The South Australian government has released the hounds against McDonalds over a potential price hike,

SA Consumer Affairs Minister Gail Gago says it is not against the law for outlets to charge different prices, but she hopes that is not McDonalds' plan.

"I'm calling on McDonalds today to come out and clear this matter up," she said.

"We want to know whether they do plan to proceed with such a policy.

"I'm also putting McDonalds on notice that inspectors will be out and are monitoring pricing structures over the next couple of months." -- Source

What a great example of economic incompetence. Gail obviously believes that higher prices are a result of the greedy and dishonest businessmen, rather than changes in the conditions of demand and production (she also assumes that the current price is somehow the 'correct' price). If, somehow, her investigators find "evidence" that McDonalds is charging too much for their burgers (ripping off the poor) and she manages to forceably keep the price down, it will only be detrimental to the very people she's trying to protect.

As burgers would be cheaper, demand rises as people are both tempted to buy and can afford to buy more. In addition, McDonalds will eventually cut supply as Gail has effectively discouraged production of burgers for producers -- profit margins have been wiped out. The end result will be the store shutting down (putting the poor people she's trying to protect out of work!). That is of course unless Gail decides to impose more regulations -- for example subsidising beef producers to lower their prices, or buns, or whatever else she can think of. This will in effect subsidise the consumer at the expense of the taxpayer, giving them something for nothing, diverting resources from somewhere more productive thereby decreasing the wealth of the entire nation.

I suppose that's how they get elected though, right?

In today's Unleashed, Bruce Haigh wrote an article entitled "What can Rudd do to restore a healthy economy?", outlining his thoughts on what the Rudd government should do to make sure our economy gets back on track. Initially I thought he was on to some good points, stating that Australian's haven't learnt much from the past...before unleashing against capitalism and promoting full-blown socialism.

Mr. Rudd has a responsibility in times of a shrinking economy to provide a minimum wage, housing, health care, transport and education for adults and children least able to financially cope in the forthcoming straightened circumstances. This is survival spending, it is not designed to create jobs; it is to keep people alive and healthy and to provide the means for their children to participate in and help engineer a revitalised economy when the global economic sickness has passed. This is basic humanitarian assistance; it will not in the short to medium term, of itself, rebuild the economy.

The only thing Mr. Rudd has a responsibility to do is to make sure this doesn't happen again. He needs to do exactly the opposite of what Bruce recommends above and avoid any and all involvement in the economy, financial system, education, health care and so on. We haven't been living with capitalism; on the contrary, we've had statists masquerading as 'capitalists' to suit their own personal endeavors. Rudd himself was a self-proclaimed believer in the market until this crisis happened, but he sure jumped ship quickly (he was always a socialist). There is no middle-ground (see The Myth of the Failure of Capitalism by Ludwig von Mises, 1932.

It can't happen overnight -- the state is so involved in everything we do it's going to be a slow process but these are the types of policies we need. From Friedrich Hayek in a 1975 Meet the Press:

"No, but it goes back to the same cause. The unemployment of which you speak, which is the initial cause, is due to labor being temporarily directed into places or activities or industries where they cannot be maintained without further inflation. Therefore you can only cure that by achieving a new redistribution of labor between employments. Adaptation to a condition in which aggregate demand need not progressively increase to maintain that employment."

"We mustn't assume that all problems are solvable in the short period. There are problems that we cannot solve or which trying to solve them quickly may do more harm than good."

Hayek was saying (he was talking about the U.S. economy) to do the opposite of what Bruce is recommending. The government created this distortion in the allocation of labour and the market needs to redistribute it to more productive areas. Any short-sighted attempt to "save jobs" will do more harm than good. Back to Bruce,

"Mr. Rudd will need to take some drastic and decisive action, taking into account the lessons learnt from the last Great Depression. He will need to cancel some overseas defence orders and rethink defence requirements and strategies, utilising local capacity, particularly in ship building. He will need to take over the local car manufacturing industry, which can also be used for defence production. These decisions will protect and provide new jobs as well as build a local defence production capacity in what will be uncertain times."

I agree with the removal of our (due to our alliance with the US Empire) overseas troop contingent but I'm not sure how to read the rest -- is Bruce really suggesting we mobilize our economy 1930s style to prepare for some (looking at his words, inevitable?) upcoming war? This won't protect jobs. This won't create wealth. Times are only uncertain because people such as Bruce are advocating full-on socialism as a response to the continued failures of the state!

The government needs to regulate the banking industry and get back into the business of banking. It needs to take over Telstra, railway infrastructure and rolling stock and providing an air service in remote Australia. The tyranny of distance demands it. User pays has failed, particularly in rural Australia.

No, the government has had its turn at running banking, telecommunications and public transport into the ground. It needs to remove ANY and ALL involvement in these industries as soon as possible. It needs to remove the red tape completely. It needs to stop creating monopolies through regulation and laws. It needs to let people decide what they want!

The federal government needs to take over the management of water and abolish water licences, as a short and long term stimulator of the economy, particularly the rural economy.

The water debacle is a creation of the government. How will more involvement solve anything? This is a touchy one though, because the state is so involved already (massive property rights issues) you can't just privatise the whole thing in an instant.

The private schools must fend for themselves, that's what private used to mean and the funding of public education significantly increased, particularly in the area of skill creation. Pulling out of depression will require it.

Here's an idea: cut all funding for schools and return the tax dollars used in it back to the parents. As with all of the above, spending needs to be cut dramatically and the market needs to be allowed to provide these services. Private schools can fend for themselves perfectly well -- that is, of course, unless they're competing with these "super schools" with endless pockets and no profit motive!

Import replacement needs to be encouraged and funded, directly, and from loans through the government bank.

Absolutely not. People should be free to choose where they buy their goods from. If there's a market for it, and people really care as much as you think about saving local jobs, then there will be an opportunity for profit (by charging premiums for "made in Australia" products) that entrepreneurs will capitalise on. Why should the government make this decision for us, at our expense? We need to remove all tariffs, subsidies and "import replacement" schemes as soon as possible.

This depression is a direct result of Globalisation. Australia should seek future protection from the buffeting of overseas financial institutions by exercising more control, discipline, stimulus and protection of its own economy.

You're right -- the U.S. Federal Reserve is the key culprit in this crisis, fuelling banks across the world with cheap credit and encouraging consumer debt. But we should not, under any circumstances, revert to a protectionist state-run economy. This cannot work and will serve only to lower our standard of living considerably. We can insulate ourselves against this sort of thing by abolishing the RBA, significantly shrinking the size and involvement of the state, and allow free banking (in other words, let banks create their own currency, backed by commodities of the markets choosing).

Despite what he says, Bruce obviously hasn't learnt anything from the past failures of the policies he advocates.

Some more union back-scratching from the Rudd government masquerading as a measure to "help workers and their families who lose their jobs through no fault of their own" as Rudd announces $300m for (unionised) retrenched workers:

Retrenched workers will now be able to immediately access help to find a new job under a $298.5 million plan announced by Prime Minister Kevin Rudd today...

...Those seeking assistance will now have access to a $550 credit for computer courses, training for heavy vehicle licences and work boots and equipment.

They can also access help for career advice, job applications and skills training.

Last week the Government committed $155 million to encourage employers to keep apprentices on despite tougher economic times

Please. As I mentioned last week and as many people have shown before, this kind of spending does nothing to help our economy. All it does is divert resources away from the areas that need it (i.e. productive industries) and give it to the areas that don't. I'm going to avoid the "through no fault of their own" part of Rudd's explanation (people who were living above their means are guilty as well) and rather focus on why this won't work. For one, how could Rudd possibly know that the market is clamoring for computer skills, heavy vehicle drivers and construction workers? The short answer is he can't! No one can know that, only the market can determine where labour should be efficiently allocated (it's not perfect, but it's better than Rudd!).

The issue we have here, as usual, is Rudd using 'emotion economics' to satisfy his union buddies -- the ones who helped him get to where he is today. This is nothing more than union back-scratching at its best, propping up his mates at the expense of every other Australian. If you complain about this idiotic economics on a logical footing, you're "heartless" or you "don't care about jobs", as the Liberal party is finding out the hard way.

No matter how well an enterprise may be managed, it will fail if it does not know how to protect its interests in the drawing up of the customs rates, in the negotiations before the arbitration boards, and with the cartel authorities. To have 'connections' becomes more important than to produce well and cheaply. -- Ludwig von Mises, The Myth of the Failure of Capitalism (1932)

These handouts need to stop. They are only going to prolong this crisis, cost thousands more jobs and reduce the wealth of our nation.

There's a great article over on mises.org today about the water restrictions in Australia, outlining how poorly government has managed this resource.

"It is near impossible to imagine any private company not enjoying the "problem" of high demand for its products and services. Yet there are some products that are repeatedly reported as shortages. There is one thing these products have in common: government intervention, typically in the form of price controls."

Click here for the full article.

What do you get when you cross a Labour government and a recession? Unions coming out of the woodwork. Their bullying tactics act to serve their particular interest group(s) at the expense of the rest of the nation. The belief that they increase wages over the long run is completely misguided and is one of the greatest fallacies that we've failed to deal with (adequately) for centuries. Wages are determined by productivity -- artificially propping up wages above the market level by embracing short-sighted antisocial policies brought about through intimidation or coercion (i.e. government support) will only serve to increase unemployment.

As Barack Obama's top aide Rahm Emanuel recently put it,

"You never want a serious crisis to go to waste. It's an opportunity to do things you could not do before."

He was implying of course that a crisis is the perfect time to increase the size of government. Likewise, unions take this opportunity to further restrict competition in their own sector of the labour market to raise wage rates. Unions don't allow competition from non-union workers and have a generally limited number of places or strict requirements for entry. For the people who don't join the unions (whether it's their choice or they are rejected), they must look elsewhere or remain unemployed. This will increase the supply of labour in the un-unionised sectors driving down wages and/or increasing unemployment. The unions, however, don't care what happens to these people -- their only interest is in serving their own, selfish interests, reducing the wealth of the nation as a whole.

Master Builders Association (MBA) executive director John Miller says the Government should slash planning red tape so that Canberra's schools can benefit from the Commonwealth stimulus package.

The Greens and the Liberals oppose the plan, but Mr Miller says it is necessary to cut planning red tape to ensure the territory meets Commonwealth deadlines and schools don't miss out.

"The Government's hell bent on making sure that we can actually get this work rolling out the door," he said.

"This is the situation, it's use it or lose it, we just can't afford to lose this work in an economic environment where we're potentially facing redundancies, particularly in the building construction industry."

He says the move would also help avoid job losses in the building industry. -- Source

Unions function through 'emotional economics', tugging on the heartstrings of the people and always portraying themselves as the victims. Take the above as an example: no matter what the situation, they're always seeking to "avoid job losses" in their respective industry. All this does is keep labour occupied in unproductive, wasteful sectors of the economy. If labour is artificially held in these industries all it does is slow down the development of more productive industries by increasing the price of labour. In effect, everyone else is subsidising these people.

One-hundred and seventy Victorian workers at a protective clothing supplier face an uncertain future after the appointment of administrators.

Staff of Melba Industries, which makes clothing for the Country Fire Authority and the Metropolitan Fire and Emergency Services Board (MFB), are being briefed by the administrators.

Melba Industries has 120 staff in Geelong and 50 in Thomastown.

The company also supplies protective clothing for the armed services and components for the car industry.

The administrators say they will be seeking government help to keep the company afloat. -- Source

The government should not keep this company afloat. Their failure is obviously a result of a misallocation of resources during the recent boom -- their business model appeared to be profitable thanks to easy credit bought on by government and the RBA (interest rates below market rates) when in fact it wasn't. It needs to 'die' and free up the capital for other entrepreneurs. We have to avoid 'emotional economics' at all costs -- all it does is hurt the very people they're trying to protect, Australians.

Almost on a daily basis these days so called 'experts' expose themselves as economic illiterates, the latest being Professor Birrell at Monash University in an article entitled 457 visas 'may cost local-born jobs' in the Australian,

AUSTRALIA'S record intake of temporary skilled migrants during the economic downturn could boost the number of Australian-born unemployed, as research suggests it is being used as a "back door" to permanent entry by low-wage workers.

The claim comes from Monash University population expert Bob Birrell, who said more of Australia's permanent skilled migrants were being sourced from the 457 visa program, which was drawing on workers from low-wage countries in increasing numbers. The visas are widely used in the ICT industry.

"People at the lower end of the spectrum are becoming permanent residents," Professor Birrell said. "They're vulnerable to exploitation because the employer knows they're not going to quibble with what he's offering them because they're desperate to get the permanent resident nomination."

As the global recession worsens, Professor Birrell said it was time for the Rudd Government to rethink its record high migration intake.

He said the tough economic climate would give employers added incentives to employ or retain cheap overseas labour in the place of local workers.

This thinking is completely misguided and assumes that there is only so much work to be done in Australia and that if immigrants do more of it, then there won't be anything left for Australians! This is economic illiteracy at its best, for if it were true, wouldn't any and every technological advance we've ever had be a dire threat to our economy? Machines can do the work of thousands of people, should we ban the use of forklifts because they take away valuable lifting jobs? While we're at it, why not ban shovels too -- we could employ several people to dig holes with their hands instead! Ridding ourselves of these technological advances to improve our economy and reduce unemployment is a joke. Likewise, artificially stopping labour from entering -- skilled labour at that -- will do nothing to ease unemployment.

Either Professor Birrell knows very little about the economics which he preaches -- or he knows it very well and is on the payroll of certain special interest groups.

Why is the government only focusing on jobs? Earlier today there was this article, then we also had $155m for employers to keep their apprentice's. Earlier in the week (surprise surprise) we had the unions telling us that we're talking people out of jobs. Right.

The issues we're facing have nothing to do with jobs. The focus needs to be on increasing wealth or value in our economy, not on full employment. Full employment is easy to achieve: Cavemen had full employment; the Egyptians had full employment; prisons have full employment. As lord Keynes once suggested, we can bury old bottles with money in them and then ordinary incentives will get people out there digging! Unfortunately this will do nothing to ease the crisis and get us back to where we need to be. In fact, it will only delay the restructuring process by keeping people in jobs where resources have been inefficiently allocated.

The only way to achieve greater wealth or value, thereby improving our economic well being and possibly (if the state doesn't get involved -- hah) achieving full employment, is by increasing production. Full production needs to be the goal. So why can't the politicians see that, why do they still harp on about jobs? It's quite simple really: they don't know the truth (politicians are generalists not economists); they're probably receiving their advice from 'brains for sale', people with vested interests in not achieving full employment; and emotion sells (or in this case buys votes). Here's a quote from Henry Hazlitt that sums it up nicely,

It would be far better, if that were the choice—which it isn’t—to have maximum production with part of the population supported in idleness by undisguised relief than to provide “full employment” by so many forms of disguised make-work that production is disorganized. The progress of civilization has meant the reduction of employment, not its increase. It is because we have become increasingly wealthy as a nation that we have been able virtually to eliminate child labor, to remove the necessity of work for many of the aged and to make it unnecessary for millions of women to take jobs. A much smaller proportion of the American population needs to work than that, say, of China or of Russia. The real question is not how many millions of jobs there will be in America ten years from now, but how much shall we produce, and what, in consequence, will be our standard of living? The problem of distribution on which all the stress is being put today, is after all more easily solved the more there is to distribute.

We can clarify our thinking if we put our chief emphasis where it belongs—on policies that will maximize production. -- Henry Hazlitt, Economics in One Lesson

From the Times:

The Bank of England will begin radical moves to “print money” in as little as two weeks as it embarks on an aggressive new phase of its efforts to stem the economic slump.

In a surprise acceleration of its fight against the recession, it emerged that the Bank has already written to Alistair Darling to seek his permission to begin so-called “quantitative easing”.

The step means that the Bank will begin creating new money to boost the amount of cash and credit flowing through the economy in an attempt to jump-start growth as soon as March 5, when its Monetary Policy Committee next meets to set interest rates.

Don't be fooled by terms such as "quantitative easing", it's just an attempt to make theft sound positive. Whenever the government (or central bank -- these are one and the same) decides to print money, guess who gets to spend it first? The government and the banks. With more money now floating around, each dollar (or pound in this case) is now worth less -- "quantitative easing" acts as a stealth tax on the value of cash holdings. It just creates the illusion of prosperity and is often popular because at first glance it doesn't appear as though the government has taken resources from anywhere. In reality, they have taken resources from everyone and anyone who holds the currency. The only people who benefit are, as mentioned earlier, the first recipients -- banks and government.

Unfortunately printing money to "...boost the commercial banks' reserves held with the Bank, so improving their ability to make new loans to consumers and businesses and, it is hoped, breathe fresh life into the economy" delays the necessary adjustment in the structure of prices towards consumer's true wishes. That is the only way real demand will be restored and this stunt is nothing more than a transfer of wealth.

Finally some sensible economics from Australian Chamber of Commerce and Industry CEO Peter Anderson, who says that payroll tax acts as a disincentive for businesses to employ people.

"I think we have to get beyond that simple blocking device and say 'let us apply some national thought to this' because it will pay off in the longer term if as a nation we are not taxing employment," he said. -- from the ABC.

Tax is a disincentive? Who would have thought. Having half of my income taken away before I can touch it really encourages me to work harder. Likewise, as Mr Anderson correctly says, any tax, legislation or regulation that increases the cost of labour for businesses will create unemployment. Just read yesterday's post on the minimum wage for an example of how artificially increasing wages above market level causes unemployment.

Mr Anderson says he is aware the move would not be popular with the states, and he would expect state treasurers to immediately complain about having to cut services.

It won't be popular at all with the states; they love forcibly collecting free revenue from their people as much as every other bureaucrat. Every tax cut made by the state will have to correspond with a cut in the 'level of services' because if it doesn't then they will have to borrow (backed by future tax hikes) or inflate the currency (a ruthless form of taxation) to recover this lost revenue.

I stumbled upon two pieces of news today, appearing at first unrelated but after connecting the dots the real culprit became glaringly obvious. The first article was published on Business Spectator, entitled Low pay, high stakes.

"For the past three hearings, the commission has operated in an economy where aggregate demand was rising, and its economic modelling rightly suggested that increasing the minimum wage would have virtually no impact on employment...

...Not surprisingly, Harper is telling the key bodies that make submissions to the commission - unions, employer bodies, and governments - to recalibrate their economic models to factor in falling aggregate demand."

Ah economic modelling, my old friend. Any economist worth his salt (not many these days) knows that economic modelling is about as capable at guiding decisions as is a blind man is at guiding a car down a street. Luckily we have the brilliant Professor Harper at the helm (that is, of course, until the new Minimum Wages Panel arrives -- ugh!), making sure the models that failed to predict the current situation are sufficiently up to date so that they may fail again in the future. What fantastic use of our tax dollars!

The inaccuracies of economic modelling alone should tell us that their figures on the minimum wage are off the 'mark' -- but the bigger problem is that the Fair Pay Commission's 'mark' is about, oh, $14.31 too high! That's right, there shouldn't be a minimum wage. I don't want to get into the fine details about this right now, so i'll just borrow a few words from Mises himself:

"The market wage rate tends toward a height at which all those eager to earn wages get jobs and all those eager to employ workers can hire as many as they want. It tends toward the establishment of what is nowadays called full employment. Where there is neither government nor union interference with the labor market, there is only voluntary or catallactic unemployment. But as soon as external pressure and compulsion, be it on the part of the government or on the part of the unions, tries to fix wage rates at a higher point, institutional unemployment emerges. While there prevails on the unhampered labor market a tendency for catallactic unemployment to disappear, institutional unemployment cannot disappear as long as the government or the unions are successful in the enforcement of their fiat. If the minimum wage rate refers only to a part of the various occupations while other sectors of the labor market are left free, those losing their jobs on its account enter the free branches of business and increase the supply of labor in them. When unionism was restricted to skilled labor mainly, the wage rise achieved by the unions did not lead to institutional unemployment. It merely lowered the height of wage rates in those branches in which there were no efficient unions or no unions at all. The corollary of the rise in wages for organized workers was a drop in wages for unorganized workers. But with the spread of government interference with wages and with government support of unionism, conditions have changed. Institutional unemployment has become a chronic or permanent mass phenomenon." -- Ludwig von Mises, Human Action

Now for the good part! In an article later in the day, Kevin Rudd announced that the government was going to fund apprenticeships around the country, costing taxpayers about $1 or $2 billion (what's the difference, right?!).

Thousands of school and university leavers will also be offered special assistance to find work under plans for a national "jobs compact".

Companies seeking a slice of lucrative infrastructure contracts may be forced to take on young workers, as the Rudd Government pushes for an apprentice-led recovery.

So companies no longer want to employ young workers. In other words, as employers will only pay the value of an additional hours work, the (government induced) credit crisis has resulted in many workers with low productivity (usually those with low education, job experience, and maturity) to be laid off by their employers. So rather than scrapping minimum wage laws and allowing people to work for what they're worth (shocking, I know!), the Rudd Government plans to 'redistribute' income from the rest of the nation and hand it to the people that their own policies put out of work! Our leaders truly are incompetent, both liberal and labour. To quote Donald Horne from 45 years ago (sadly nothing has changed),

"Australia is a lucky country run mainly by second-rate people who share its luck. It lives on the other people's ideas, and, although its ordinary people are adaptable, most of its leaders (in all fields) so lack curiosity about the events that surround them that they are often taken by surprise" -- Donald Horne, The Lucky Country

Maybe one day we'll stop riding on other people's backs, living off of nature's gifts (resources) and get our act together. We can dream...

When in doubt, blame the banks! From the Australian:

Under new ATM access rules due to start on March 3, banks will no longer pay each other a fee every time a customer uses another institution's machine. But nothing will prevent banks from charging their customers a "foreign ATM fee".

Just like with so many things in this country, one government regulation will lead to another. Already we have 'consumer groups' (lobbyists/interest groups) worrying that the banks are going to increase charges to consumers as well as maintain old ones -- NAB, Westpac, ANZ and St George have already announced they will continue to charge foreign ATM fees and the others will follow shortly after.

Consumer advocate Choice yesterday stepped up pressure on the big banks to scrap foreign ATM fees, saying: "The benefits of direct charging reforms will be quickly undermined if customers are charged a separate second fee from their own bank."

Honestly, what do they expect? This is a perfect example of what happens when governments get involved, I can see it now:

Joe: "Hey Sam, those banks are ripping people off, lets come up with a way to stop them!"

Sam: "I agree completely. Let's get our whole team on this and have the new regulation out by friday!"

...one year later (on a friday!) the new regulation comes into effect...

Joe: "Sam, the banks don't seem to be suffering at all. In fact, it looks like they've found a loophole and are actually ripping customers off even more now!"

Sam: "Call the team Joe, it's going to be a long week!"

Now the above is a pretty poor example but it gets the point across -- history has shown over and over again that once you add one regulation they will continue to pile up until they've become some inticrate web of rules that only some 'expert' can untangle. But hey, that creates jobs right? What a joke. Why doesn't the government just deregulate the finance and banking sector, give up control of the dollar (yes, allow banks to create their own currency backed by whatever they want -- not guns like in our current system) and let the market decide if they're being ripped off or not.

This is my excuse for a lack of commentary on the 'stimulus' package -- I'm in the process of converting the entire network from Wordpress to a new CMS that will allow a fully integrated user database, forums, galleries and so on across the network. The only reason I'm doing this is because every single time Wordpress updates (very very frequently!) I have to reconfigure my code to keep accounts working across the network simultaneously.

Everything will remain the same except Pyvis.net and TheAnnualHike.com will be reverting to their old layouts (I preferred them anyway).

UPDATE: The stimulus passed, bugger! Commentary to come tomorrow.

Senator Xenophon joined forces with Coalition senators to defeat the $42b 'stimulus' package, proving once again that politics can save us from...politics! Nick Xenophon's desire to benefit his own interest groups at the expense of the economy has, for now, saved the economy from this horrible 'stimulus' package.

"What happened in the Senate this afternoon was that the Government voted for jobs and the Liberal and National parties voted against jobs," Mr Swan said.

"The actions of the Liberal and National parties in the Senate and their actions in the House over the past week have effectively sabotaged the Australian economy." -- Source

Mr. Swan clearly has no idea how economics actually works; instead he, along with fellow economic illiterates Rudd and Gillard, continue to attack opposition to their 'stimulus' on the grounds of emotion rather than economics. They are joined by the Business Council of Australia, one of the many interest groups they cater to,

The chief executive of the Business Council of Australia, Katie Lahey, said: "The critical thing right now is to maintain and underpin confidence in the Australian economy, and we think the package the Government has put forward will be important in doing that." -- ibid

If this stimulus passes, it may give the impression that jobs are being saved -- but as Bastiat said, it's about looking beyond the immediate effects to see the damage this thing will cause elsewhere. Lets say it saves 500,000 construction jobs. Great, right? What you don't see are the 1,000,000 jobs that were never created thanks to this package distorting the nature of the economy. It will prop up areas of the economy that are full of, you guessed it, malinvestment -- all of which was caused by the same people who claim to have the solution! It will drive wealth from productive areas of the economy and subsidise people who shouldn't have been in their respective industry in the first place. The result of this wealth destruction is that as a nation we're all poorer.

My message to Australian politicians is this: Liberals and Independents, if you really care about jobs and the welfare of the economy, block this 'stimulus' package with everything you've got. I don't care how you do it or what your motives are (personal interest groups). Likewise, to the Labor party, don't back down and give these Independents or Liberals what they want (money for their interest groups)! We need politics to fight the politicians so that hopefully nothing gets done (i.e. they can't cause more damage) and then maybe, somehow, we can luck our way out of this mess.

This year, taxpayers will receive an Economic Stimulus Payment. This is a very exciting new program that I will explain using the Q and A format:

Q. What is an Economic Stimulus Payment?
A. It is money that the federal government will send to taxpayers.

Q. Where will the government get this money?
A. From taxpayers.

Q. So the government is giving me back my own money?
A. Only a smidgin.

Q. What is the purpose of this payment?
A. The plan is that you will use the money to purchase a high-definition TV set or some such thing, thus stimulating the economy.

Q. But isn't that stimulating the economy of China ?
A. Shut up.

Below is some helpful advice on how to best help the Australian economy by spending your stimulus cheque wisely:

If you spend that money at Kmart, all the money will go to China .
If you spend it on petrol it will go to the Arabs.
If you purchase a computer it will go to India .
If you buy a car it will go to Japan .
If you purchase useless crap it will go to Taiwan .

And none of it will help the Australian economy.

We need to keep that money here in Australia . You can keep the money in Australia by spending it at garage sales, going to a cricket match or footy game, or spend it on prostitutes, beer and wine (domestic ONLY), or tattoos, since those are the only businesses that may still be owned by Aussies

Source: Unknown

Just an interesting cartoon I stumbled across here.

Kevin Rudd, as he did with the last stimulus package in December, is hoping that people will go out and binge some more rather than pay off the excessive debt they accumulated whilst living above their means,

"We hope those who can will spend the money - whether it's buying a new washing machine, some more presents for the kids or a little trip away."

Doing so would keep the Australian economy ticking over, he said.

The reason Rudd urges people to go out and spend this money is because if they use it to pay off their debt or save it rather than splurging on consumption a corresponding shrinkage of the money supply will occur. This is because we live in a world of Fractional Reserve Banking, where

...banks keep only a fraction of their deposits in reserve (as cash and other highly liquid assets) and lend out the remainder, while maintaining the simultaneous obligation to redeem all deposits immediately upon demand.

If a loan (debt) is paid off and a new one isn't created, the money supply effectively shrinks. For the crisis to resolve itself this is required -- monetary policy sent incorrect signals to capital markets, reducing lenders’ ability to distinguish between good and bad loans; it also sent incorrect signals to potential borrowers about what they can and cannot afford. This created malinvestment which is now in the process of unwinding.

By encouraging people to continue spending, Rudd and his advisors are trying to keep the party going; unfortunately they won't succeed -- on the contrary, it will just make it a more drawn out and painful process. This is of course assuming the $42b stimulus gets approved -- Rudd is currently engaged in several 'forums' with special interest groups, no doubt wheeling in his barrels of pork, in an effort to make sure that the plans meet the requirements of these special interest groups (at the expense of everyone else). In short, bank customers' economic difficulties, one of the inevitable consequences of all credit expansion, render many loans irrecoverable, accelerating even more the credit tightening process (the inverse of the expansion process).

From Money, Bank Credit, And Economic Cycles by JESÚS HUERTA DE SOTO:

In fact, the bank may completely fail as a result, in which case the bills and deposits issued by it (which we know are economically equivalent) will lose all value, further aggravating the monetary squeeze.

Furthermore, one bank's solvency problems are enough to sow panic among the customers of all other banks, leading them to suspend payments one by one, with tragic economic and financial consequences.

Moreover we must point out that, even if the public continues to trust banks (despite their insolvency), and even if a central bank created ad hoc for such situations provides all the liquidity necessary to assure depositors their deposits are fully protected, the inability to recover loans initiates a process of credit tightening that is spontaneously set off when loans are repaid and cannot be replaced by new ones at the same rate. This phenomenon is typical of periods of recession. When customers default on their loans, banks become more cautious about granting more. Hence the natural reluctance of the demoralized public to request loans is reinforced by banks' greater prudence and rigor when it comes to giving them. In addition, as bankers see their profitability fall along with the value of their assets as a result of irrecoverable loans, they will attempt to be more careful, and other things being equal, to increase their cash on hand by raising their reserve ratio, which will have an even greater tightening effect.

Finally business failures and frustration arising from the inability to honor commitments to banks will contribute even more to the demoralization of economic agents and to their determination to avoid new investment projects financed with bank loans. In fact many businessmen eventually realize they allowed themselves to be carried away by unjustified optimism in the phases of expansion, largely due to the excessively generous credit terms bankers initially offered, and the businessmen correctly attribute their errors in judgment to these easy terms.

...we have seen that the fractional-reserve banking system can contract and drastically reduce the money supply just as easily as it expands credit and increases the money supply. In other words, the system generates an elastic and extremely fragile stock of money which is subject to great convulsions that are very difficult, if not impossible, to mitigate or stop. This monetary and banking system contrasts with inelastic systems (for example, the one that combines the classic gold standard with a 100-percent reserve requirement), which do not permit disproportionate expansion of the money supply (the worldwide production of gold has been growing in recent centuries at the rate of 1 to 2 percent per year). Moreover they offer the following advantage: due to the fact that these systems are inelastic (gold is indestructible and throughout history the world has accumulated a very inflexible stock of it), they do not permit any abrupt decline, nor (logically) any credit or monetary squeezes which exert debilitating effects on the economy, as opposed to the current situation for which the existing banking system is responsible.

From the above we can see that no amount of "stimulus" can stop the process from occurring -- the necessary correction process has already begun. If governments insist on sponsoring fractional reserve banking, the current crisis will always be an inevitable result.

We've recently been "blessed" with two pieces of good (bad) news... Not only has the RBA slashed rates again in an attempt "...to give further support to demand [and] help to cushion the Australian economy from the contractionary forces coming from abroad," but Kev and Wayne have yet another "stimulus" for us!

Much like the first one back in December, in which we were informed by Kevin Rudd that,

"By spending their payments, families and pensioners will help create Australian jobs and strengthen the Australian economy"

With the latest stimulus, Rudd is spouting things such as,

"It does not represent the removal of the problem - it is our best effort to reduce the problem [and] it is a strategy in which a nation can have confidence and as I have said before, it is a strategy to which we will add in the future as is necessary."

So how about we briefly address the plan then and see how much truth there is in what Kevin says (assuming the Liberals don't block it). We're told the plan consists of:

• $14.7b for school infrastructure and maintenance;
• $6.6b for community and Defence housing;
• $2.7b small business tax break;
• $890 million for community infrastructure and road improvements;
• $8.2b tax bonus for those earning under $100,000;
• $1.4 billion for single income families;
• $20.4 million for farmers in hardship;
• $2.6 billion for children going back to school;
• $511 million for students and unemployed returning to training;
• Free ceiling insulation for around 2.7 million homes;
• An increase to the solar hot water rebate of $600 and a doubling of the Low Emissions Plan for Renters to $1,000.

Infrastructure Spending (this includes #1, #2, #4...and I may as well include the last two as well):

These "social investments" really tug on the heart strings -- who is going to object to additional funding for schools or housing for poor/military/disabled people?! This makes it difficult for people to see the real picture, the economics behind it all, which in this case -- just as it is when the government spends on anything -- is a bunch of hogwash. As Murray Rothbard wrote:

"By stressing particular, specific problems, the inference comes that the taxpayer must quickly provide each of a number of goodies: food, housing, clothing, counseling, et al. in turn. And this means far greater subsidies to different sets of bureaucrats and special economic interests: e.g. construction companies, building trade unions, farmers, food distributors, clothing firms, etc. Food stamps, housing vouchers, public housing follow with seemingly crystal-clear logic."

Once again, we see that this is nothing more than a diversion of labour and capital from more productive areas of the economy, incentivising investment in unproductive areas. Not only that, but by providing 'welfare' for these people -- as Rothbard calls them, the "parasite class", we are giving them yet another reason to not work (as if they needed any more).

Regarding school spending -- why not privitise the whole system? Do you honestly believe that the state can do a better job? They've done a bang-up job so far haven't they? That's an issue for another time though (if you're interested in how it could work, here's some reading for you - Rothbard, Block, Rockwell).

Free ceiling insulation? Come on -- what's the bet that we'll be reading about that industry in a years time with their lobby group begging for a bailout and welfare payments for their former workers. It's not all their fault -- the government is creating "fake" demand and encouraging entrepreneurs to seek out this profit. Unfortunately it's not sustainable and all of these businesses will face the harsh reality when the party stops. This will not "create" any jobs. The solar panel rebate falls into this category as well.

"Bonuses" - this includes all of the one-off payments, or everything not covered above:

Tax cuts are great, but only when they're accompanied with a decrease in spending as well. If they don't come with the latter, then we're just going to have to pay for them in the future either through taxation or inflation (same thing). Unfortunately for Rudd, all of his "stimulus" is just a once-off payment (in effect, a transfer of debt from private households to the government -- in other words, robbing the savers to pay the debtors). I'm not sure about the details of the small-business tax break; if this is indeed a perminant reduction in tax, then it's the only piece of good news to come out of this package (but again -- spending must be cut as well!).

The Farmers, or Farmed Robbery:

$20.4 million for our "struggling" millionaire farmers, typical. These guys are always receiving special treatment, because of how "essential" they are to our economy. This is yet another "temporary" subsidy to our farmers, designed to "ease the pain" that they seem to constantly be in. At the end of the day, price supports, supply restrictions, protectionism, taxes and government regulation all cause prices to be higher than they would in a free market.

So, will this "stimulus" help us?

Plain and simply, no. This package will only prolong the recovery period by further distorting the market. Only when the government ceases involvement and, literally, does nothing, will we be able to have a proper recovery. Kevin Rudd is flat-out lying (even if he believes it himself) and this is nothing more than catering to traditional labour lobby groups and campaign financiers at the expense of the rest of the economy.

Steve Keen missed the point a little bit with his recent Debtwatch #31, stating that Marx was correct and that the "Cavaliers" are to blame. I apologise to Steve for not reading the whole issue -- I only read the first two sections and the conclusions. But that was enough to find this error in thought:

This month’s Debtwatch is dedicated to analysing how these Cavaliers actually “make” money and debt—something they think they understand, but in reality, they don’t. A sound model of how money and debt are created makes it obvious that we should never have fallen for the insane notion that the financial system should be self-regulating. All that did was give the Cavaliers a licence to run amok, with the consequences we are now experiencing yet again—150 years after Marx described the crisis that led him to write Das Kapital.

On the contrary, the financial system would function perfectly well if it was self-regulated, the problem is the regulation! In a self-regulating free market, banks would be able to engage in fractional lending if they so choose but the penalty of getting it wrong is bankruptcy. People would only put their savings in banks that they knew had a 100% reserve backing (i.e. did not engage in fractional banking) and as such they would be the only banks to receive deposits and stay in business. Market forces would ensure that only the most trustworthy and sound banks are able to function. There would be no bailouts, no rescue packages and therefore no moral hazard.

The current problem stems from government regulation encouraging banks to engage in fractional banking. That, combined with the government-sponsored reserve bank continually inflating the money supply and artifically setting interest rates is the issue, not the "cavaliers" -- they are a symptom but not the cause. I will agree with Steve that the half-hearted mix-match of capitalism/socialism does not and has not worked. But he's recommending we move further to the left, a stance I disagree with wholeheartedly. Banks should be completely de-regulated and the government should cease all involvement in financial markets, starting with the removal the Reserve Bank.