Before we get into this weekend’s Markets and Money, consider this little snippet of news about the American Spring from the 5 Minute Forecast:
Andrew Wordes shed his mortal coil in a blaze of… well, it’s hard to call it glory.
For the past seven years, he’d been fighting city fathers in Roswell, Ga., over his desire to keep chickens in his backyard. He hired lawyers. It got expensive. So expensive he couldn’t keep up his mortgage payments.
Monday morning, shortly before police showed up to evict him, he called Atlanta’s WSB-TV, where his saga had become a running storyline. A crew arrived.
“I appreciate everything you’ve done,” he told reporter Mike Petchenik. Mr. Wordes then went inside… and blew his house to kingdom come. He’d doused the place with gasoline in advance; his body was so badly charred he wasn’t officially ID’d till yesterday.
Having had chickens in our backyard, before an unknown member of the Queensland wildlife made them disappear, this little story struck close to home.
Self-immolation is running hot as a form of protest these days. The American patriot battled over his right to keep chickens and the Arab protester about his right to sell oranges. Makes you feel privileged to live in Australia, right?
Except, you might have noticed, that Andrew Wordes’s story featured a mortgage he could no longer pay. And that’s the crucial link to today’s Markets and Money.
When Times Get Tough, the Tough Get Going
The famous Aussie battler is complaining about the cost of living. According to politicians and pollsters on the TV program Q and A, the cost of living is the number one election issue.
You’d think that would delight someone like us, who warns about the threat of inflation all the time. Finally, people are taking it seriously!
But the cost of living debate is actually incredibly cringe worthy and embarrassing. We’ll tell you why in a moment. First, why should you care? Well, it’s time to get your perceptions in order, or you won’t handle the coming storm very well. When things get truly bad in Australia, it’s your own sanity that is most important to protect, not just your wealth. Forewarned is only forearmed if you prepare yourself and your wealth.
So, let’s take a look at what Australians are so worked up about and why it’s measly compared to what’s coming and what you should prepare for.
Our favourite complaint about how difficult it is to make ends meet is this one from the Age. It’s all about the ‘precariat’ Australians are living in – where their lifestyle is precarious for financial reasons. In other words, they are having trouble finding jobs that suit their lifestyle. Kathy Carra was interviewed about her situation and she complained about having 40 jobs in the last 12 months. 40 jobs in 12 months! And Australians are struggling? Of course, the real reason Australians feel like they’re struggling has to do with spending. Kathy bought a house. Another precariat resident bought a ticket to Europe. We’ll get back to the spending later. What’s amazing is that these people are struggling by the Australian definition. This is nowhere near struggling.
Here are some examples of true hardship that Australians would be justified to complain about, if they experienced them:
- Youth unemployment above 50% (as it is in Spain).
- Debt wakes, where younger family members say goodbye to Mum and Dad before emigrating to avoid their debt burden. They cannot return without fearing debtors prison. (This is happening in Ireland right now.)
- Elderly turning to crime in record numbers because of the cost of living (as they are in Japan).
- The federal government using debt collectors to chase up education debts. (In America, one victim of the government’s chase has ‘cut meat from his diet and stopped buying gas to drive his 82-year-old mother to doctor’s visits for her Parkinson’s Disease.’
- A mainstream and respected health news website reporting that the government raided public utility funds to pay of its debtors, leaving hospitals with bouncing cheques. (Greece.)
These are problems that Australians, as a nation, only fear in their nightmares.
But they are also whinging about the price of petrol. Zero Hedge reports that the Europeans are paying around $10 per gallon, which is around $2.50 per litre in Aussie dollars. Petrol prices are low in Australia. And they’re not rising anywhere near as fast as in recession-struck Europe: ‘Italy has been hit the hardest with Fiat Uno drivers paying 18% more this year than last for a litre of petrol’.
There is one problem that Australians can justifiably complain about. But nobody mentioned it during the Q and A TV debate that inspired today’s Markets and Money. Apparently, inflation doesn’t feature in the cost of living rising. Don’t tell us you believe the government’s 3.1% rate. Inflation can take place in all sorts of places outside the government’s definition. Like house prices and equity prices.
But even if we do take the government’s 3% rate of inflation, a dollar today will be worth about 23 cents in 50 years. Put differently, after 50 years of 3% inflation it would take you $4.38 to buy what a dollar does today. The chart below shows what just 1% more or less inflation than the 3% can do over time. With a 4% inflation rate, the green line, it would take 50 years for $10.50 to buy what $1 does today.
The problem with this is that it increases exponentially. Inflation feels slow initially, but steadily gathers steam, even if it stays at a constant rate. That’s what people find so confusing. Your cost of living may only rise at 3%, but 3% a long time ago amounted to far less in nominal terms than it does today. 3% inflation on a cup of coffee that costs $1 appears less painful than 3% inflation on a cup of coffee that costs $5. One is an increase of 3 cents, the other of 15 cents.
Taken to its logical conclusion, steady low inflation is horrifying. Here is a 150-year chart of the same data above. 2%, 3% and 4% inflation are shown. After 150 years at 3% inflation, it takes $84.25 to buy what $1 does today. At 4%, it takes almost $360.
But get this. Going by the RBA’s actual performance, which is an inflation rate of 5.8% on average over the last 40 years, it takes more than $8000 dollars to buy what $1 would 150 years before.
All this inflation creates a constant rat race environment. You have to keep running to keep up.
But nobody seems worried about inflation. On Q and A, they’re all talking about how Julia Gillard’s taxes have increased their living costs. And that’s before they’ve been introduced!
The biggest factor in Australian’s outrage over their storm in a tea cup is the perception of stability. It has been perfectly viable to live paycheque to paycheque for Australians because the world they live in is so stable. A catastrophe consists of having to end your Foxtel subscription because you didn’t get the promotion you were expecting. The fact that people can run their household budget so narrowly is quite an achievement. But what happens if the economy takes an actual hit? What if those 40 jobs a year aren’t waiting for you?
Remember, the cost of living can only be a blight on society if it is caused by the central bank’s inflation, or if it reflects people’s out of control spending. Higher prices is the economy telling you to slow down. Actually, it’s not just telling you, it’s forcing you to slow down. Unless of course, you go into debt.
And that’s the one thing Australians can justifiably grumble about, even if they got themselves into it.
Until next week,
Markets and Money Weekend Edition
About the author: having recently escaped from academia, Nick decided to drop his tights (the required attire of a trapeze artist) and joined Port Phillip Publishing. Instead of telling everyone about the Markets and Money, he now spends his time writing for the weekend edition.
ALSO THIS WEEK in Markets and Money…
Heralding the Unsung Benefits of Frontier Markets
By Joel Bowman
Watching them acquiesce so willingly to the thugs’ demands, you almost feel betrayed, like your friends have turned into comrades and gone over to the dark side. You feel yourself giving them the evil eye. And they feel it, too, finding any excuse to avoid eye contact with you while you’re pressed up against the back of the agent’s wandering hand. Then, when the hand wanders a little further, you’re promptly, rudely, reminded who the real enemy is.
Warren Buffett Scorns Gold. Bad Move!
By Addison Wiggin
The billionaire “Bond King” is also singing gold’s praises these days. Bill Gross, the guy who founded PIMCO, the $1.3 trillion financial firm dedicated to managing bond portfolios, remarked last month, “Recent central bank behaviour, including that of the US Fed… may as well induce inflationary distortions that give a rise to commodities and gold as store of value alternatives when there is little value left in paper.”
How to Avoid Investing Idiocy by Ignoring the Fed
By Dan Denning
That is, it’s absolute idiocy to base your investing strategy on expectations for more stimulus from the Federal Reserve. That is not the best reason to buy stocks. It is not even a reason. It is a hope, or probably just a gamble. At the worst, it is a giant, unproductive distraction from thinking about the things that will really determine whether you make or lose money in the next 10 years.
Why Saudi Arabia is Trying to Talk Down Oil Prices
By Dan Denning
The Saudis don’t want oil users looking for other suppliers. They think talking down the price will prevent oil consumers from thinking about alternatives. For investors, though, now is a very good time to think about who is going to provide the world with the energy it needs over the next 50 years. Not just the developed world in Europe and North America, either. We’re talking about the WHOLE world, including China and India. The energy they require will have to come from multiple sources. That’s a clear opportunity for investors.