I've been meaning to write about this 'package' for a few days now but just haven't had the time. The government has decided to spend $4 billion on a bailout for the commercial property sector. I haven't gone over the fine print or legal details but I don't need to -- It's a mistake.

With the collapse of the financial and household sectors it makes perfect sense that the commercial property industry will suffer as well. With hundreds of thousands of "suits" now out of work and companies failing left, right and center, there's a hellofalot of office space suddenly vacant! Add to that the fact that commercial property bubble has been fueled by the same reserve bank induced debt-binge that has affected every other sector and its collapse is INEVITABLE! All this subsidy will do is delay this event from happening!

But no, the government feels that this industry is too "important" to go broke. In effect, they have agreed to transfer wealth or income from some other area of the economy straight into the pockets of the bankers -- as if they needed any more! The taxpayers will lose precisely as much as these bankers will gain. As another consequence, other industries (the more productive ones) will now be that much smaller than they normally would have been. This inefficient money-grab, the forced diversion of labour and capital from more efficient industries into this inefficient, artificially-inflated sector, will result in less wealth generated for our nation and a lower (average) standard of living.

Luckily, Malcolm Turnbull has (accidentally?) decided to fight this package. In his words:

"I have to say I don't think its prospects are very promising from our point of view," he told Fran Kelly on Radio National Breakfast.

"Let's see what they finally present but as it's been presented by the Government, the Government has misrepresented it.

"It's simply about Mr Rudd wanting to use our taxes to help refinance borrowings on existing buildings to prop up asset values."

Whatever his motives may be, lets hope he's successful in blocking this theft.

A recent article by the ABC indicates that females may soon be on wage parity with their male counterparts,

Statistician Brian Pink says higher education levels among women could soon see them earning as much as their male counterparts.

"As we see the proportion of the female population being more highly educated, then it follows that one would expect that they will progressively appear in the statistical profiles as having income that's commensurate with a higher education," he said.

Lets first ignore the fact that it was a statistician making the claim; neither of us are qualified to speculate as to the reasons behind the gender gap, but Walter Block has a few ideas as to why this gap may exist and, in fact, never close:

As for the pay gap, I made the case that it was due, instead, to the asymmetric effects of marriage. This institution enhances male earnings and reduces those of females. Why? Because wives do the lion’s share of cooking, cleaning, shopping, child care. (A survey I took of my Loyola Maryland audience overwhelming supported this contention.) This is an example of the basic economic axiom of opportunity, or alternative costs. When anyone does anything, he is to that extent unable to do something else. Since I was in Baltimore, I illustrated this by use of Michael Phelps, world champion swimmer. I opined that he probably wasn’t a world-class cellist, because to achieve that goal in addition to having a lot of talent, you have to spend many hours each day practicing, and he was busy with other (watery) pursuits. Well, women are also busy with activities other than supplying labor to the market, hence their lower productivity in this sector, compared to what it would be if they were never married.

I gave several bits of evidence, or proof, or illustrations, of this. For one thing, when you compare not all men and all women, but only the never-marrieds, the wage gap between males and females virtually disappears. When you take only young people, aged 18–24, again the male-female wage gap cannot be found, since most of them have never been married. And this entirely reasonable. After all, while women’s productivity on average may well have been lower than men’s in past centuries, when physical strength was important in this regard, in the present century this is no longer true. For another thing, if (all) women really had the same productivity as men, nowadays (they don’t, due to marriage), then there would be additional profits available to any firm that specialized in hiring females. Surely this is a situation that could not long endure.

Now consider the glass ceiling, where Austro libertarians have an even more radical explanation. While men and women, on average, have equal productivity in the market (apart from the influences of marriage), their variance is not at all the same. Rather, men are God’s, or nature’s, "crap shoot": they are all over the lot, ability-wise. In comparison, women are God’s, or nature’s, insurance policy: they are for the most part bunched toward the middle of the IQ, or productivity, frequency distribution. Their standard deviation is very low. I gave examples of this. Take, first, the left-hand part of this bell curve. Men vastly outnumber women in prisons, as homeless street people, in mental institutions, and cemeteries at early ages (that is, men die way before women, not only from natural causes, but also as murder victims). At the other end of the spectrum, there are also precious few women to be found. There are very few female chess grand masters, Nobel Prize winners in hard sciences or economics, top physicists, chemists, mathematicians. Larry Summers was booted out of his Harvard presidency for speculating that part of the explanation for this state of affairs was biological in origin. I went him one better by claiming that this was an important part of the cause, and made the socio-biological case that low female variance allowed our species to out-compete others. E.g., if females were now found in disproportionately high numbers in prisons, on the street, in mental institutions, etc., they would have been incapable, a million years ago, of raising babies. Such a species would have lost out to our own, where very few women are not able to raise the next generation.

Interesting huh?

In a podcast similar to what I wrote back on the 16th, Robert Murphy talks about the financial crisis.

Listen to it here!

[Kevin Rudd] urged unions and workers to exercise wage restraint and asked business operators "to do their utmost to protect their workers from dismissal, knowing these workers will serve them well when times turn good again".

"I know there are employers who have asked their workers to accept shorter working hours rather than lose their jobs," he said. "That encourages me because at this time Australians need to look out for each other as we have done so many times in the past when the going has got tough. We are all in this together". Source

So, it seems Kevin is subtly kicking Keynesianism into gear by halting the growth of wages, a pre-requsite for the theory to "work". The next step will be to start the inflation-making machine (printing presses, spending) and watch as the nation becomes poorer! The lowering of hours is a good one too -- all that will result in is previously employed or "productive" employees (the ones who will keep their jobs regardless) subsidising, in effect, either unemployed workers or the "unproductive" ones (who would have lost their jobs). The very quotable Henry Hazlitt:

...in order that the new workers will individually receive three-fourths as many dollars a week as the old workers used to receive, the old workers will themselves now individually receive only three-fourths as many dollars a week as previously. It is true that the old workers will now work fewer hours; but this purchase of more leisure at a high price is presumably not a decision they have made for its own sake: it is a sacrifice made to provide others with jobs.

While these policies may appear to provide benefits in the short run to certain 'favoured' groups at the expense of others, it can never be good for the economy in the long run as it distorts the structure of production (over-expansion in some industries at the expense of others, wasted capital -- which, eventually, will collapse when it cannot yield an adequate return post-inflation).

In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause - it is seen. The others unfold in succession - they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference - the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, at the risk of a small present evil. --  Frédéric Bastiat, That Which is Seen, and That Which is Not Seen, the Introduction.

Access Economics has forecast a recession in Australia for 2009. This isn't actually the reason behind this post, I'd rather focus on a bit of commentary found on Business Spectator, in particular the part where the author (Alan Kohler) writes:

Throughout most of last year Access's very good economist Chris Richardson and I conducted a friendly debate about growth and inflation - Chris was saying, both privately and publicly, that the authorities should focus on inflation and that growth would be okay; I was saying and writing that we were in a for a serious recession and that inflation would not be a problem and that rates should be cut and fiscal stimulus should be used.

and he continued,

It would be wrong to beat up Chris and his colleagues for their insouciance last year (they were in good company).

Now here's my take on this. While Chris Richardson is wrong in his reasoning, his response would actually be the better course of action (albeit accidentally). That is only because by ‘controlling inflation' he would have inadvertently kept the money supply closer to the level it should be at (in other words, he would have intervened less). Fueling a debt-ridden economy with yet more debt is not the way out of this thing...

No prizes for guessing when the other two depressions occurred. Luckily our debt-GDP ratio is half that of the U.S. so we're not going to be hit as hard as they are.

Just because Chris was wrong does not make Alan correct by default; in fact they were both wrong. Alan's prescription would actually lead to a worse recession -- first, increasing the money supply will only treat the symptoms and not the disease. It is akin to putting out a fire with gasoline; it would make things worse. We don't have a problem of monetary deflation, quite the contrary. We have price deflation -- people have decided the good times are over and are now starting to build up their savings rather than spend (this is a good thing). So increasing the money supply probably won't do much, at least not in the short term (in the long term when the money ‘gets out' it could lead to, worst case, hyperinflation). Encouraging more debt-fueled consumption isn't the way out of a debt-fueled crisis...neither is inflating our way out (it worked wonders for Zimbabwe).

Secondly, ‘fiscal stimulus' won't help at all. It will rob peter to pay paul as government fiscal spending only creates a diversion of jobs. It moves labour from productive areas of the economy to unproductive areas - from somewhere people want to somewhere a bureaucrat decides is best. Take this example.

Alan and Chris strike me as two people arguing over where to place the deck chairs on the titanic as it sinks. Although Alan is correct about one thing in his article -- forecasts are pure guesswork and should never be taken as anything else. I'll leave you with some interesting quotes from history,

"The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be exempt from any intellectual influences, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbled of a few years back." - Keynes, The General Theory of Employment, Interest and Money.

Then there's this beauty (I just love really old quotes for some reason),

"The budget should be balanced, the treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and assistance to foreign lands should be curtailed les Rome become bankrupt. People must learn to work, instead of living on public assistance." - Cicero, 55 BC.

Finally, Mises on the Causes of the Great Depression,

"All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates. This may contradict the prevailing view. It certainly is not popular. Today all governments and political parties have full confidence in interventionism and it is not likely that they will abandon their program. However, it is perhaps not too optimistic to assume that those governments and parties whose policies have led to this crisis will some day disappear from the stage and make way for men whose economic program leads, not to destruction and chaos, but to economic development and progress."

Just a stupid idea I've been playing with (relating to the previous article). These numbers are just made up, I would need actual data to do this properly. Here's the scenario:

You have a road with 100 car users. They travel at an average speed of 50km/h on a road of 1,000m in distance. Suddenly, Joe Bloggs decides to ride his bike. Due to a lack of a cycle path, he uses the road he used to take his car on. So the new situation is this: 99 car users on a road of 1,000m. Lets assume that as there has been a 1% decrease in the number of cars, that corresponds to a 1% increase in the average speed (I have no idea what the actual ratio is - this also doesn't take into account the speed limit - which might be 50km/h - or road capacity etc), which is now 50.5km/h.

When we factor in Joe Bloggs, traveling at 20km/h , we have a new problem. Cars were traveling at an equal distance from each other in a nice, flowing manner. But when Joe joins the road, hugging the left hand curb, cars have to slow down, wait for oncoming traffic to be clear (relatively - i.e. no big truck approaching), then move slightly to the right before overtaking and continuing at 50.5km/h. However, this slowdown has an effect on everyone behind Joe. Assume that each car is inconvenienced by 10 seconds (generous, it's likely more) and has to slow down to 30k/h for that time. Prior to Joe converting to a bike, it took commuters 1 minute and 12 seconds to reach the end of the road (going at an average speed of 50km/h).

The 0.5km/h speed boost translates to a 1 second gain for each vehicle, or 1 minute 35 seconds, plus the 1 minute 12 seconds from Joe -- great, Joe has reduced overall congestion by a whopping 2 minutes and 45 seconds - that must be great for the environment! However, when we factor Joe the cyclist into the equation, the 10 seconds that users are stuck at 30km/h results in only 83.333 meters traveled in that time. Subtracting this from the 1,000 is: 1 minute 5 seconds (to travel 916.666 meters at 50.5km/h) plus 9 seconds (83.333 meters at 30km/h) equals 1 minute 14 seconds of travel time, an increase of 2 seconds of travel for every other commuter, not the 1 second decrease we had expected. So now we have to shave that 1 minute and 35 second gain off and instead add 3 minutes and 18 seconds (2 seconds for each of the 99 vehicles left). Subtracting Joe's savings of 1 minute and 12 seconds of commute time by not driving his car, the increase in commute time becomes 2 minutes and 6 seconds (or 0.75%), thereby causing more damage to the environment and more congestion than if Joe had driven his car.

Make sense?

It's about time someone did a study on those 'packs' of cyclists who plague our roads.

The study found the behaviour of the cyclists breached all three cycling road rules included in the research. "The cyclists were riding more than two abreast for the entire footage, almost the whole ride the cyclists were in more than one lane, and almost half of the red lights faced were ridden through," the study reported. - Source

Although I don't drive to work anymore, I have many unfond memories of cyclists blocking an entire lane of the freeway acting like they own the place. They don't even pay to use the roads in the first place! Not only that, but the taxpayer funds all of these expensive state-of-the-art bike lanes and what do they do? They ride on the road anyway (I have personally witnessed this scenario) parallel to the vacant bike lane.

There exists a common 'get-out' clause amongst politicians and academics alike, spouting off phrases such as "it would have happened anyway" or "it happened because we didn't do enough" in response to failed intervention. The issue is the onus of proof: they present their (flawed) economic models which show their policy working perfectly and conclude that the only logical explaination as to why their policy (bailout, stimulus, tariff, subsidy -- whatever) didn't work was because of some external factor -- greedy businessmen, China, the opposition (for example adding 'compromises' into it which stop it working to its full effect). But the answer always stares them right in the face -- it's the actual policy itself that is flawed.

Government intervention has and will never work. The market must be allowed to correct itself; industries must be able to shrink or die, allowing new industries to accumulate capital and labour and grow; the price system must be allowed to work as freely and undistorted as possible.

"The market processes give meaning to the capitalistic economy. They place entrepreneurs and capitalists in the service of satisfying the wants of consumers. If the workings of these complex processes are interfered with, then disturbances are brought about which hamper the adjustment of supply to demand and lead production astray, along paths which keep them from attaining the goal of economic action—i.e., the satisfaction of wants. These disturbances constitute the economic crisis." - Ludwig von Mises, 1931, The Causes of the Economic Crisis: An Address

The only way to stop major economic crises is to stop government interferring with the market. Unfortunately, it seems (almost) no one learned from the great depression or any other crisis in our history; instead they say that government "didn't do enough". Alas this is what the people want to hear, that there's some magical fix to this mess and that the government can save them. They don't want the truth.

We can only hope that when this crisis is over people will finally open their eyes and realise they have been misled. I just hope it isn't too late by then, comrades.

"Freedom is indivisible. As soon as one starts to restrict it, one enters upon a decline on which it is difficult to stop." -- Ludwig von Mises, Human Action

While deflation is the bogyman to the central bankers, unemployment appears to be the arch-nemesis of the Krugmanites (Keynesians). The problem is that as I've mentioned many times before, unemployment is created by governments artificially diverting 'good' production to areas of 'bad' production though shoddy policies and incentives. Krugman and co. argue that the government will have to spend big to fix the looming 10% unemployment rate and is actually worried that the planned $1 trillion isn't enough! What Prof. Krugman doesn't understand is that it is production which inherently drives employment. We can have full employment without full production; we can't have full production without full employment.

I don't want to get too deep into this as there's plenty of commentary against Krugman's policy advice to date, so I'll just paste a clip from Henry Hazlitt's Economics in One Lesson which will hopefully open some eyes:

Primitive tribes are naked, and wretchedly fed and housed, but they do not suffer from unemployment...Nothing is easier to achieve than full employment, once it is divorced from the goal of full production and taken as an end in itself. Hitler provided full employment with a huge armament program. World War II provided full employment for every nation involved. The slave labor in Germany had full employment. Prisons and chain gangs have full employment. Coercion can always provide full employment. -- Henry Hazlitt, 1946.

This seems to be the phrase touted by the media every day; as each month passes the data indicates that the crisis is worse than expected, jobs are down and that we're all going to suffer for our evil deeds. Let us not forget that it wasn't the 'evil capitalists' who caused this (they played their role but are one of the symptoms not the cause) -- it was government intervention in the markets, more specifically, the reserve banks artificially keeping interest rates down -- thereby allowing many businesses who would fail in a true free market -- to make 'fake' profits.

To get to the point of this post, the new measures government is unveiling to "combat the crisis". The big winners: the pensioners, parents and first home buyers of course -- traditional favourites of government intervention and flawed 'stimulus' packages.

The Government is in the process of spending $10.4 billion, with payments to pensioners, families and carers, and increasing the first-home buyers grant.

I for one can't believe how short-sighted the government is. Oh wait, yes I can. I just don't know why everyone is buying into their hogwash. Government 'stimulus' comes from one place and one place only: taxation (inflation -- the act of printing more money -- is the most vicious form of taxation). They are taking wealth from other areas of the economy and transplanting it (inefficiently -- this is the government after all) to somewhere a bureaucrat in Canberra has deemed worthy (because bureaucrat's know better than you do, right?).

When the government runs up a deficit to fund "stimulus" projects, all that really means is that it is forcing taxpayers to pay for projects that they wouldn't buy with their own money. -- Robert P. Murphy

Lets get back to the stimulus package and have a closer look. Sure, the pensioner will go out and spend his 'new' $1,000 on a TV. He has a new TV, plus you create all of those jobs in the TV industry, everyone is happy. Sounds good right? Except everyone forgets the 'other guy' -- the individual/business who was taxed this $1,000 and is now not able to spend, invest or save it. Lets assume this individual was going to buy a $1,000 suit with that money. That suit will now never be made.  If this spending on a TV created one job, then a private job (the tailor) was lost somewhere else in the economy. At best, government spending is a diversion of jobs -- from a legitimate need to a government-determined need.

Congratulations, you just learned how bubbles (artificially inflated sectors of the economy that will eventually have to 'pop' as they are based on false fundamentals) are formed!

Now briefly on to these voodoo economists:

Deutsche Bank chief economist Tony Meer expects the budget deficit to be in the region of $10 billion to $12 billion, depending on the size of additional spending.

He expects the tax cuts legislated for this year, in addition to those that were delivered last July, would pump about $10 billion into the economy in 2009-10.

How can these 'economists', who are paid exorbitant amounts of money, continue to push this economic blasphemy? These stimulus packages don't 'pump' anything into the economy but long-term misery. The government never lends or gives out anything that it hasn't taken (or will take) away from private individuals and business. It simply takes from successful businesses and gives to unsuccessful businesses. Government creates and even encourages unemployment with their continued intervention and 'aid', distorting the markets and hindering the progress of the successful sectors of the economy. Perhaps the Upton Sinclair theorem can help explain it:

It is difficult to get a man to understand something, when his ideological worldview depends on it not being true.

It's time to wake up and smell the bacon!

Update: I'd just like to point out that, regarding the first home buyers grant, my post last week predicted that this would be increased and extended as an attempt to keep the bubble inflated and encourage further malinvestment, or a diversion of resources. It has to end sometime...

...we've been here before! Ludwig von Mises, in 1931, wrote about the causes of the Great Depression. His explanation bears a remarkable similarity to that of today's situation. I've included a small section below which indicates how wrong the current policies of fiscal and monetary stimulus actually are (make sure to click 'read more' after the first paragraph). The next logical step is communism (no doubt renamed and rehashed but fundamentally the same thing -- as everyone knows that communism is bad!)

2. INFLATION AS A "REMEDY"
It is astonishing that sincere persons can either make such a demand or lend it support. Every possible argument in favor of such a scheme has already been raised a hundred times, and demolished a thousand times over. Only one argument is new, although on that account no less false. This is to the effect that the higher than unhampered market wage rates can be brought into proper relationship most easily by an inflation.

This argument shows how seriously concerned our political economists are to avoid displeasing the labor unions. Although they cannot help but recognize that wage rates are too high and must be reduced, they dare not openly call for a halt to such overpayments. Instead, they propose to outsmart the unions in some way. They propose that the actual money wage rate remain unchanged in the coming inflation. In effect, this would amount to reducing the real wage. This assumes, of course, that the unions will refrain from making further wage demands in the ensuing boom and that they will, instead, remain passive while their real wage rates deteriorate. Even if this entirely unjustified optimistic expectation is accepted as true, nothing is gained thereby. A boom caused by banking policy measures must still lead eventually to a crisis and a depression. So, by this method, the problem of lowering wage rates is not resolved but simply postponed.

Yet, all things considered, many may think it advantageous to delay the unavoidable showdown with labor union policy. However, this ignores the fact that, with each artificial boom, large sums of capital are malinvested and, as a result, wasted. Every diminution in society's stock of capital must lead toward a reduction in the "natural" or "static" wage rate. Thus, postponing the decision costs the masses a great deal. Moreover, it will make the final confrontation still more difficult, rather than easier.

...and

All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production. Give up the pursuit of policies which seek to establish interest rates, wage rates and commodity prices different from those the market indicates. This may contradict the prevailing view. It certainly is not popular. Today all governments and political parties have full confidence in interventionism and it is not likely that they will abandon their program. However, it is perhaps not too optimistic to assume that those governments and parties whose policies have led to this crisis will some day disappear from the stage and make way for men whose economic program leads, not to destruction and chaos, but to economic development and progress.

The stats are indicating that we have some significant price deflation occurring in housing, the worst of which is being experienced in WA. Considering that the other states (ex. Queensland) have been in virtual recession for a long time now and houses probably already reflect close-to-real prices this was hardly surprising. People's time-preferences are changing; with all of the grim news and speculation over the home buyers grant individuals are holding off on that new house.

This is NOT a credit issue -- I'm sure most people who are in the 'considering' bucket can afford to buy a house. There are other factors involved here.

Think about it

1) Confidence is down -- The news is saying we're all going to be out of work soon! Better not buy that home just yet!

2) Anticipated Price Deflation -- It's widely expected that, in the short term, house prices will fall. Why spend $1m today when I can get the same for $750k in a year?

3) Government Intervention -- The first home owners grant and speculation on other aid ('stimulus') packages. This is, in my opinion, the biggest culprit. The government has been fueling this speculation with their own policies -- for example the first home buyers grant has gone from $7,000 to $14,000 ($21,000 new). Add to that the availability of artificially cheap credit (yes, this was the RBA's work) and you get a housing bubble.

So what will happen?

People will speculate, for good reason, that if they hold out they will end up with a better deal -- confidence that they won't lose their job; a cheaper price thanks to falling market prices; a larger home buyers grant from the government; lower interest rates on their mortgage; and hopefully some kind of fiscal stimulus bonus.

Would you buy a house today?

House prices (approvals) will continue to fall. The government will intervene and provide some kind of bailout package to go with continued interest rate cuts. The bubble will re-inflate and everyone will praise their brilliant work. Until five (I have no idea what time frame we're talking here; this is a rough guesstimate) years down the track inflation hits, interest rates rise and the bubble pops (again). Now the real question is -- how do we stop this vicious government-induced cycle?

Source

To quote Mises:

All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production.
- Ludwig von Mises, The Causes of the Economic Crisis

I've just been looking at some data from both the U.S. and Australia and it's quite worrying, especially the U.S. data. The first indicates what everyone has expected -- the Central Bank is pumping (read: printing) massive amounts of currency in an attempt to counter Bernanke's biggest fear: d-d-deflation.

The problem with this is that Bernanke appears to be confusing price deflation with monetary deflation, two different concepts. What currently exists in the U.S. is the former, where consumers have decided that the boom is over and they're now spending less than they did before. This is a natural process -- as demand falls so do prices. It's not due to a lack of money supply.

Now, that's where the problem starts...Bernanke seems to think that by throwing more dollars into the economy and inflating the money supply he'll somehow manage to keep the party rolling and get rid of that evil little thing called deflation. However, this isn't treating the cause of the problem -- in fact nothing done so far has attempted to treat the cause, just the symptoms. Consumers are afraid to continue the reckless borrowing and spending trends they used to have and so this 'plan' is unlikely to work. Here's a chart of the U.S. household saving level:

Now, what happens when all of this money is pumped into the economy and no one wants to spend it? Not much (the banks, who will end up with most of it, will be reluctant to lend -- the 'multiplier effect' will end at the first rung). However, when things start to pick up again -- the sharemarket has a good run, some positive stats come out, Bernanke declares victory -- the shit hits the fan (pardon the french). All of this artificial 'funny money' (money is a medium of exchange...while it is a good, it must have first originated as a serviceable good before it can become an indirect serviceable good (money). Therefore it requires real savings. You can't just 'make it' out of thin air -- look at Zimbabwe) and credit will send prices skywards and massive price inflation will occur in response to the monetary inflation being crafted out today.

What will the Central Bank do to fix this when it happens (the problem is no one knows when -- it could be months, years...who knows, I'm not in the business of voodoo forecasting)? Simple! They'll crank the interest rates up in an attempt to stop the rampant inflation and the monetary yo-yoing will continue.

How does Australia fare in all of this? Lets first have a look at some charts I've quickly whipped up:

These appear to indicate that we're following the path of the U.S., albeit not to the same extremes. We can only hope that the RBA doesn't decide to inflate the money supply at the same rate as our American friends (we know they'll be pumping, just not to what extent). I'd say the entire scenario is akin to gashing your arm and instead of letting it heal by itself, the Central Bankers are instead picking at it, resulting in a slower recovery and long-term scars!

I know I'm eagerly awaiting the next piece of gold (speech) to come out of Glen Stevens -- hopefully it's as good as the last one.

I know it's old but I just had to bring this up. The words in the title are ones spoken by Glen Stevens, the Reserve Bank Governor of Australia in a speech on December 9, 2008.

I do not know anyone who predicted this course of events. This should give us cause to reflect on how hard a job it is to make genuinely useful forecasts. What we have seen is truly a ‘tail’ outcome – the kind of outcome that the routine forecasting process never predicts. But it has occurred, it has implications, and so we must reflect on it.

I find it odd that the Reserve Bank Governor doesn't know anyone who predicted the recent world events. Off the top of my head I can think of a few - hell the entire Austrian School of economics has been calling this thing since 2006(ish). Perhaps it's because the Reserve Bank relies on their Computerised General Equilibrium (CGE) models of the economy, based on the flawed neoclassical fundamentals in which their staff are trained to provide them with these 'forecasts'.

Unfortunately, CGE models have all but conquered the world of policy analysis today; use of the general equilibrium framework appears to be taken as the mark of good science. I personally favour an Austrian approach of qualitative case-by-case analysis. To quote Henry Hazlitt (I forget the exact date -- sometime around the 1930s/40s):

The art of economics consists in looking not merely at the immediate but at the long effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.

Perhaps the Governor aught to broaden his horizons a bit and start reading literature from all trains of thought rather than just neoclassical/keynesian rhetoric that they've been blindly following their entire lives.

With the financial crisis still creating headlines everywhere it seems that an Australian broking firm has been shut down amidst the stench of scandal. Slowdowns/recessions/depressions are always great for ending scandals -- the 'too good to be true' firms are often revealed for what they really are. From the Australian:

ONE of WA's best-known stockbrokers, Terry Hogan, has shut down his firm after the alleged disappearance of millions of dollars of a client's money.

Following the failure of the SEC in America to spot the Madoff scandal (despite being warned many times) I'd just like to take this opportunity to briefly explore the role of ASIC here in Australia. Unfortunately I don't have the time to run the numbers and produce a neat chart showing the historical funding levels of ASIC but I've noticed that they, like the SEC in the states, have received increased funding in every recent budget and are now pleading for more (ASIC currently have 1,669 staff compared to the 3,000 or so at the SEC in the states -- and comparing our population -- it's safe to say that ASIC appears a bit bloated).

If almost 1,700 staff can't spot scams before they happen (all they seem to be able to do is 'investigate the claims' after the deed is done; meanwhile the culprit will no doubt have hidden most of the money and the victims won't see a cent) then what is the point? I have to agree with the Austrians on this one and endorse a private-sector watchdog to spot these scams before they happen. After all, if a private-sector watchdog failed at its job I can guarantee that it would be out of business pretty fast -- whereas all that happens to ASIC is they receive additional funding!