Extreme Shock Ahead - Prepare Now.

Many people in Australia think that they are immune from the euro debt crisis, but the government there could be about to embark on a program that could increase their exposure at just the same time that the will be forced to lower interest rates because of a drop in economic activity. At the moment, the Australians are sitting pretty, with an RBA benchmark of 3.5%. However, not that long ago, it was 4.5%. Now, as the Australians reduce their interest rates, the amount of capital flight coming into the country via the carry trade to exploit the high interest rates will dry up. However, there is a significant possibility that the Chinese would be willing to help the Australians, but the fact that they are joined at the hip with the USA and up on their moral high horse may make that option much less attractive. There seems to be a general perception in europe that all is well in Australia, but with a large drought crimping the wheat harvest and their currency rise making exports more expensive, things may not be as rosy as they seem. To give you an idea, this is the kind of stuff coming out of Australia at the moment. [begin article] Thursday, 26 July 2012 – Melbourne, Australia By Kris Sayce Extreme Shock Ahead: Prepare Now Extreme Shock Ahead: Prepare Now '[John Williams, President, Federal Reserve Bank of San Francisco] added that there would be benefits in having an open-ended programme of QE...The main benefit from my point of view is it will get the markets to stop focusing on the terminal date [when a programme of purchases ends] and also focusing on, "Oh, are they going to do QE?" he said. Instead, markets would adjust their expectation of Fed purchases as economic conditions changed.' - Financial Times 'European Central Bank council member Ewald Nowotny said there are arguments in favour of giving Europe's rescue fund a banking license...Granting a banking license to Europe's permanent bailout fund, the European Stability Mechanism, would give it access to ECB lending, easing concerns that its 500 billion-euro ($602.5 billion) cash pot won't be enough if Spain or Italy require aid.' - Bloomberg News 'Reserve Bank governor Glenn Stevens says Australian governments are enjoying their lowest borrowing rates in more than a century, sparking debate about whether the Commonwealth should exploit the cheap cash and go into deficit to fund infrastructure projects.' - The Age Something isn't right in the world. And it's playing havoc with your investments. We'll call out these acts of interest rate manipulation for what they are: crimes against humanity. It's the institutionalised plundering of the savings of private investors...taken indirectly by the State in order to preserve the excesses and corruption of the Welfare State. The aim is for the government to get its money for nothing, while crippling your savings and those of other investors. But in typical mainstream style, those cheering on the government just don't understand the harm caused by fiddling with interest rates. The following quote appeared in today's Age from Deloitte Access Economics' Chris Richardson: 'On the Commonwealth side, you have real yields currently for 2020 at 20 basis points. So, in a sense, if you take inflation out, the government's almost getting interest-free money, which is a great result for the Australian government, and that's obviously also a good result for the taxpayer.' Not so. It's a terrible result for the taxpayer... Bad for Savers, Bad for Taxpayers Low interest rates (free money) encourage the government to put the taxpayer on the hook for more than it otherwise would if interest rates were higher. Not only that, but it's only free money in that the government pays next to no interest for borrowing it. But it's not free to the taxpayer, because whoever the government borrows from will expect to get their money back. And because the government doesn't generate its own revenue and profits, it can only repay the lender by borrowing more money (kicking the can down the road), or taking more money from taxpayer pockets. So we're not quite sure how that is 'a good result for the taxpayer.' And as Henry Hazlitt writes in Man vs The State, whenever the government expropriates money from the private sector, it will always use it for grandiose and wasteful projects. By contrast, if left to the private investor, things would be different. Private investors would be worried about how their money is spent. As Hazlitt notes: 'Private investors, for example, might lend more freely for toll roads and bridges, and similar projects that promised to be self-liquidating, than for those that yielded no monetary return.' That's not to say that all private investors and entrepreneurs get everything right. The point is, if a project is a dud (such as a toll road no-one uses), then the entrepreneur and his or her investors lose out. But those who didn't want the project haven't suffered or lost anything. Those who crave government spending on wasteful infrastructure follies often forget the reality that infrastructure isn't only expensive to build, but it's expensive to maintain, too. It's one thing to put the taxpayer on the hook for a fancy road while interest rates are low, but what about the ongoing expenditure to finance this unnecessary folly? The Art of Land Speculation That's why governments worldwide come up with ever more elaborate schemes to pay for these things. In yesterday's Money Morning we mentioned the call to use tax increment financing (TIF) for a new Melbourne rail line. We revealed TIF for what it was — a fancy way of spending tomorrow's money today, backed by the ancient art of land speculation. And once a government starts spending not just today's tax dollars, but also borrowing in advance of tomorrow's tax dollars, it's a slippery slope of no return. As Hazlitt observed of Uruguay in the 1960s: 'Uruguay's warning to the United States, and to the world, is that governmental welfarism, with its ever-increasing army of pensioners and other beneficiaries, is fatally easy to launch and fatally easy to extend, but almost impossible to bring to a halt — and quite impossible politically to reverse, no matter how obvious and catastrophic its consequences become. It leads to runaway inflation, to state bankruptcy, to political disorder and disintegration, and finally to repressive dictatorship. Yet no country ever seems to learn from the example of another.' There's a simple reason countries don't learn — nationalistic bias and cheerleading. The old, 'we're different'...'it couldn't happen here' mentality. You'll remember that from the Aussie housing debate. It didn't take long for those arguments to shatter. But even when there's proof a country isn't different and that it did happen here, the mainstream still cheers for those in power. The belief that despite the evidence, our central bankers, bureaucrats and politicians are smarter than everyone else's. See the way the mainstream press and certain commentators hang on every word uttered by the RBA governor and his minions. Feel the anticipation in the media as Budget night approaches...awaiting the next one-year central plan. It's clear that a certain type of people want to be led. They can't and won't think for themselves. And they urge the government to take their money to spend as the government sees fit. And because they're unable to think, they demand that others shouldn't think either. And that the government should take the money of the thinkers along with that of the non-thinkers. Because, well, it's only fair that everyone contributes. But after all the fiddling and the theft of personal wealth, one day they'll realise the damage they've caused... Prepare for the Extreme Shock Eventually, low interest rates lead to trouble in the future...when they begin to rise (look at Europe). You can see in the following chart from The Economist that artificially low interest rates can cause an extreme economic shock when they eventually revert to their natural level: US interest rates are at their lowest in over a century. And Spanish and Italian interest rates have soared after being held artificially low for too long. So high interest rates in Australia and even in the US are inevitable. That's why it's important to do all you can now to protect and grow your wealth. It's certainly not too late to get started. [end article] I think this demonstrates a general world wide destabilisation, it's like the velocity and amount of money flowing around the world is beginning to destabilise the entire global system. Australians may say to themselves 'Oh, we have nothing to worry about, we are not in the Euro', but capital flight has pushed up the AUD, making exports more expensive at the same time as wheat prices around the world are rising. However, since the 5 years drought seems to have finally finished, if Australia has a bumper wheat crop, then the global price of wheat could fall considerably. Christopher Carrion