Future Fund ‘Borrowing’ Program Amounts to Theft

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All attempts to reflate the system are failing. Leverage is collapsing. Next on the docket is a series of interest rate cuts by Central Banks. They RBA will probably lead off that global parade today at 2:30pm in Sydney.

How big will the cut be? It will be 50 basis points for sure. But if the RBA really wants to make a splash-and give the banks room to pass on the reduction to borrowers-it will be a full percentage point.

By the way, did you see in today’s Australian that Aussie banks have been borrowing from the Future Fund? The paper reports that, “Three of Australia’s largest banks have obtained long-term loans from the Future Fund as cash dried up from other sources.” It happened in late March and early April of this year, just after Bear Stearns went belly up.

“The ANZ, Westpac and National Australia Bank (NAB) tapped funding for up to 10 years.” Leaked documents showed that ANZ borrowed $500 million from the Fund. What NAB and Westpac borrowed were not disclosed.

Now isn’t that interesting? A back-door borrowing program at the Future Fund. Or is investment? You decide!

All borrowing is, one way or another, borrowing from future income. If you can create surplus value with the borrowing, then you are not stealing from future income. But if you’re borrowing from the future to meet today’s liabilities-well that’s a kind of theft.

That is the theft the managers of the global economy are trying to get away with at the moment. They are creating massive new government liabilities via bank rescues and bail out plans. That’s not money the central banks have in a giant lock box. It’s money borrowed from the future that will have to repaid.

Even though gold stocks are still struggling, we expect bullion prices to go much higher. Governments will increase their liabilities massively in the coming months. The supply of money is growing. The supply of gold is not.

Let’s not forget the context of today’s bursting credit bubble. From 2001 to 2006 you had a huge explosion in global real estate financed by massive easy credit courtesy of historically low interest rates. Now, the real assets bought with that borrowed money-houses-are falling all over the globe. This makes households less wealthy-especially households that converted what little equity they had into lines of credit to finance consumption.

At the same time, those houses were securitised, insured, guaranteed as credit-worthy and sold as investments to pension funds, money centre banks, regional banks, life insurance companies, and central banks. They were also used as collateral for further borrowing by those same institutions. A huge edifice of finance was built on a foundation of borrowed money. With the foundation crumbling into rubble, it’s all falling apart. What happens next?

The central bankers are now in the position of deciding which institutions are saved and which fail. There will be some saving in the next few weeks. And then there will be the failing. More money will be created out of thin air. The forces of inflation are going to counter attack, but only after burying their dead.

Depositors in banks should be protected, especially since governments in Europe, the U.S., and Australia have explicitly moved to guarantee banks deposits. But there will be no such insurance for stock prices. The only saving grace for Aussie investors is that the collapse in share prices gives you the best chance since 1987 to pick up real assets selling at or below book value. More on when the share market will turn tomorrow.

Dan Denning
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.
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Comments

  1. Hi Dan,
    Australia is only ‘moving’ towards a guarantee for bank deposits. At present there is no such insurance in Australia. Suffice to say Australians get screwed. Not only were we encouraged to invest in the share market to take advantage of the 12mth capital gains discount (assuming we had gains of course!) rather than be prudent and save deposits, but now what deposits we do have are very much at risk. Thankfully there have been no runs on banks as yet, but before they do, where would you suggest the average joe assess the creditworthiness of our banks?

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  2. I was under the impression that the Commonwealth Bank was directly underwritten by the government still, even though it is not publically owned anymore. Perhaps someone with more idea than me could comment.

    Inflation could still be a huge problem especially with the falling value of the Aussie dollar and the banks stealing from our future fund. What money you have could be worth a lot less, and that is a real concern. In the worst case scenario currency could be worth as little as falling stock.

    But that’s the problem when everyone believes paper is worth something. The current situation is unprecedented and it is possible that the only way to protect yourself could be to invest in tangible objects with real value in a depression economy (like food, fuel and clams). That’s if things continue to get much worse.

    A country like Iceland undergoing an economic collapse is a pretty major indicator that things are pretty scary right now. Hold onto your seats folks you ain’t seen nothing yet.

    beyondtool
    October 7, 2008
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  3. Beyondtool

    CBA has the strongest balance sheet of the Australian banks. It is not underwritten by the Australian Government but there is a market expectation that the Government would not let the CBA to completely fail. Money would be printed, if necessary, to prevent that event. There have I believe been “statements of implied comfort” relating to the other 3 major Australian banks as well. In the event of a major bank collapse the market would expect the Treasury to orchestrate a supported buyout (Bear Sterns style).

    Back to Dan’s article — I never did like the concept of the Future Fund or how it has been operated – with high fees and along the lines of a super fund. Government have a different strategic timeframes, priorities to individuals and the scale of investment is magitudes greater. The whole idea was a crock and of course it is there to be used/pilfered as and when needed.

    Unlike Icelandic paper, the country and its now sound infrastructure will still be in the North Sea after this crisis abates. Taking on what Buffett and Gates are saying, innovation is not dead and people will continue to go to work and produce (even in Iceland). For that to happen the banks do need to stay open (as a public utility) and asset prices need to adjust back down to actual values.

    One thing to remember though is that there is still a lot of cheap credit air in a now one third deflated tyre and the wheel is still turning. For the past 18 months I’ve been posting the view here that inflation will be used as a fiscal tool to keep the tyre (at least partially) pumped during an adjustment period for however long it takes. Excessive central bank interventions will of course extend the adjustment period to a point of unbearability.

    Coffee Addict
    October 8, 2008
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  4. Nick Sherry is a dill. And I’m starting to panic because the “pseudo” cash option in my mandatory industry superfund is now “flat lining” which means that credit events and marks-to-market are now happening.

    Actually I would be happier if the published graph did show the actual “cash” fund loss (rather than a bogus flat line of 0%) because I need transparency to know how to respond.

    Do I jump back into a balanced or growth portfolio in the next month or so? Maybe I should (for reasons of diversification if nothing else) but there is that niggling issue of my fund LENDING all the equity investments to major foreign banks. Dan pointed to this connivance (by many funds) several months ago.

    When the HMS Pandora ran aground on the Great Barrier Reef in 1791 a crew member threw a set of keys to the Bounty mutineers being held in a cage and most of them got out. Nick Sherry doesn’t have a set of keys and is in no position to pretend that he does. Nore is he in a position to proffer bogas advice.

    Coffee Addict
    October 8, 2008
    Reply
  5. This is really scary as the growth we have depended upon was built on a credit bubble and fair value may be say the long term trend value of markets at say 4000 for all ords. However we have to repay the past excesses to return to fair value so it may drop well below this as an overshoot for an extended period. I expected this to occur as we had baby boomers becoming nett drawers on superannuation not nett savers but this is an early trigger. I always thought I would never retire.:)

    Reply
  6. The CBA has the strongest balance sheet by what measure?

    Against Australia’s near world’s worst household debt-to-income ratio?

    And against the world’s most open import economy, open to severe import price inflation passing through to the general economy and flattening the retail sector along the way?

    And against debt service predominantly dependent on borrowers reliant “services industries” like finance and retail and other bottom surfing or dog walking driven incomes?

    CBA really is as safe as those houses funded from offshore for which the funding is being denied at recycling by foreigners & for which there is no local capital, or export income, or prospective asset sales to foreigners, to form the capital to replace the RMBS as it reaches maturity.

    And by measure of loans against over valued collateral against the highest market share of the debt binged valued residential property lending? Market share that which Norris and Schubert chose to aggressively increase after the RMBS funding bubble burst globally. And again they are at it with Bankwest and are hurtling down the road on the back of the pig flat toward the inevitable crash & bail out that will flatten the economy for a generation.

    CBA is a work-in-progress heading to insolvency. These days you can mark an anglo bank’s balance sheet by any method that suits the proletariat of greed except that of a rational deduction.

    We are at 1890. Foreign investors are getting torched so forget about any empire or SWF coming to our aid with renewed investment to offset our debts except to secure commodities in perpetuity at knock down prices.

    Reply
  7. So, I agree CBA looks like the safest option. Does this mean Bankwest is implicitly safe, or when will it be so? (ie when will its assets be insured by CBA)?

    Reply

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