The Economic Illiterati

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No news is good news. Or is it, good news is not news?

Either way, the Reserve Bank of Australia departed from the global interest rate playbook yesterday. It left the cash-rate unchanged at a 45-year low of 3.25%.

The “Australian economy has not experienced the sort of large contraction seen elsewhere,” wrote RBA Governor Glenn Stevens in the note that went out with the announcement. “The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers.”

Blah blah blah.

Okay okay. What has changed?

Well, this is not the best news in the world for first home buyers, or for pensioners and anyone living off a fixed income. And the stock market doesn’t seem especially enthused about it either, given the early action today. The only positive reaction came from the AUD/USD. With Aussie rates fixed for another month, the yield advantage over the U.S. currency might (maybe) make the Aussie attractive to the last three risk-taking traders on the market (although given the current global state of fear, we’re not expecting a carry trade to resume any time soon).

There was an absurd reaction though, among the economic illiterati. The RBA’s relatively reassuring assessment of Australia’s current status seemed to please most of the pundits on TV last night. “We have it bad, true,” you could imagine them saying, “but not as bad as everyone else. In fact, we have it so not bad, we’re not going to cut rates-just to show you how not bad we have it!”

Australia’s economy held up in the fourth quarter, only just. The ABS reports that fourth-quarter GDP shrank by one-tenth of one percent. We know things weren’t so flash in China, Japan, America and nearly everywhere else on the planet.

If Australia’s economy grows this year, it’s going to have a lot to do with the success of China’s $585 billion infrastructure stimulus plan. But that’s only if that plan works. And by works, we mean that it stimulates demand for Aussie resources.

Hang on, though. We’ve done nothing but carp, complain, and criticize lately. What about any useful ideas? Are there any?

Well, yes! There may be a few good uranium trades in the offing this year as the spot price recovers. If we’re going to cap carbon emissions we’re going to have get out electricity from somewhere. And it probably won’t be the wind. At least, not in China.

The Australian Bureau of Agricultural and Resource Economics (ABARE) published its quarterly review of commodities yesterday. It was not pleasant reading. ABARE forecasts a 17% fall in the value of Aussie exports in 2009 to $162.

The big contributor to the decline (if something can contribute to a decline) is the projected 22% fall in mineral resource exports to $126 billion. This stems mostly from price declines in base metals, coking coal, and iron ore…the things you need to make things made of metal.

But even if the Chinese are not building as much, they still have to eat. Everyone has to eat sometime. ABARE reckons the weak Aussie dollar will help lead to a 12% increase in the value of arm exports. We just have to hope that the credit crunch does not lead to a disastrous year of production for farmers-who in addition to getting no rain, may not be able to get much credit either.

Energy exports will take a big hit in dollar value, falling 34% to $51 billion. This represents lower contract prices for thermal coal and lower spot prices for oil. The two exceptions appear to be uranium and LNG. Both in volume and value terms, the outlook for each is pretty bright, according to ABARE.

“World uranium requirements are forecast to increase faster than world supply in 2009,” the agency reports. “As a result, the uranium market is expected to remain in deficit for a sixth consecutive year. Supported by this deficit, spot prices are forecast to recover gradually in 2009 to end the year at around US$62 a pound…In 2010, the spot uranium price is forecast to average around US$70 a pound, an increase of 35 per cent on 2009 prices. Strong consumption growth and a decline in secondary supplies of uranium are forecast to support this price increase.”

See. Some good news.

The bad news is that the global system of delivering credit and capital to businesses that can put it to efficient and productive use is broken. It’s a giant sucking wound on the body economic. Or, if you prefer, a mangled limb.

Rather than amputating it, regulators and politicians are pouring more public resources into propping up the people and institutions that have failed. Whether they are doing it out of ignorance, ineptitude, collusion, or genuine conviction is irrelevant. They are effectively stealing future resources away from productive activity and using them to prop up unproductive activity for the sake of engineering GDP numbers that give the illusion of growth and normality.

Boo! It will be important to think about other ways to grow your income in the coming years that don’t involve buying and selling securities. Real skills may come back into vogue, in which case your editor may have to pick up a second job. In the meantime, you have time to build those skills while the professional policy makers juggle plates.

We’ve been told that AIG and certain other institutions are too big to fail. But it’s obvious that the financial system as it is, with all the government bailing wire and chewing gum, is too broken to work. Transferring income, raising taxes, borrowing more money…none of this gets us any closer to a new production possibilities frontier.

But we’ve said all that before. What does it mean for markets? Lower stock prices and higher government bond prices. Government bonds, especially U.S. Treasuries, will increasingly be seen as the last best hope for capital preservation on the planet. Really intrepid investors would take advantage of higher yielding corporate bonds.

Of course that just leads to a concentration of savings and capital in the government bond market. It could make for a truly spectacular bubble. 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.
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9 Comments on "The Economic Illiterati"

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Ivor Evans
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Hi Dan I’m no economist but I follow the writing of you guys every day along with many others. From what I see the global economy is insolvent with IOU’S. The looting of wealth is global. The living beyond means is global. As we have evolved from feudalism it is likely that humanity will head back in that direction unless radical change does not occur. The options are 1. The world slips into a long deep depression that will enslave hundreds of millions more into poverty. 2. Feudalism will range wide and far resulting in a world war and further… Read more »
Pete
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Ivor: “If there is a solution it needs to happen soon cause at this rate even gold won’t be worth a pinch as no one will be able to afford to buy it, as the currencies won’t be worth a pinch.”

Pete
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Try purchasing half as much gold…or less. It can be split up down to the atomic level (in theory).

Pete
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Gold can be divided right down to the atomic level.

Pete
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Argh I give up on this ‘moderation’ system. It is awful.

Greg Atkinson
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Yesterday I found the answers to the questions raised by the global economic crisis after watching Plan 9 from Outer Space. Finally that movie is making sense and I now almost understand what Rudd is trying to do with his stimulus plan. I suspect many of our politicians and central bankers etc are being controlled by aliens. This is why the Japanese finance minister recently appeared drunk at a press conference and why Rudd uses terms like “school educational system” instead of “schools”. I wish to patent the term “Plan 9 moment” to describe an event or action that makes… Read more »
Graeme
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It seems to me that Australians have a choice: a) Follow the standard (US, Japan, UK etc) model towards zero interest rates, endless intervention, bail-outs and economic stagnation, or b) Try to preserve some financial sanity by not intervening and accepting the pain of needed de-leveraging and economic adjustments. I do not have any confidence that Rudd would follow the latter course. However, the delicate state of the Aussie dollar might eventually prompt some reflection on the impact of wasteful spending, deficits and money printing. I do not see the world currency idea mentioned by Ivor as any solution. It… Read more »
Ivor Evans
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I hope that I did not disturb Pete into giving up. What I meant by Gold won’t be worth a pinch is as a last bubble to burst. Money may rush to buy gold as fear drive the investors to a perceived safe haven but when that bubble bursts it can only be driven by further people wanting to buy and that can only be with currency. If we take the contrarian thinking to a conclusive point all currency is headed to currency heaven. If that is the case it may coincide with a gold bubble. So what you have… Read more »
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[…] uranium requirements are forecast to increase faster than world supply in 2009,” said ABARE in a recent report. Increasing demand is expected to way heavy on existing supply, which will […]

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