Interest Rates Headed Up in Australia, Australian Dollar & Market to Follow

Forget about 300 Spartans, 700 Thespians, and a million Persians at the pass at Thermopylae. We already know how that battle turns out. What we want to know is if the ASX/200 can get past the gates of 6,000 and stay there.

"The thousand nations of the Persian Empire descend upon you," says the Persian Ambassador to the Spartan King. "The millions of dollars of superannuation funds descend upon you," we say to the ASX.  While the Spartans went down in a blaze of glory, the ASX, so our theory goes, is on the verge of "melting up."

Indeed everything is melting up this morning, presumably on the news coming from Team America that the Fed's next interest rate move may be a cut, not a raise. The Fed and the Reserve Bank appear to be headed in opposite directions. The Fed, while wary of inflationary pressures in the economy, has to move to alleviate the crushing burden of high-interest debt on American mortgage-holders. Down go American rates.

The Reserve Bank is worried about inflation, too. "Expectations that the Reserve Bank of Australia could lift interest rates as early as next month are firming amid indications that the economy is growing strongly despite already operating at close to capacity." Let's see... economy growing at nearly 4%, at 83% of capacity, with record-low unemployment. Sounds to us like inflation is definitely  "in the pipeline," even if it's not showing up in official statistics.

With rates headed down in America and up in Australia, look for higher highs on the Aussie dollar, and probably higher highs on the Aussie share market. Geez, between Australian share markets and AFL super stars, everything in Australia is getting higher these days.

Still, it's probably a better idea-if you must buy shares-to buy shares correlated to China (like BHP and Rio) and not shares correlated to the American consumer (Westfield). We still don't know how long or low the housing-related slow-down in America will be. One reader has an idea.

Dear Mr. D. Denning,

What gives?

This whole housing bubble and the impending bailout is pure unadultered [sic] bullpuckey.

It represents the zenith of central banking.  The grand masterpiece of deceit to rob the middleclass for the remaining life of our fiat money system.

Ben Bernanke, the well manicured bearded mofo, with his ivy league sweater vest, will concoct the ultimate bailout that will send us all to the poor house to save the swindling bankers.

The sooner it falls apart the better.

As money supply increases towards infinite, its value decreases towards zero.

What a bunch of steamy loaf bullpuckey!

What he said.

Isn't a little inflation a good thing? Let's go to the grave for a comment from John Maynard Keynes. "The best way to destroy the capitalist system is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens."

"Sounds more to us like a case of diminishing marginal utility," replied DR founder/writer Bill Bonner yesterday. We asked him to comment on our thought that something like Jevon's Paradox was at work at global markets. His response was that each additional dollar of credit created in the world economy seems to be producing less growth. It takes more debt just to create a dollar's worth of growth in GDP these days, be it Australian or American.

That means capital is not getting more efficient, but less. Maybe the easier way to say it is that the more money and credit there is in the world... the less efficient and productive it is at creating real value. More isn't always better. In fact, with some things, more is often less!

This means the globalisation of financial markets has not resulted in the more efficient allocation of capital. It's just accelerated its waste and eventual destruction in poorly-thought-out, unrealistic projects. This isn't so much money wasted as it is opportunity missed. No new capital is formed-a factory, a machine, something that creates a job and an income.

Instead, someone in Sydney's pension money is lost on a bad interest rate bet made by a banker in Melbourne, who thinks he knows something about the direction of the Brazilian currency. That's not really investing. That's betting on a bettor, which, come to think of it, is exactly what you'd be doing if you bought shares in any of "asset management" companies now going public.

All of it, of course, is totally, unequivocally, belly-laughingly absurd, although it won't be so much fun for people who lose money they were counting on. But as we were reminded this week, just because you have money in the bank or the stock market doesn't mean you can actually get it. Our bank cut us off because of "suspicious activity." In the stock market, a gain isn't real money until it's in your bank.

And even then, just because you have money in the bank doesn't mean it's yours, especially if it's not real money. As far we're concerned, there's only one kind of real money, and that's the kind that comes in gold bars and silver coins.

Of course, gold is just gold and silver is just silver. Neither are born as money. They are born as metal. But unlike what your government prints, or what the central bank in Team America is gearing up to print, you can't print gold and silver when you want to. The relatively steady growth rate in their supply ensures they are stable medium of exchange between two parties who wish to conduct a transaction.

"You're a freak," a reader wrote in yesterday. We agree.

Dan Denning
The Daily Reckoning Australia

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