Automatic Teller Man

Stimulus Package Attempt #2

Yesterday the Australian Government released details of a second stimulus package to the tune of A$42 billion dollars.

Summary:
• $14.7b for schools - $200,000 each
• $6.6b for 20,000 new homes
• $3.9b to insulate 2.7m homes
• $890m for road repairs and infrastructure
• $2.7b small business tax break
• $12.7b for cash bonuses of up to $950

Kevin Rudd – the human ATM
First there was FuelWatch, then FoodWatch - now introducing... ATM-Watch!

Kevin's criteria to stimulate the economy:

Criteria #1: You must be an Australian Citizen
* REWARD: $950 per person (cause you should feel good about being an Aussie!)
Cost: A$12.7 billion

Criteria #2: All Australian citizens must stay warm
* REWARD: here's some pink batts to put in your ceiling (just what I intended to get for Xmas!)
Cost: A$3.9 billion

Criteria #3: All schools must spend $200,000 on maintenance
* OPTIONS: repair holes in Detention Room doors and walls; remove graffiti; service vending machines.
Cost: A$1.9 billion

Wow, I never knew spending money could be this hard! Really is there any skill required to announce a $42 billion spending spree in one day? An ATM could have handed out the money in a more thoughtful way to passes by. If the ATM runs out of money, just fill it up with more printed cash (from the Government's blank check book...).


$42 billion to support 90,000 jobs

The package is supposed to support jobs - 90,000 of them. Lets see, 42bn divided by 90K = $466,666.67. Nearly half a million dollars per job to "support" insulation installers, builders, and of course Armaguard security officers (need more people to keep those ATMs full).

A lot of money to sort out the winners from the losers (losers of cause being the working taxpayer).

I was hoping there would be a few billion handed out to "support" the Australian wine industry. It's just been through its worst export year in 15 years (by value and volume). If only every working taxpayer was given a dozen of bottles of shiraz in the mail. Maybe it will come out in the budget :). Maybe he will introduce a "wine-o tax" (alla "alco-pop" tax) for the industry instead.


Temporary Deficit

Despite the Prime Minister, Kevin Rudd, saying it would be a "temporary deficit'', today's mini-budget reveals the nation's finances will be in the red for at least the next four years with the accumulated deficit of $118 billion (almost identical to the $115 billion that has been wiped from expected tax collections from companies, individuals and the GST).

The Australian Government will now be deep in the red for at least the next four years with an accumulated deficit of $118 billion.

The Prime Minister and Treasurer claim the deficit will be temporary. It’s all rhetoric. Circumstances will get worse. The stimulus packages are short-sighted and will only provide short-term economic “activity”.

There is no plan for long-term job creation.

There is no exit strategy to get out of deficit (there are no large assets left to sell (like Telstra) to repay debts).

Expect a third attempt to stimulate the economy come the budget on 5 May 2009. Least there might be some money which will be thrown at productive assets (bail out State obligations to upgrade ports, railway hubs etc)

Chart 1: From a $20 bn surplus to a $20 bn deficit in two year.
source: ABC news 2/2/09

Chart 2: Put it on the credit card please
source: ABC news 3/2/09

The deficit projections will blow out more as the year progresses. Even more worrying, how much will the Government devalue the purchasing power of the Australian Dollar by the end of 2009?

The Opposition

The opposition isn't much better than the Government. To date, I would give the Rudd Government ½ star out of 10, and the opposition 1 star. They are reading the same book but on a different page. They are both viewing the world from the book of Keynesian economics.

Opposition comments on the $42 billion package:

Malcolm Turnbull:

So far, the Opposition Leader, Malcolm Turnbull appears to be more interested in wedge politics.

He responded this morning and explained why the Coalition will block the $42 billion economic stimulus package. Turnbull proclaimed that the package was so big "it looked like panic".

Turnbull still, however, supports the need for a type of stimulus. He wants tax cuts, rather than targeted one off hand outs. In my opinion, tax cuts will not fix the structural problems of Australia and the world monetary system.

Turnbull quotes from today:

"Someone has to stand up for fiscal discipline."

The Federal Government's plan would mean borrowing $70 billion over the next four years, an act that would increase national debt to $200 billion.

"That is a $9500 debt for every Australian, a debt our children will have to pay off years into the future"

"It is an insult to taxpayers"

Peter Costello:
(Tuesday 3/2/09 on Lateline)

"It's poor quality spending"

"Spending should create long term production, create long term new jobs"

"The budget has gone from a $20 bn surplus to a deficit. Not because revenues have fallen. This deficit is driven by policy decisions. $28 billion of policy decisions."

One former politician has actually given this some thought...

Paul Keating:

On Monday night, just before the Prime Minister released the $42 billion stimulus package, former ALP Prime Minister, Paul Keating gave a frank interview on ABC's Lateline program >here<.

Keating appears to be the only political figure in Australia which has actually put some thought into the problems we face from the financial crisis. He cites some major strucutural reforms must be persued, and that the United States no longer has any economic bargaining power to bring to the table.

Here is some of what Keating discussed:

"Expansion of credit running for 60 years. This is the first time 2008, 2009 where we've had a contraction of credit.

What we need is a completely new global political and economic settlement.

Be rid of the old IMF.

Be rid of the old G7.

Bring the surplus countries into the political framework. G7 is made up of all debtor nations. There are no surplus countries.

We need a totally new Bretton Woods Agreement.

The United States cannot reflate the world. .. but they will try to reflate their way out.

You will start to see in the price of gold, if this goes on for a couple more years, the serious question of an American default. A default by the United States treasury.

Until we get a true settlement, where the great states like India and China, and their big economies and the surplus countries like Russia, the oil countries in the middle east, get a greater say…Until we get to a representative world structural of power. That is global political and global financial power, then that’s the only way confidence will really return to the system. This can't be done by the Americans.

On Kev's 7000 word "social capitalism" essay:

We should not get too ideological about it. In the end rational policy is always good.

On Kev's attack on Neo-Liberals:

When Keating was pressed if he identified himself as a neo-liberal, his answer was

"Absolutely".

Future for both major parties

The days for soaring popularity for both major political parties are numbered. We will hit recession. Unemployment will rise. Housing prices will fall. All debts must be accounted for. Inflation will start hitting food and rents more. M0 money supply will increase sharply, while M3 money supply will contract (as property prices fall in Australia).

The political party which wakes up first and stops reading from the book of Keynesian economics and realises that a new monetary framework is required, will do better in the long-run. Perhaps a new political force will come before either party reinvents themselves.

Invest your $950

The best thing you can do (in my opinion only), is either use the handout to repay high interest bearing debts (credit cards, car loans) or save it.

Through the saving option – avoid saving cash. The Australian dollar will continue to diminish in purchasing power (vs tangible items). ie. $950 in Australian dollars might have $850 purchasing power by years end.

On the flip side if $950 were saved for real money, that is, gold and silver, your savings will increase in purchasing power going forward. I will be investing in the shadow monetary system. Think long term. The more citizens with gold and silver, the less capacity government will have in the future to try and print its way out of the black whole. Governments cannot print a nation into great wealth, just ask Zimbabwe.

Cheers
Scott

Kev preaches new era of "social capitalism"

Prime Minister Kevin Rudd paves way for era of bigger "big" government and economic irresponsibility

Australian Prime Minister Kevin Rudd has conveniently ditched his "economic conservative" rhetoric to reveal his true disdain for free market economic principles. The PM is expected to release an 7000 word essay next week attacking neo-liberals who ultimately "brought about the global financial crisis". (More of my views of the free market can be seen here)

No question, Kev is using the financial crisis to lay the ground work and rationale for driving the budget into a giant black hole. Expect a very large budget deficit come 5 May. It won't matter if fiscal and monetary policy becomes even more economically unsustainable if it means Kev gets to pursue his core socialist ideology (economic left).

A snipet of what is to be released this week can be seen at Phillip Coorey's article in the Sydney Morning Herald.

Some extracts from the article:

“The time has come, off the back of the current crisis, to proclaim that the great neo-liberal experiment of the past 30 years has failed, that the emperor has no clothes,” he writes of those who placed their faith in the corrective powers of the market.

Mr Rudd writes in The Monthly that just as Franklin Roosevelt rebuilt US capitalism after the Great Depression, modern-day “social democrats” such as himself and the US President, Barack Obama, must do the same again. But he argues that “minor tweakings of long-established orthodoxies will not do” and advocates a new system that reaches beyond the 70-year-old interventionist principles of John Maynard Keynes.

“Neo-liberalism and the free-market fundamentalism it has produced has been revealed as little more than personal greed dressed up as an economic philosophy. And, ironically, it now falls to social democracy to prevent liberal capitalism from cannibalising itself.”

Australian's should be concerned at this strong position Kevin is detailing. He is trying to justify why more Government is better. Why pushing the budget deep into the red (many billions of dollars) can be justified. Throwing money at problems won't fix anything. Nor will printing money fix the global financial crisis, or rising unemployment, the property bubble, and DEBT implosion more generally in Australia and abroad.

Australia as a nation is by in large financially and economically uneducated. For too long we have been conditioned and taught in our schooling system to be consumers, not investors. Now at the top, our Prime Minister is showing all signs he does not understand the history of monetary policy, and the basics principles of economics. Money has to be accountable. If you borrow a dollar of someone today, they will expect it to be repaid in the future. Principle + interest. Maybe Kev should consider financial education as the conrerstone to his education "revolution".

As Alan Kohler stated this week at the Business Spectator:

Most of the world’s political leaders are seeing the financial crisis and recession as a chance to borrow money to bolster their sagging popularity or to bring in some spending programmes that are ideologically dear to their hearts before they get booted out.

Kohler was also spot on when he said this about Obama after his inauguration:

Barack Obama’s inauguration was, as expected, a wonderful, inspiring event. It might even have a lasting impact on sentiment in the US, and might, in itself, help the recovery by improving consumer spending and business investment.

But I seriously doubt it, and so does the market: this financial crisis is just not susceptible to rhetoric, no matter how soaring.

Keynesian Economics is the problem Kev, not the solution

Keynesian Economics (which Kev is preaching) is the very economic branch which is responsible for the global financial crisis - not the solution. With a world monetary system dominated by debt-backed fiat currencies, spending (printing) more Australian Dollars to keep inflated property prices high, or keep people in jobs which should not exist under a competitive market place. Kevin cannot beat the market. The more government intervention and regulation there is in a market, the greater the distortion on the allocation of resources.

The PM has given two thumbs up to further devalue the purchasing power of the Australian dollar. The more "stimulus" and handouts he will announce, the more dollars will have to be borrowed to fund consumption. The Government is now a lender, buyer,

PM's reference to FDR

With the PMs reference that President Franklin Roosevelt rebuilt US capitalism after the Great Depression is nothing short of bias and ignorant. The US was still in a depression up till World War II. Unfortunately the saying that "Those who win the war write the history" somehow also applied to FDR's economic credibility. FDR failed to create sustainable long-term jobs. He failed to secure a strong monetary system. US Citizens were flocking towards sound money, gold and silver, because they no longer had trust and confidence in the US Government and the banks. As a consequence of FDR's ambition to instill "big" government on the economy, he outlawed gold ownership (which was not lifted until 1974), thus taking control of money from the individual back to Government. You can only have big government if the citizens are using the money government wants them to use. When gold and silver are king, governments are economically powerless.

As Mike Maloney details in his book, Guide to investing in gold and silver,

"What got us out of the Great Depressoin wasn't the government spending and work programs of the Roosevelt administration, or even WWII, as most people think. No. What got us out of the Great Depression was the tremedous influx of gold from Europe. When the United States raised the price of gold by nearly 70 percent to $35 per ounce... countries now buying from the U.S. now found their currency purchased 70 percent more U.S. stuff than it used to."

This all eventually led to the Bretton Woods system - the monetary system that ensured the U.S. and the western world would not fall back into depression after WWII.

Kev's Track Record:

* $10.4 billion Stimulus Package, including increasing the first home owner grant

$10.4 billion dollars on one-off consumption. This action defies belief. All it did was made the retail spending numbers look half-decent for Xmas. It did not create jobs (just delayed sackings for a couple of months). It did nothing but create a $10.4 billion hole in the budget. There was nothing sustainable with this spending whatsoever.

* $6.2 billion package for Australia's automotive industry

The Government picking and choosing winners and losers. Under a free market the worst performing operations and companies should be taken over by better performing companies. It is not sustainable for Governments to prop up industry. They need to live on their own two feet. The vicious cycle of hand outs must stop. Lets also not forget that these car companies were going to build more fuel efficient vehicles regardless. The Government is using the word "green car" to replace the negative connotation word of "protectionism" and "subsidiary".

* $30 + million to "buy time" on ABC Learning

Again, waste of taxpayers money so families could take 4-6 months to find a new childcare provider...

* $4 billion Australian Business Investment Partnership (commercial property fund)

* Plus other non-economic failures to do with his vision of centralised government. FuelWatch, FoodWatch, and now talk of InternetWatch (filter). The PM is ideologically opposed to individualism, entrepreneurialism and free market principles.

The Government were let off before Xmas. Centro Properties almost went into Administration if it were not for the Commonwealth Bank changing its tune... A collapse of Centro would have immediately made commercial property prices fall across Australia, and insert downward price pressures on other types of property (residential, industrial, rural).

Kev's Fed Government have now put in $2 billion, along with the 4 major banks contributing the other $2 billion. The new fund will offer loans to companies which could be used to refinance existing syndicated loans. It may also lend up to another $26 billion for commercial property projects by government guaranteed debt. "Commercial property projects that could be supported by this initiative include shopping centres, office towers and factories under construction, as well as existing properties of that nature."

Propping up debt-laden property companies is like trying to build a sea wall around the Australian coast. The tide will continue to its thing. Debt will continue to implode, and the market will shake out the over leveraged property developers. Government manipulation of the markets to intentionally keep commerical property prices up will just not work. Kev cannot beat the free-market.

The main loosers from Kev's actions

Kevin has especially had a distain for the X and Y Generations. Largely as a consequence of an aging population, the younger, working generations have been singled out. If you are a working taxpayer and don't have children - no handout. If you earn too much - no handout. Redistributing wealth comes at the cost of one person, to give to another. The final insult to the younger generations is the $14 to $21K first home owner carrots to appeal to aspiring first home buyers. The numbers show it, most young people wouldn't be buying a house without Kev's carrot. The carrot and artificially low interest rates are there to manipulate investment decisions. Where is the disclaimer that housing prices are likely going to head sharply lower in Australia within the next 18 months? Too bad if you buy at the top of a falling knife.

What Kev and the media fail to acknowledge

On Friday Gold made a new high in Australian Dollar terms, going over $1,400 per ounce. Silver had a strong rally as well.

Chart 1: Gold hit a record high of $1,456 p/ounce on Friday.

Kev should count his lucky stars that the media in Australia focuses on reporting commodity prices (incl gold and silver prices) in terms of US Dollars. As I've mentioned previously gold and silver prices denominated in US Dollars continue to be manipulated by a couple of the large US commerical banks through issuing paper-gold and paper-silver (through short-selling Derivatives). An unprecedented level of gold and silver ownership is taking place around the world. Governments around the world whom show economic ignorance will eventually loose to the shadow monetary system. All fiat currencies fail eventually.

Conclusion:

The more Kev wants to fight an ideological war on free-market economic principles, the more you should think about buying gold and silver in Australia, while you still can. As I write there is now a 16 week wait on delivery of silver from a bullion dealer. The financially educated citizens are taking a position. Unfortunately Kevin will only devestate the very people he wants to help, the poor and disadvantaged. The more he wants to print (and push the budget into spiraling deficits), the more everyone's purchasing power will decrease. If social capitalism was sustainable... We wouldn't be closing down hospital beds... We would've thrown extra $100's of billions at education, defence, infrastructure long before now. Even our spending in the last 20 years is not sustainable with our aging population.

We cannot afford to live beyond our means and let Government fund consumption. Kevin cannot beat the market.

Don't take Kevin's carrots with open arms. Question the actions. Question the need for more big government. Invest time and money into financial education today.

- Scott