Australians saved $15.1 billion in the December quarter, lifting the savings rate to 8.5 per cent, the highest in 18 years.
The amount saved during 2008, according to Westpac’s economists, was equal to all the savings of the previous 11 years combined, and it subtracted 5 per cent from demand – the largest drag on GDP from savings since 1960.
Saving used to be safe?
People always look to increase savings in uncertain times. Unfourtately, in my opinion only, most Australian's are saving the wrong type of money. Putting your dollars in the bank used to be a relatively safe, conservative investment a few decades ago, but no longer is for two main reasons.
#1) Our currency is backed by nothing
#2) You go backwards saving today due to inflation
Reason #1:
The Australian Dollar (and its physical coins) used to be backed by gold and silver. Well at least up until 1971, when U.S. President Richard Nixon closed the gold link, and in effect making all currencies around the world truely fiat, backed nothing more but our confidence in Government (whom prints the money). To best illustrate my point consider these two scenarios.
* If you put $1 dollar under your bed in the year 1801 and kept it there for 100 years, it would still be worth around $1. ie. It would still hold its purchasing power.
** However if you put $1 dollar under your bed in 1901 and kept it their again for 100 years, it would only be worth around 3 cents. The other 97 cents has been lost to inflationary (and we have had a massive decrease in purchasing power).
This is the first main reason why knowing the difference in money over time can mean a huge difference in your power to save. We currently live in a monetary environment which punishers savers and encourages inflation, debt and easy money.
So why the huge difference? A $1 coin 200 years ago was backed by gold and/or silver (gold standard). Today there is no link to gold, and through the printing presses and fractional reserve banking, the total supply of money grows by 1 or 2 digits each year. The more new money, the more inflation (decrease in purchasing power).
Australians are saving the wrong type of money
This is why I believe the bulk of Australians are saving the wrong type of money. There is a huge difference between currency and money.
Australian Dollars (currency), will be highly susceptible to future inflation (decrease in purchasing power).
Conversely, everyone should be saving “money” (gold and silver) which is finite in supply. Historically, gold and silver is the most sought after tangible form of money. Many monetary economists often refer to it as “real” money. It’s real, its finite and it becomes obvious if you try to manipulate and expand its supply.
Australia’s notes and coins
As stated previously, the notes and coins in Australia today are backed by nothing but our faith in Government. Today in Australia our coins have nickel, copper and other metals in them (see Trivia at bottom of post on the 1966 round 50 cent coin) – there is no monetary metals in them. There is really no tangible difference between a $5 note and a $100 note – except that the Government tells you one is more valuable than the other. In reality, our money today is backed by nothing. It hasn’t been backed since 1971, and right now it is being printed by the Government (including Australia) like there is no tomorrow.
So the “real” money Australians should be saving is gold, silver. Avoid cash. “cash is trash”. The importance of this difference should not be understated.
Reason #2:
Inflation statistics are manipulated (see a more detailed post I did >here<)
Last year in 2008, Australia’s M3 money supply (the broadest measure of money supply) grew by 15 percent. M1 money supply (notes and coins and short term deposits) grew by 12 percent.
So I ask why are official interest rates in Australia dropping like a falling knife in the last few months? (Ans: The central bank and Government is lowing interest rates because they want to manipulate investment decisions - get financially uneducated young people into the top of the largest property bubble in Australian history.)
If interest rates were left to the market (a scenario before we had central banks), interest rates would be climbing sharply right now into the double digits (and we wouldn’t have huge bubbles bursting in the sharemarket and property market). The market would actually be encouraging people to save (what should happen), and not encourage people to take on more bad debts.
So if money supply grew by 15% last year, why are term deposits paying 4.5 percent at the bank currently? Inflation is much worse than what the bank is paying out in interest!
It turns out Treasurer Wayne Swan was actually right! when he talked about the “Inflation Genie is coming out of the bottle” – but of course he no longer believes this.
Yes, money supply growth (inflation) will likely slow substantially in 2009, but “stimulus” actions taken so far, and the greater role of Government trying to centralise the economy will bring highly inflationary consequences in two to three years from now.
Don’t buy the statistics thrown willy nilly by the Government, by the ABS or by the media. Everybody knows that 78 percent of statistics are made up. The numbers being released are overwhelmingly and increasingly more un-believable.
(Refresher example: You only need to work 1 hour a week to not be included in the Unemployment Rate number. How many Australians have had their hours cut in half in the last 12 months, or working a lot less than they would like?)
Be concerned about inflation, not deflation!
In the last year many economists are talking about a deflationary depression. An important distinction must be made. The world, including Australia is experiencing asset deflation, all the while most economies are expanding their money supply (through printing, fractional reserve banking etc (measured via M0, M1, M2, M3 money supply)).
Ignore the advice the U.S. Government, the Treasury Secretary Timothy Geither or the Fed’s Ben Bernanke’s rhetoric (likewise the equivalent in Australia). Watch their actions instead. All signs point to more asset deflation and a huge amount of future inflation (of food, commodities, rents and other basics).
Asset deflation needs to happen. Bubbles must burst. Sharemarket bubbles are been bursting and we are already at pre-bubble levels in most major markets. Property markets are bursting as well and we are yet to see things really heat up in Australia yet.. It’s happening in commercial property already. Industrial, rural and residential will not be spared. Expect minimum 40 to 50 percent falls within the next few years.
Toxic Bank/Rudd Bank/Other Government-made institutions.
I will discuss these later this week, after the expected “big” news coming from Timothy Geither in the U.S. As i’ve said previously, no government-made institution or printed money can reverse the direction of the market. Expect news of more helicopter drops of money which will fall into the growing black hole (of debt deflation).
Part of the Govenrment response so far is the government guarantee of deposits in the major banks in Australia. Why would you want them guarantee dollars which are loosing purchasing power? If they had to save our banks the only way they could uphold their guarantee promise is to print hundreds of billions of dollars, thus lowering the purchasing power of your savings substantially.
Conclusions:
- Study basic monetary history
- Save some ‘real’ money, not fiat money
- Australia's money supply is growing at its fastest rate in 20 years, while Australia's gold production has been declining for over a decade. So which will increase its purchasing power in the next 10 years?
- Savings should be a core investment for anyone... but it depends what you save.
- Do you have trust in the bank guarantee to protect your inflated-dollars?
- If you could print your way out of trouble, Zimbabwe would be the richest nation on earth! (gold is worth Trillions of Dollars over there!)
Best,
Scott
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Trivia
Ever wondered why the 50 cent Australian coin is not round like the 20c, 10c and 5c? Well it used to be.
In 1966 the Canberra Mint released a round 50 cent coin (each round coin was progressively larger from 5c to 50c). The round 50 cent was 80 percent silver and 20 percent copper (containing 1/3 ounce of silver). Unfortunately for the Australian Government the price of silver appreciated some 60 percent for the year to the end of 1966. There was now more than 50 cents worth of silver in each 50 cent coin. As a result the coins were replaced the very next year with the 12-sided 50 cent coin.
The original 1966 round 50 cent coins now sell for over A$8 dollars each on eBay and are still seen as an (bullion) investment in physical silver. Around 14 million round-1966 50 cent coins were put into circulation.
Likewise the bronze 1 cent and 2 cent coins were removed from circulation in 1991 due to the metal (copper, zinc, tin) exceeding face value.
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Trivial?
Recently I travelled on a holiday to Vietnam. The first question Vietnam’s Customs asks you on entry is:
“Are you bringing in more than 300 grams of gold?” ... now why is this?
A few years ago Vietnam had one of the lowest valued currencies in the world. It has been experiencing huge inflation. Last year the reported inflation rate of Vietnam was 26 percent. If this is the Government’s reported statistics – imagine what the real rate is....
Its a cash society. Everyone has little small bundles of cash hidden in their homes, but everyone knows that gold and silver is finite and that it has value.
It’s just that some countries understand the monetary significance of gold and silver. Australia is yet to learn this lesson.
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