they are only capable of dealing in numbers rounded to the nearest 5,000...

Hence, there was a housing shortage of 85,000 homes in Australia in 2008.

But the report doesn't stop there. Not content with providing a suspect set of numbers for 2008, the report goes on to outline the shortage for future years.

So, based on the 85,000 starting number for 2008, this has been extrapolated to 108,000 for 2009, all the way up to 431,000 for 2028.

We're not surprised the property spruikers have never mentioned the numbers behind the gap. If they did they'd be laughed out of town.

To argue that a housing gap and therefore ever-rising property prices can be based on the number of homeless people is utter nonsense. We don't think we've ever come across such statistical foolishness.

For a start, there is a big difference between the desire for a dwelling and the demand for a four-bedroom home in the suburbs, or a two-bedroom townhouse in the inner city.

Put it this way, we haven't seen too many house auctions, but odds are first home buyers aren't facing stiff bidding competition from the local hobo.

And furthermore for the researchers to claim that the lower rental vacancy rate implies a shortage of housing is also statistical smoke and mirrors. Perhaps we could make the target vacancy rate 4% and argue there is an even bigger 'chronic' shortage in housing.

The facts are, as we suspected all along, the case for a housing shortage in non-existent. It does not exist. There is no housing shortage.

That's because it is price that is the major problem in the housing market. Prices are at unsustainable levels brought about by the manipulation of demand and supply by the various levels of government.

As soon as the manipulation ends, price discovery will lead to a collapse in the housing market.

Only then will the property spruikers realize there is not, and never has been a 'chronic' housing shortage.

Kris Sayce
for The Daily Reckoning Australia

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In fact, it's pretty good timing. In yesterday's Money Morning we opened a proverbial Pandora's box of vipers on our readers by bringing up the subject of 'climate change.' You can read it online now if you so wish by clicking here.

But for today's reckoning there's another subject that we've been pumping away at for some time, and which Dan has also challenged head on here.

Of course, I mean housing.

You'd think after nearly two years of credit crunching the bureaucratic boffins would have surprised us all and developed some common sense.

That was probably a little too much to ask for.

So perhaps it isn't any surprise that according to yesterday's Washington Post, "US Considers Remaking Mortgage Giants."

The story states:

"The Obama administration is considering an overhaul of Fannie Mae and Freddie Mac that would strip the mortgage finance giants of hundreds of billions of dollars in trouble loans and create a new structure to support the home-loan market."

To be honest, it's almost not worth commenting on. Is it really possible that these supposedly educated public servants and politicians are acting naively? Is it really possible that they haven't considered the consequences of their actions?

Of course not.

They know exactly what they're doing. It's why the term 'unintended consequences' has become a misnomer.

It is the consequences that are unintended - they are fully known in advance - it is the timing of the consequences that the pollies are getting wrong.

Their goal isn't to stop a housing boom followed by a housing bust. Their goal is to try and make sure it doesn't happen on their watch. The vagaries of the election cycle has given Obama a free kick.

Still only seven months into the job he can easily blame everyone else - Bush, free markets (laugh!) - and claim that everyone else has handled things wrong and that his solution is the only one to 'cure' the supposedly broken free-market.

Of course, Obama's policies are no different to any other meddling politician. There's no point in just singling out presidents Hoover, FDR, Nixon and Bush Minor, they've all had their fingers in the till.

Every president at least since Hoover (and maybe before) has either meddled to help a boom, or meddled to help a bust. Sometimes they've done both... simultaneously - ie. Obama.

But if you think you've seen the worst of the housing slump. Think again.

According to a report from Reuters, "The percentage of US homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March."

The statement was based on a report from Deutsche Bank. But get this, "We project the next phase of the housing decline will have a far greater impact on prime borrowers."

You've seen the charts already that show the next wave of adjustable-rate mortgages resetting over the next two years. When that happens in the prime as well as sub prime market, the last twelve months will look like a teddy bears picnic compared to the next slump.

That the Australian housing market is "recovering" is a cause for even more concern.

As we said at the 'Australia in the Red' debt summit, "recovering from what?" For something to recover you generally need to show symptoms of sickness. So far all the Australian property market has shown is a couple of spots.

But these 'spots' are potentially hiding something much, much worse. The fact that we are reading so many news stories and even emails coming into the Money Morning mailbag telling us that property doubles in value every seven years is concerning.

We're also told that the Australian property market is different to the US and the UK, and that Australians have a 'deep desire' to own their own home.

That these subjective arguments are passed off as fact should be seen as the biggest sign yet that property is about to burst.

It reminds us very clearly of the comments from financial planners and fund managers who used to claim that share prices 'always go up.' That argument has looked a little less convincing over the last ten-year bear market.

Just as share prices have stagnated for ten years despite boom and bust periods, why shouldn't property prices do the same? There is absolutely no logical reason to suggest that property prices always go up. It isn't possible.

The only reason property prices have been able to sustain the astronomic rise of the last thirty years is down to one reason, and one reason alone...

Government interference. You can argue that slack lending standards and a rising population are all to blame, but they are only as a consequence of government meddling.

The fact is the Australian property market is the most unfree market in Australia. At every step of the property buying/selling process there is interference from either federal, state or local governments.

Each level of interference has a consequence on either supply, demand or price.

It is this distortion that has caused the property market to reach bubble proportions. And it is the continuance of these distortions that will guarantee property price slump in the near future.

Cheers.

Kris Sayce
for The Daily Reckoning Australia

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"A surprisingly bleak forecast for the world economy pushed stocks to their biggest loss in two months."

That's not something we've said, that's straight from the Associated Press. It's based on research released by the World Bank.

Considering the fairly poor record of any government endorsed institution to predict the current economic downturn, we're almost tempted to think we should view this as a reason to become bullish on the global economy.

But we won't just yet.

If you fancy reading the full report from the World Bank, you can do so by clicking here. It's 167 pages of pure delight.

The World Bank is clearly in a difficult position. It needs to lay on the sauce to highlight how bad things are - so it can get increased funding - yet compliment its paymasters (governments) on the:

"[A]mbitious unilateral and multilateral actions, both conventional and unconventional, governments have drawn on monetary policy, fiscal stimulus, and guarantee programs to shore up the banking industry, which lay at the epicenter of the crisis."

All of which "are beginning to have a positive impact on financial markets."

They are certainly having an impact. Whether it is positive is another matter.

In fact, based on the story on the front page of today's Australian Financial Review (AFR), the seeds for a further slump appear to have not only been sowed, but are being nicely watered in as well.

The AFR tells us:

"Business stocks up on stimulus-package tax breaks."

The story goes on to say, "Businesses are pulling forward capital expenditure to take advantage of the Rudd government's $3.7 billion tax break for investment in new plant, equipment and motor vehicles before the end of the financial year."

Conventional wisdom, ie, the wisdom of the mainstream press, is that this is good. They'll tell us it's a good sign for the economy. They'll tell us that business is seeing the 'green shoots' of recovery. Just like they have done about rising bond yields - more on that below.

They'll also tell us this will be good when the consumer is ready to spend again next year.

We don't have a problem with predictions. We're prone to make the odd one or two as well. But we do have a problem when the entire basis of the prediction stems entirely from arbitrary and non market-driven government aid.

Let's look at the facts. Why are these businesses bringing forward capital expenditure? They are doing so for one reason only - for a tax break. There is little difference between a business and an individual making an investment purely due to a tax break.

They are both destined to end in tears, unless there is a genuine economic or financial reason for the investment. As you know, we're not a fan of taxation. But we also know that governments have no intention of lowering the tax burden. Any tax cut today, is a tax increase tomorrow.

The AFR points out Caltex is bringing forward "$9 million of pump supply and installation at its service stations." For what reason? "before July 1, when the 30 per cent investment allowance for large businesses winds back to 10 per cent."

But as Money Morning reader Andy asked yesterday on the subject of government spending, "isn't this consistent with one of the aims of government - to smooth out the cycles - by creating jobs in a recession, and restricting job growth in a boom?"

The simple answer to that is, that's what governments will tell you they do. Hence the clamour to get all the stimulus packages approved, so that government could "fill the gap" left by the private sector, and to be seen to be doing something.

What they forget to add is that it's the policies of government and central bankers that cause the problems in the first place - I guess you could argue it's only right they try and fix it! Except they just end up making it worse.

As we've stated before, government incentives and tax breaks only succeed in misallocating resources at precisely the wrong time. Currently the economy is trying to shrink. It has experienced a boom and therefore it must shrink.

Any attempts to stand in the way of this merely prolong the effects of the downturn and makes it worse.

If we use the example of Caltex above, we can assume they already had plans to invest in "pump supply and installation" at its service stations. Based on its revenues and profitability and budgeting we'll assume it had previously planned to do this sometime later than July 1st.

Perhaps much later.

However, the incentive of a government subsidy has caused Caltex to bring that expenditure forward. Possibly forward to a time when they hadn't considered it to be economic.

The government incentive changes that. We can assume therefore that Caltex is taking on extra risk by doing so. Instead of basing its decision on profitability, it is basing the decision on getting a tax break.

If we amplify this same example across the entire economy, there will be thousands of businesses contemplating exactly the same thing. They will splurge on capital goods now, just because the market is being distorted with the tax break.

Of course no-one's forcing them to do it. But that's where the fear of losing out comes in. If Business A doesn't invest now, he'll fear that his competitor - Business B - will do so, and potentially gain at Business A's expense if the economy does pick up.

Normally a business would make the judgment to invest based on expected profitability of the investment - sometimes they get it right and sometimes they get it wrong.

The real danger now is that money is being borrowed and profits spent in the hope that the increased capital expenditure will pay off next year as demand rises from business and consumer customers.

The only problem is that if all the spending is taking place now, who will be left to spend next year? Especially as the costs of these expenditures have to be built into the product price.

What happens if spending doesn't pick up? Because businesses have brought forward all their investment to today. Don't forget, there are still forecasts for unemployment in Australia to rise above 7.5% - some have even forecast closer to 10%. Companies are laying off staff, and corporate and government borrowing must still be repaid.

And it doesn't help matters when bond yields continue to rise, as you can see from an update to the Aussie Bond Yield Curve we've been publishing recently...

Interests rates are moving higher and therefore the cost to business and consumers is moving higher. That's when the impact of inflation really starts to bite.

So, far from government stepping in to smooth out the business cycle, it actually steps in to contribute to the booms and busts and damage the economy further.

Based on the reaction of the markets in recent weeks, the rose-tinted glasses worn by those who believed in a strong economy next year are starting to become a little more tarnished.

Kris Sayce
for The Daily Reckoning Australia

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So this morning we have a full plate on offer to us. But we can't cope with them all, so the ANZ Bank's $2.85 billion capital raising, Bendigo Bank's $615 million tree exposure, and Rio Tinto's iron ore negotiations can wait for until tomorrow and Friday.

This morning the subject is tax. We're looking at it for two reasons, one is the "12-page lift-off Smart Tax Guide" from today's Australian Financial Review (AFR), and the second is thanks to an email from Money Morning reader Graeme Beal.

Mr. Beal sent through an email last night to the Money Morning Mailbag [moneymorning@moneymorning.com.au] writing:

"Recently I felt moved to give the Tax Review panel my take on tax policies here and abroad which I contend contributed mightily to the recent shemozzle in financial markets."

Mr. Beal sent a copy of his submission to us. It's 26 pages long. Unfortunately, we haven't had time to read it yet - but we will. Therefore at this stage we've got no idea whether we agree with Mr. Beal's proposals or not.

But that's not the point, we're grateful he's sent it to us as it's highlights an important fact...

Australians pay waaaaaaaaaaaay too much tax. We've highlighted before that the government's total tax intake is around 40% of GDP. We're aware the government enjoys expressing things as a percentage of GDP, although we haven't heard them mention that statistic too often.

So, we thought we would pay a visit to the Australia's Future Tax System website, and in particular drop-in on the terms of reference for the review.

Remember, this is the review that the omnipotent treasury secretary Ken Henry is running.

Take a look for yourself by clicking on the above link, it'll only take you a few minutes to read.

It's a perfect example of how government's in general claim to be helping out, whereas in reality all their proposals (whatever the political party) will only succeed in destroying everything they claim they are building.

We don't have the space to reprint everything here, but even the first paragraph serves up so many untruths it's not funny:

"The tax system serves an important role in funding the quality public services that benefit individual members of the community as well as the economy more broadly. Through its design it can have an important impact on the growth rate and allocation of resources in the economy."

Actually, let's rephrase our comment above. It's not that all their claims are untrue at all. In fact they are right. Only not in the way they believe.

The tax system does have "an important impact on the growth rate and allocation of resources in the economy." It's just that the government has a negative impact on growth, and ends up allocating the resources in all the wrong areas.

Thanks to government interference and meddling, more resources than necessary are diverted into parts of the economy such as construction at the expense of say, manufacturing.

Simply because the government taxes excessively but then provides tax breaks back to property developers and investors, capital is drawn towards funding those ventures.

Yet something of intrinsic value, say manufacturing, is hampered due to restrictive government policies (again, it's all parties) such as the minimum wage. Who would invest in domestic manufacturing without the ability to freely negotiate the cost of labour.

In a free market neither the property sector nor the manufacturing sector would be assisted nor handicapped by the government.

But that aside, there was another paragraph in the tax review's terms of reference that stuck out like a sore thumb. It was this:

"The review's recommendations should not presume a smaller general government sector and should be consistent with the Government's tax to GDP commitments."

In other words, don't even think about suggesting the government spends less. Although in reality the inclusion of such a clause is purely academic. As if a public servant would recommend less government spending.

But how can you have a tax review where one important part of the outcome is already decided. Namely government expenditure.

Therefore the review cannot possibly recommend an cut in taxes if it is to propose a balanced budget. The outcome of the review must and can only conclude that current levels of taxation - at least - are necessary.

The result will be not so much of a tax review, but rather a tax reshuffle.

And that's not all, I mentioned above how government's claim they are helping but only succeed is harming, well, here's how they believe they can help:

"The review should make coherent recommendations to enhance overall economic, social and environmental wellbeing, with a particular focus on ensuring there are appropriate incentives for:

• workforce participation and skill formation;
• individuals to save and provide for their future, including access to affordable housing;
• investment and the promotion of efficient resource allocation to enhance productivity and international competitiveness; and
• reducing tax system complexity and compliance costs."

We can sum this up very quickly. Workforce participation and skill formation become lower the more government is involved. The first home-buyers bribe and high taxes make it hard and for some impossible, to save for housing.

A government cannot by any stretch of the imagination promote "efficient resource allocation." Do we really believe a government bureaucrat can better manage the allocation of resources than a truly free market? We don't think so.

And as for the last point, that's the double whammy. This will be Ken Henry's coup de grace. It will be the recommendation that individuals not be burdened with having to complete tax returns every year...

That it takes up too much time and too much money, and that it is best for the individual to just pay tax and not have to worry about filling in a form.

This will ensure that many taxpayers lose complete control of how much tax they pay. But of course, it won't be marketed that way. It will be marketed as a way to "help you" or in real government-speak "responsibly helping working families around the kitchen table."

And you can bet the tax office will increase the number of audits and prosecutions of tax payers just to drive home the point that filling out a tax return is too hard. "Which would you prefer? A $500 tax refund, or a 6-month jail term? Your choice!"

The final point that drew our attention was this:

"The review should take into account recent international trends to lower headline rates of tax and apply them across a broader base, as well as domestic and global economic and social developments and their impact on the Australian economy."

Well, that's just another way of saying keep the rates as high as they can get away with, but increase the number of things that are taxed...

I mean, they state it clearly what their intentions are, "apply them to a broader base."

The biggest tax grab will come from carbon taxes, or emissions trading, or greenhouse taxes - whatever they want to call it.

But to put it simply, just think of anything that isn't currently being taxed, write it down and then look at your list in a couple of year. Because by then chances are the government will have found a way to tax it.

Kris Sayce
for The Daily Reckoning Australia

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"Budget to grab $800m from super funds... After the initial payment in June, super funds will be required to hand over their obligations from temporary residents twice a year, in April and October."

The super balances in question belong to people that have come to Australia, worked for a period of time, paid taxes, received superannuation contributions from their employer, and then left the country to return home.

But stealing private property doesn't seem to worry the government or Kevin Rudd, at least not yet. Besides, as the AFR reports, if these foreign workers want their property back: "Members will be able to claim their savings from the ATO, but from this month former temporary residents will have to pay withholding tax of up to 45 per cent, up from 40 per cent previously."

You see, the process of expropriating this private property is that it will be treated as tax revenue. The Australian Taxation Office (ATO) will tax these super balances at 100%. The funds will then be added to the government's consolidated revenue - in other words, straight into the government wallet for it to spend.

It all sounds very Venezuelan doesn't it? Kevin Rudd and superannuation. Hugo Chavez and oil.

Needless to say, not only is the Rudd government grabbing $800 million from superannuation, but because it will spend the money to 'save' the economy, it will add another liability to Australia's balance sheet as each year more money is snaffled from savers and spent.

And the scary thing is, I saw this coming. I wrote in Money Morning recently that now would be the perfect time for the government to sink its paws even further into your wallet and your savings. But even this has happened quicker than I thought possible.

Is Kevin Rudd coming for YOUR retirement cash?

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.

Australian taxes are already high. What are the other options? It can increase the GST for starters, but that's only going to drip feed through to government coffers. If it wants a big one-off hit what better way than to get hold of the $1 trillion held in superannuation.

It would wipe out government debt in an instant and still leave it with plenty of your money to spend on wasteful infrastructure projects.

What this means is that yet again savers are being punished. The dream of paying for your retirement with your super could be about to end. To read more about how developments in the market affect your super, make sure to sign up for my free daily e-letter Money Morning. Click here to sign up to Money Morning.

Kris Sayce
Editor, Money Morning

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