You Can’t Eat Bytes

What’s cooking for Australia in 2013? That’s where we left off in yesterday’s Markets and Money. And obviously, we’re assuming we’re all going to make it to 2013 and that the whole Mayan calendar thing is wrong. But for Australia, there are at least two events on the 2012 calendar that could have a huge effect on your investment performance in 2013.

The first is next Tuesday, October 2nd, when the Reserve Bank of Australia meets to fix the price of money. The next is on Melbourne Cup Day, Tuesday, November 6th. What the RBA does with the cash rate is always the subject of surveys and speculation. Its decisions affect capital flows, the value of the dollar, and the price of gold.

But we’d like to look at it from a different perspective today: can Australia afford lower interest rates? The cash rate is 3.5%. If commodity prices continue gliding lower, there’s a case to be made for lowering rates. The housing fetishists are dreaming of this at night, no doubt. Non-bank lenders and even major Aussie banks are ramping up loan-to-value ratios and asking for smaller deposits…the kind of lending not seen since the heady days of the US subprime era.

Remember though, Australia’s banking sector gets a lot of its money by borrowing from overseas lenders. Australia imports capital. And one of the factors that makes foreign capital willing to lend to Australia is higher interest rates. If the RBA lowers interest rates, it gives foreign capital less incentive to invest here and finance a new housing boom.

Wayne Swan’s big bad budget deficit plays an indirect role in capital flows too. If Australia were to ever lose its AAA sovereign credit rating, it would result in even higher borrowing costs for Aussie banks. Of course, we’re assured Australia’s credit rating is safe. The government deficit and debt levels – though they’ve grown every year under Swan – are still smaller as a percentage of GDP than they are in Japan, the US, and the UK.

But our point is that Australia requires higher interest rates to attract foreign money flows. We know this challenges the idea that the Aussie dollar is a ‘safe haven’ currency. But we’ll probably find out more about that issue in 2013, if not sooner.

If there is a dollar crisis in Australia, it won’t be all bad news. Some companies will enjoy a huge benefit from a lower dollar. This could easily lead to a change in the leadership of the stock market. The most popular and widely held stocks won’t be the banks and the miners. They’ll be…something else! This was one of the points we’ve made in our recent new report.

A big factor in the fate of the miners will be China. The usual suspects in government and the media are confident that Chinese growth numbers are accurate and sustainable. By the way, these are exactly the same people who missed the fall in commodity prices and the GFC. And in any event, there’s a growing chorus of analysts who think the Chinese growth numbers aren’t accurate at all.

It’s worth pointing out that most official statistical forecasts in any country deserve to be treated with suspicion. It’s not out and out fraud and deception we’re talking about (although that’s a worry). It’s that the statistics just don’t add up. Charles Dumas, of Lombard Street Research, reckons China’s GDP is growing at just 1.6% annually, far below the official rate of 7.5%.

If Dumas is right and China is growing far slower than official reports, then the poor economy will almost certainly translate into social and political trouble. The new leadership of the Communist Party of China (CCP) might just sail its brand new aircraft carrier over to the Senkaku islands and give Japan a piece of its mind. That seems unlikely. But cornered politicians do strange things, no matter what their nationality.

Speaking of strange things and politicians, former Prime Minister Malcolm Fraser warned yesterday that Australia could be drawn into a nuclear conflict between China and the US if it isn’t careful. Fraser spoke about Australia-US relations in the ‘Asian Century’ at the University of Melbourne AsiaLink centre. According to Jon Kerin in today’s Australian Financial Review, Fraser said:

‘The major danger and the one China recognises, is that the United States, as a power whose economic relativity is less than it used to be, may seek to maintain supremacy through armed conflict, at a time when there is no valid dispute between China and the US that would justify war.’

Fraser added that the US Pacific plan was, ‘strategically flawed and ran the risk of rapid escalation to a nuclear struggle.’ He encouraged Australia to be subservient to no one and to preserve long-standing alliances. But he said, ‘we must not extend the scope of those alliances in a way that binds us to follow America into wars which are contrary to our own interests.’

We should have invited Malcolm Fraser to our After America conference in March, where we sorted all these Australia, US, China matters out! The conference produced no official conclusion. But we left with the impression that armed conflict between the US and China – especially nuclear conflict – is so remote a possibility that it’s not worth planning for. As if you could plan for it anyway.

Nuclear powers tend not to attack one another. This is the whole benefit of becoming a nuclear power, which explains Iran’s intentions pretty clearly. The US and China exist in a complicated web of economic mutual dependency. They could certainly have a falling out over the value of the dollar and the value of China’s Treasury holdings. But is that the kind of dispute that ends in mushroom cloud?

The reality for the United States is that force projection becomes a lot harder to maintain when you’re broke. The US has enjoyed air and sea superiority across the globe for 50 years. But will it be able to afford its military in the coming years? And will the civilian leadership of the US military decide that it’s better to use it while they’ve got it?

It’s a lot more likely, in our view, that the US simply abandons its role as enforcer of the global liberal order. It could sell off its military in bits and pieces on the global arms markets. Asset sales are one way to meet mounting bills, aren’t they?

But this touches on the point we made yesterday: the future of conflict goes beyond arms. In the ‘Code War’, you don’t need an aircraft carrier to project force. You need an army of hackers who can take down the networks and infrastructure of your adversary without ever firing a bullet.

There are already examples of how this could work. The ‘Zero Access’ botnet creates a Zombie Army of a million computers capable of generating a $100,000 a day in illicit fraud. Frankly we have no idea how it works. But the principle is clear: massive on-line resources can be mobilised in any number of campaigns, whether it’s out and out fraud, or some other goal.

And there’s even an on-line version of ransom. The ABC reports that an Alice Springs man paid $3,000 in ransom money to overseas hackers who invaded his computer system and took his business data hostage. Jeremy Spoehr says that once he paid the ransom money, the hackers honoured the agreement and released his data.

That’s an alarming story. But the real worry in the future is not from people who want to steal, ransom, or commit analog crime in a digital world. The real worry is that computer viruses and hacking become tools in a kind of ‘virtual jihad’ in which the only motive is destruction. And here’s a question for you to ponder…

In a world where banks, stock markets, and payment clearing centres are targets, what good is digital money? You can’t eat bytes, can you? You can’t even barter with bytes. Everyone will be reduced to paying with hamburgers, if they haven’t all been stolen by the Hamburglar.


Dan Denning
for Markets and Money

From the Archives…

The Sharks Amongst the School
21-09-2012 – Greg Canavan

Bernankonomics 101
20-09-2012 – Greg Canavan

There’s Going To Be a Fight
19-09-2012 – Dan Denning

The World’s #1 Money Printer
18-09-2012 – Bill Bonner

The Video That Started All the Controversy
17-09-2012 – Dan Denning

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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4 Comments on "You Can’t Eat Bytes"

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Steve LaMont

For Dan Denning:

Hey Dan – I recently came across an article of yours online. I read it and enjoyed it, so I simply want to say “keep up the good work.” Hope all is well down under…Steve LaMont…Estes Park


That aircraft carrier link is great, remember the opium wars, China has every reason not to trust the west at all, and clearly they don’t, that means they need to build a huge defence force, this will be excellent for those economies that provide raw materials, but better still is the implication for neighbouring countries who will be caught in an arms race and also needing to spend large slices of their economic resources on matching China, again good for those economies that provide raw materials.

The RBA has just announced that it has developed an all new set of high security embedded banknotes. We aren’t talking about replacing one note or another but the whole damned set. No they aren’t going to issue them just yet thank you! Just a reminder that whether it is wealth stored in gold or banknotes the ownership and redeemability of either is questionable during a crisis. As for the US belligerence. If hard money comes the US elite needs an excuse and a distraction in order to save their necks. That is all that matters. US jingoism is alive… Read more »
Like the article, especially the bit about the fellow who was robbed of his data then paid a ransom for its return. This sort of theft is not uncommon, although its the first time I have heard of such a paltry sum being paid. Which leads me to my next point. Do not keep sensitive information on your computer, put every thing on a thumb drive or similar, I use a pqi thumb drive or a sd card. There should be nothing but the operating system on your computer, clean your system every night, use ccleaner, its free and the… Read more »
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