–Feeling besieged by the Welfare State? Tired of rising taxes, endless browbeating by unelected bureaucrats and insipid drivel in the news papers that passes for economic thinking? You’re not alone friend. You’re not alone.
–A big welcome to www.economics.org.au. We learned of the project when we were up in Sydney recently. If you’re interested in economics and more discussion on some of the ideas you find here in the Markets and Money, give the site a look. It is always encouraging to find fellow travellers on the road to financial freedom and liberty. They usually make good drinking buddies too. So have a look.
–When we have a look at markets today, well…it’s depressing. Day after day we all have to put up with the fraud of serious looking men and women in suits making a complete mockery of common sense, reason, and good judgement. As exhibit A in the case against the absurdists running our money and our economy into the ground, we offer the remarks this week of Federal Reserve Chairman Ben Bernanke.
— Bernanke spooked investors in New York when he fronted a group of empty headed Senators in Washington and told them that the future of the U.S. economy was “unusually uncertain.” But in a real boon to those of us looking forward to the inflationary effects of trillions of dollars more in quantitative easing, Bernanke assured the Senators that, “We remain prepared to take further policy actions as needed to foster a return to full utilization of our nation’s productive potential in a context of price stability.”
–Can this sort of nonsense really be taken seriously? Unfortunately, we have to take it seriously because it has serious investment consequences.
–But how long will it be before most people understand that the Fed, the regulators, and the monetary authorities have no credibility when it comes to: a) understanding what is going on, b) fixing it, c) confessing to their culpability in causing the misallocation of capital and the zombification of large chunks of the global banking sector and generally forcing all of us contemplate their moronic and opaque pablum?
–These people really are vandals and thieves. We are encouraged to take them seriously and cede micromanagement of the economy and public life to people who don’t have an entrepreneurial bone in their body. What a big con.
–In any event, don’t be fooled about the stress tests coming up. When those so-called stress tests for European banks come out late this week they are likely be just as much a whitewash of the real capital inadequacy issues as were the American stress tests. In fact, the whole exercise is perfect pretext for another round of central bank quantitative easing/outright support of asset prices.
–After all, American and European banks are stuffed full of housing-backed securities and sovereign debt. The credit boom manifested itself in many assets. Much of the fiscal and monetary policy since 2000 has been designed to keep those assets from deflating. It can’t work.
–We reckon-as we wrote in the July issue of Australian Wealth Gameplan published last night-this latest and largest round of quantitative easing will come sooner than most people are expecting and be a lot less effective than some people are hoping. It’s time to get ready for it now. Crank up the fan…here comes the merde.
–Meanwhile, a minor merde storm is brewing between Australian banks. Nothing sexier than watching the banks go at it over lending practices. Commonwealth Bank of Australia hard man Ralph Norris delivered a rhetorical smash to the nose of NAB’s Mark Joiner. According to the Australian, Joiner said last month that some banks in Australia were making “super profits” by expanding their mortgage lending to the detriment of small business lending.
–“Kapow!” says Mr. Norris. Well, not literally. Rather, he said, “I think the real issue is that we have a bank (NAB) that has performed poorly for many years and missed out on an opportunity when the mortgage market opened up… The market [for small business lending] grew by 0.5 per cent and we grew by 9 per cent…I don’t know where that rubbish is coming from, because the facts certainly don’t support it.”
–Never having been a banker, we are inclined to sit back and watch the slap fight. But the stakes are high. CBA’s loan book is 60% in residential mortgages. Under Basel II, the bank has to hold less capital against a home loan than it does against a ‘riskier’ business loan. So, you could argue that expansion of the mortgage lending book, even at the expense of business lending, is a safer move for the bank and delivers bigger profits to shareholders. It also keeps the rivers of credit flowing into Australian property.
–You could argue that. But it’s not the argument we would make. We would instead make a high-handed, ivory tower, abstract kind of comment that the people of a nation can’t all get rich by buying and selling houses from one another. For one, it’s a singularly unambitious national goal. But that’s not the biggest argument against it.
–Creating a profit is hard. In some ways, it’s unnatural. Profit is surplus value. Human beings improve their living standards by increasing productivity and efficiency through innovation and constant adaptation. The free market is a great mechanism for producing surplus, as long as risk taker and small businesspeople and crack pot inventors and dreamers and builders have access to capital.
–Of course the banks are under no obligation to take bad risks (unless you’re talking about U.S. banks compelled to make loans to bad credit risks during the American housing boom.) But perhaps this is just one of the inevitable costs of being an island economy. Were there more competition in the financial sector, there would be big profits on offer for banks able to make good lending decisions to small business.
–In fact, we’re sure the Big Four probably do quite nicely on their business loan books. But there’s no doubt in our doubting mind that the banks are over-exposed to property because Australia has a collective national obsession with getting rich on property. Why NAB is choosing to stick it to CBA isn’t quite clear to us. But we do agree with NAB’s general point.
–As for the aforementioned impending (we believe) quantitative easing round two, how should you prepare? Well, in the fashion that you find most fit naturally. But we’d suggest that asset markets are going to cop it good and hard in the second half of this year. We’re expecting a one-two combination of big falls in stock markets and then wild, irresponsible, unprecedented and unconventional attempts to reflate by central banks.
–But it’s Friday. So let’s all go away and think about it over the weekend and come back Monday and discuss. And by the way, thanks very much for the many, many emails we received about climate change and carbon pricing. Most were thoughtful and articulate. A few were rubbish but amusing. We’ll print some of the responses next week.
–In the meantime don’t forget: the people backing an emissions trading scheme the most usually have a vested interest in the exchanges that will be set up to trade said emissions. It’s like a potential casino owner telling you we should all be compelled to gamble. The government’s interest in the matter is self-evident: mo’ money. And the bureaucrats who are backing it presumably thrive, in some small-minded and mean-spirited but satisfying way, on simply telling people what to do.
–Resist them all! And as the great thinker, champion of liberty, and emancipated American slave Frederick Douglass advised, “Agitate! Agitate! Agitate!”
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