Another week in Australia without a new government. Not bad for a Monday. The current Prime Minister is set to meet with three so-called independent members of Parliament to discuss forming a minority government. This gives us a chance to correct an error we made awhile back.
“Every election is a sort of advance auction sale of stolen goods,” wrote HL Mencken. We misattributed that quote to Mark Twain, another great American wit. But the observation seems especially apt right now.
With Australia’s election not yet over, the auctioning of future stolen goods continues is on display for all to see in Canberra. The independent MPs each have their own Christmas list of things you must buy them. Paul Hogan must be gratified to know that his large late fee on unpaid taxes will go to making Australia a safer, better-governed, freer, and more prosperous country.
But really the big news since Friday is that the media are still taking Ben Bernanke seriously. The Fed Chairman gave a much-anticipated speech last week in which he assured the naive and the hopeful that the Fed would do whatever it takes to support the U.S. economy.
Here’s a suggestion Mr. Bernanke: fire everyone one that works for you and then resign. That would do more to promote U.S. growth and sound money that anything else you could possibly do.
But assuming that doesn’t happen, how will the Fed support an economy whose second quarter growth was revised downward last week from 2.4% to 1.6%? Buy everyone ice cream?
We’re being flippant because it should be obvious to anyone with two neurons firing in the brain that you cannot support growth by adding to the stock of debt. The Fed’s quantitative easing programs can fund higher government deficits. And higher government deficits can fund more “stimulus” even as households and businesses hunker down and deleverage.
Yet all that stimulus does is seem to support exports and manufacturing growth in places like Germany and China – where the cars and goods Americans by are made. The stimulus stimulates. Just not where you’d expect, like having your feet tickled but feeling it in your ear.
This is a critical issue for Australia. The chart we showed you last week clearly demonstrates that Australia’s stock market tracks the U.S. That means bad U.S. earnings and a weak economy would be bearish for Aussie stocks. But what about China?
The argument is made that Australia’s economic growth correlates more with Asia than America. “Our national income will soon be growing at a China-like rate, underpinning a boom investment that is already underway,” writes RBS chief economist Kieran Davies in today’s Australian Financial Review. “Iron ore is now our largest export, accounting for almost four per cent of the economy, while coal is not far behind at 3.5%.”
The argument is that strong coal and iron ore prices – even though they may fall in the next quarter as contract prices are correlated with the spot market – support national income, which supports national investment ($112 billion in projects in the mining sector alone, according to RBS), which supports national employment, which supports national spending, which supports national taxes which support all the promises made by politicians who support themselves at your expense.
This all sounds mostly true. But it all hinges on the boom in China having nothing to do with the credit boom in America – you know…the one that’s deflating and causing the world’s nastiest economic hangover in seventy years.
Here’s what worries us, though. What if China’s great economic growth story really is just a derivative or manifestation of the world’s greatest credit bubble ever? Writing about this phenomenon at Zero Hedge, Tyler Durden hits close to home:
Well, of course, China needs its resources. Soon every open mine will be a “BRIC” to be exploited by Chinese interests, which come, see, and suck the place dry as they build yet more vacant cities, ghost towns, and highways to nowhere, hoping they can sustain the illusion of the world’s greatest bubble for a few more months. Which is precisely all those who are betting on a collapse of China are playing it not with China CDS, but those of Australia: for when the worm turns, Bad in Beijing, will be nothing compared to the Massacre in Melbourne.
So what’s our solution? We don’t really have one, at least in terms of correcting the errors of the boom. That happens naturally if you let it. The key is to let it and not fight it. Fighting it only makes it worse. But once it’s happened, the return to normalcy is painful. There’s no easy way out, like spending someone else’s money.
This, by the way, is probably why so many people don’t like Austrian Theory. Its main prescription is that prevention is the cure to monetary madness. With sound money, the rule of law, free trade, and low taxes, you generally promote liberty and prosperity without going into massive government debt. But once you have a credit bubble on your hands, the only way out is liquidating the bad investments, not preserving them.
It was interesting that on Friday, while the Dow first fell and then rallied, copper, coffee and corn all rose. The commodities markets see the Fed’s QEII program as being inflationary. Either that, or people are starting to think about trading Federal Reserve Notes for things that are actually useful…while they still can.
Come to think of it, we like the idea. In a few weeks, we’re headed back to America for some business. Earlier in the year we looked at house prices and found they were still falling, so we stayed out of the market.
This time, our plan is to hire a storage unit and fill it with the sorts of things that disappear from shelves when people begin to lose confidence in paper money. On our list: coffee, vodka, cigarettes, petrol, vitamins, over-the-counter pain killers, petrol, batteries, bullets, a hatchet, maps, a non-North Melbourne scarf, etc.
Not on our list: U.S. government bonds.
What’s on your list? You can let us know with an email to email@example.com . Investors who take the Fed at its word or who actually still believe the Fed can support the U.S. economy with asset purchases deserve what they get. You have been warned by these morons what they intend to do. Now is the time to get your wealth out of the places where it is likely to be destroyed.
All that said, it looks like U.S. bonds are becoming a kind of Noah’s ark for people who believe in central banking. Everybody on board the Bernanke Boat if you believe making more credit available is the solution to a world that already has too much debt. All aboard!
Judging by vanishing U.S. bond yields, there appears to be quite a few people willing to get on the good ship Death Trap, captained by Helicopter Ben. If you’re going to stay out of this trade, just keep in mind that it can run longer than it should or than you might believe is possible, which is fine with us. It gives us more time to stock up on vitamins at Wal-Mart.
Iceberg. Hindenburg. Call it what you will. Here’s a note from our friend Ron Kitching on what’s really going on.
Stimulations, Booms and Busts.
History shows that freedom of the individual, and the open, competitive spontaneous organizations, customs, and procedures in a free market, secure private-property system, is much more efficient than centralised consciously rational-directed systems of organising the human economic activity.
The mystery for any economy, is how people’s actions are impersonally coordinated by the market. All classical liberal monetary theorists noticed, that the price system – free markets – does a remarkable job of co-ordinating people’s actions, even though that coordination is not part of anyone’s intent.
The market, wrote F. A. Hayek, is a spontaneous order. By spontaneous Hayek meant unplanned – the market was not designed by anyone, but evolved slowly as the result of human actions. But the market does not always work perfectly.
The main cause of market distortions is increases in the money supply by the central bank. Such increases make credit artificially cheap.
Entrepreneurs then make capital investments that they would not have made had they understood that they were getting a distorted price signal from the credit market.
Artificially low interest rates cause investment to be artificially high, and cause mal-investment and the boom turns into a bust. As readjustment to reality occurs many people are thrown into temporary unemployment.
Monetary theorists see the bust as a healthy and necessary readjustment. The way to avoid the busts, they argue, is to avoid the artificial booms that cause them.
The “stimulation” commended by many was and remains an artificial boom. Bernanke is getting ready for another one.
for The Daily Reckoning Australia