The Motor Traders Association is suggesting that we destroy all of our old vehicles to "stimulate" the industry,

The Motor Traders Association of NSW has written to Treasurer Wayne Swan explaining the benefits of the initiative, while the Motor Traders Association of Australia (MTAA) has commissioned think tank Access Economics to produce economic modelling on the costs.

The MTA NSW has asked the Government to pay up to $3000 to crush cars more than 10 years old.

Once the car was destroyed the owner would get a certificate to be presented at a car dealership to receive $3000 off a new car.

That sounds logical, right? Wrong. They're confusing need with demand. Just because the government and interest groups think we all need to replace these old vechicles, it doesn't me we're entitled to them. We have to produce something, to accumulate purchasing power before we can demand ! However, I do agree with the comment below that this will help the auto industry, in the short term about this there is no doubt,

"We need to help the industry, including 103,000 small businesses that make a living from the car industry and 318,000 workers."

While this "stimulus" may create more work for the car industry and small businesses supported by it, it's actually just a diversion of demand to this industry from others. While these guys are out building cars that no one is actually demanding , other products, the ones people do actually demand, are never created. If the arguments put forth above are really true, then why doesn't the government immediately wreck our old plants, planes, houses, whatever and recycle (or just junk) the old parts? How do they know when something needs to be replaced? Quite simply, they don't.

There exists an optimum level of replacement, a period when the benefits derived from replacing an old piece of machinery overtake the benefits of keeping it. This isn't for the government to decide, it's for the individual. They alone should decide if the vehicle has no value to them anymore and needs to be replaced.

Even if this "stimulus" does increase GDP in monetary terms (i.e. raising prices or 'national income'), it will not be creating any additional wealth or production in our economy: it will destroy it. It's the same reason why most natural disasters result in an increase in GDP, because GDP only measures output, not real wealth.

The sad thing is, this policy is just stupid enough to appeal to the economic illiterates that run this country.

The Reserve Bank of Australia (RBA), a group of government-sponsored bankers given the task of keeping the banking, finance and currency cartel going on behalf of various interest groups, decided to leave rates on hold at 3.25pc during their last meeting. Their decision was received with mixed results: the politicians were slapping themselves on the back, citing their 'stimulus packages' as having cushioned the economy while the homeowners and other debtors were moderately critical.

The minutes of that meeting which were released today have revealed that they believe "...the domestic financial system remained strong and the monetary policy transmission process was working to deliver large reductions in interest rates to end borrowers, particularly households."

Well that's true enough. The artificial reduction of interest rates below what the market rate would be will distort the capital structure of the economy and encourage malinvestment in areas such as housing. Why shouldn't people be able to buy houses that they can't afford, right?

"Early indications were that the monetary and fiscal stimulus that had been applied to the economy was having an expansionary effect, but the size of this remained unclear and it would take some time for the full impact to come through."

"The question for policy was whether further stimulus should be added at this meeting, or whether, having reduced rates at each meeting since September, the Board should pause for a further evaluation of the situation. Members could see reasonable cases for both courses of action. On balance, they judged that, having made a major change to monetary policy over the preceding several meetings in anticipation of weak economic conditions, the best course for this meeting was to leave the cash rate unchanged. Members believed this would leave adequate flexibility for policy at future meetings."

The real reason behind the RBA's decision to leave rates unchanged is the dreaded "liquidity trap" that they all fear. The theory behind this stems back to Keynes, where he said that if the rate of interest falls to a level where people prefer to hold cash rather than debt (due to the low level of interest), then central banks have lost "...effective control over the interest rate". This view is supported by central bankers around the world, including the RBA. Here's a good argument outlining the flaws in this theory.

Interest rates need to rise, not fall. Monetary and Fiscal policy will only cause long-term misery. Eventually -- I don't know when -- the stop-go inflationary policy of the central banks will have to end. Each time we have a recession (a necessary restructuring process) and it's 'cured' by said policy, the capital structure of the economy is further distorted. The Austrian's tried to let their government sort out their woes in the 20s and 30s with spectacular results,

“Austria was successful in pushing through policies which are popular all over the world. Austria has most impressive records in five lines: she increased public expenditures, she increased wages, she increased social benefits, she increased bank credits, she increased consumption. After all those achievements she was on the verge of ruin.” -- Fritz Machlup, The Consumption of Capital in Austria, Review of Economic Statistics, II, 1935, p. 19.

We can't turn stones into bread as Keynes suggested. Printing money doesn't create any wealth. If we continue down this path, unrestrained government spending will result in the "eating of the seed corn", or capital consumption, as Mises noted after witnessing the Austrian demise. There's a point at which the interventionist welfare state will have exhausted "the reserve fund" of accumulated wealth, after which the consumption of capital becomes the only basis upon which to continue to feed the fiscal demands of the state.

The government today announced it's going to slash the number of skilled migrants allowed into Australia to "save local jobs",

"We don't want people coming in who are going to compete with Australians for limited jobs."

Senator Evans says he sees little chance of a change to policy next year.

"What we'll look to do is run a smaller program and keep the capacity to make sure we can bring in any labour we might need as the year develops," he said.

Surely the opposition would object to this, given that the economics behind it are completely false? Nope, not our Malcolm,

Opposition Leader Malcolm Turnbull says the Government should act to cut further if unemployment worsens.

"We've been calling for the Government to cut its immigration intake for months now in light of the worsening economic situation so this is a welcome move," he said.

"It's good that they've finally recognised the gravity to the threats to jobs in Australia and acted to reduce the immigration intake."

...and of course the union has chipped in with their thoughts as well,

The ACTU says it is prudent to make the cuts when unemployment is on the rise.

If the goal of both sides of the political fence is to impoverish us as a nation, then a job well done to all involved! This is just further evidence that neither side has a clue about what's going on and the whole political system in Australia is a sham: left, right - the only difference is who they steal from and who they 'redistribute' to.

China's growing anxious about the level of debt in the U.S. Well, I wonder why? Could it be the inflationary monetary policy they're persuing, or the reckless fiscal spending? It's only a matter of time until China untethers herself from the sinking ship that is the United States and lets them go under.

I think now's as good a time as ever to be short US dollars!

Rudd is planning a "Robin Hood" budget for later this year, stealing from the wealthy (savers) to pay for the poor (debtors). I always thought that Robin Hood stole from the state (the kings, royals and their friends) and gave back to the people? This is equivilant to the king stealing from his people then handing (some of) them back a small amount and asking them to say thanks! It's just another step towards a larger government, creating disincentives to work and save along with wealth destruction and moving us ever closer to serfdom. How much longer can this nanny state continue? Not only have they already horse drawn and quartered capitalism in this crisis (capitalism was NOT the cause!) but it's almost as if they're deliberatly getting every policy response wrong.

Our leaders wouldn't have anything to gain from socialism, would they? Great.

Nothing depresses me more than listening to Julia Gillard, I don't think anything she says makes sense. From the ABC,

"The political party in the Australian Parliament that is spitting in the face of the Australian people and refusing to recognise that mandate is the Liberal Party, with Mr Turnbull dithering on one side, looking over his shoulder to see what Mr Costello is going to say to him next."

What Julia doesn't understand is that their new IR laws will destroy jobs. Unfortunately she can't see beyond the few short-term jobs it will "save" and definitely can't see thousands of jobs that will never be created because of these "reforms". Of course the unions are in full support,

Ms Burrow says a national union poll shows workers want new laws to protect them during the global financial crisis.

"People know that the rights and protections that are in the government's IR bills are more important than ever in an economic downturn," she said.

"Unfair dismissal protection is absolutely central to people's security, they must be put in place."

Any policy that increases the cost of labour above the market rate (when I say market rate, I mean the fair rate) will increase unemployment and lower the standard of living of the nation as a whole. The government has made it nearly impossible to tell if someone is 'employed' or not, the ABS definition is a joke:

"Employed persons comprise all those civilians aged 15 years and over who worked for one hour or more in the reference week or who had a job from which they were absent. Work is taken to mean work for one hour or more during the reference week, undertaken for pay, profit, commission or payment in kind, in a job, business or farm, or without pay in a family business or farm."

Needless to say, even if you aren't 'employed' according to the above definition (one hour a week? are they kidding?), you have to fill several criteria before you're considered 'unemployed'. If you saved for a rainy day and never have to step foot in a Centrelink office, chances are you're not unemployed by their definition.

The term 'CUB' has been floating around Australia (in particular in Western Australia courtesy of the mining boom) since early 2006 and refers to a type of young, white, mainly working-class male. They're generally uncultured, uncouth, poorly educated and are ostentatious with their money, easily falling prey to slick marketing.

I came across an article in the West today which was sympathising with a 29 year old tradesman who had recently been made redundant. He fit the 'CUB' definition perfectly, he: was earning up to $1,700 a week prior to the crisis; has no education; married young; has children; and has multiple cars and a large 4-bedroom house. He is now employed in the fruit picking industry at $550 a week.

The article went on to blame immigrants for "takin our jobs!" when hard working locals should have them. The glaring flaws in that argument aside, the real question is why does this guy deserve our sympathy? During the government-created boom, he was living the high life, far above his means. He splurged on cars, tvs, holidays and much more and now has to bear the cost of that lifestyle. It's a painful slap in the face, but there's no reason that hard-working, prudent savers should have to foot the bill and bail out the 'CUBs' for the same reason that the banks, auto-makers and other failed companies shouldn't be bailed out. Doing so would further send us down the welfare state road by removing yet another incentive to act responsibily: personal losses (free health, free education, welfare benefits, child bonuses, housing bonuses...the list goes on: all of them discourage individual responsbility).

It's time to start living within your means. Real savings are the only road to prosperity, wasteful consumption is nothing but a destroyer of wealth. Plan for the future, don't spend all of your savings and then beg (or in the case of bailouts, take) from people who planned for the inevitable storm and lived within their means. People aren't 'doomed' to be poor: it's a life choice. In the free market there is profit and loss, removing the loss side of the equation has disasterous consequences for both businesses and individuals. Let them live with their choice, through the good times and bad.

Some gold from Malcolm today, he really is running out of ideas. From the ABC:

Opposition Leader Malcolm Turnbull says Prime Minister Kevin Rudd is scaring people by describing global economic conditions as a cyclone.

"Using this type of extravagant language is very counter-productive," he told ABC Radio's AM program.

"Anyone that listens to that is hardly going to take their $900 and spend it - they're going to use it to pay off debt and put it into the bank."

According to Malcolm Turnbull, now that we're too scared to spend we might actually, gasp, start the road to recovery by increasing savings and paying off debt. Yet he chooses to use this as an opportunity to criticise the government?! This shows that both major parties have no idea what they're on about regarding economics. More spending on consumption will not create jobs; it will not pull us out of this crisis. It will only delay the recovery process. We need real savings and for people to pay off the debt they accumulated while living beyond their means. We need a reduction in the size of the state, not an increase. We need to remove the coercive cartel that the state has over banking and money, starting with the RBA. That is what Malcolm should be attacking the government over, not that we're "too scared to spend".

In reply to Malcolm, Wayne Swan chipped in with some usual idiocy,

"I simply reject the notion that there has been no significant impact flowing through from the Government's efforts to stimulate the economy," he told Radio National.

"The alternative is to sit and wait and do nothing and what that will produce is far higher unemployment, far higher lost output and enduring damage to our economy for the long term."

Mr Swan has refused to speculate on whether the country is already in recession but he admits that the nation faces a huge challenge.

"I don't think anybody can say what will occur as we go down the road with this global recession," he said.

Ah, the old "we didn't do enough" fallacy, the "it would have been much worse if we hadn't acted" Keynesian response to the repeated failures of their theory. Their "stimulus" will increase unemployment, it will distort the structure of the economy and will result in further pain in the future.

I have a pretty good idea of what will happen as we go down this slippery road to serfdom: a short-term "fix" through the continuation of a 'stop-go' inflationary policy (in other words, subsidise the banking sector -- Bernanke plans to inflate the money supply to the 'old' level that existed before the bank-created money began to unwind, in effect clearing the banks' debt by devaluaing the currency -- in other words, stealing from anyone who holds USD). Following the 'recovery', inflation will pick up and they'll start to 'tighten' their monetary policy, in the process causing all of the malinvestments that are only around because of the increasing rate of inflation to go broke. In the process, jobs 'created' there will be destroyed and we'll have unemployment in those sectors. We then have the next recession which will come around sooner and will be more severe. Unless these structural issues are resolved, we're destined to have booms and busts, becoming more frequent and severe each time.

Either we have a fundamental change in the way banking and money operate (i.e. free banking) and end this vicious cycle, or...and this is what I'm afraid of...we eventually fall into full-blown socialism.

A bit of good news out of the Reserve Bank today, with the board deciding to leave rates unchanged at 3.25%. Despite the heretics screaming that this will cause us to head into a deeper recession from the rooftops of the highest building they can find, this is relatively good news. I say relatively because the best news would have been a rate hike, but that's just not going to happen with the current incumbents.

You see, when there's a credit crisis people suddenly realise that they didn't save enough over the boom period -- many investments were undertaken, malinvestments, that never should have been started. Many businesses that were in fact not profitable, appeared profitable throughout the boom. The capital structure of the economy has been distorted. People start to realise they need more liquid funds and seek to borrow money to keep their businesses afloat. The logical response by the lenders of this liquid capital, as simple supply and demand dictates, would be to raise prices (interest) -- supply hasn't increased but demand has (this would also deter the marginal -- high risk -- borrowers from taking out loans). Only the most profitable enterprises would be able to afford these higher rates, allowing the most prudent and successful to acquire the much needed liquidity while leaving the unprofitable ones (where all of the malinvestment was) to die. This would no doubt be painful in the short run, but it's not nearly as bad as the current inflationary policy response will be.

...today credit expansion is exclusively a government practice. As far as private banks and bankers are instrumental in issuing fiduciary media, their role is merely ancillary and concerns only technicalities. The governments alone direct the course of affairs. They have attained full supremacy in all matters concerning the size of circulation credit. While the size of the credit expansion that private banks and bankers are able to engineer on an unhampered market is strictly limited, the governments aim at the greatest possible amount of credit expansion. -- Ludwig von Mises, Human Action

The response I speak of is of course a rate cut - lowering the rate of interest below the natural rate lenders would charge in a free market. Rather than let the rate of interest rise, the central bank begins watering down the potency of the currency, enabling them to supply everyone with much needed liquid funds. This fallacy arises from the belief that lower borrowing costs will revive the economy by stimulating investment and consumption, thereby adding to output and employment. The rate is lowered to whatever is deemed appropriate by the government, pressure groups, unions and so on -- people with a vested interest in seeing this rate fall. This is only a superficial solution as these new funds aren't backed by any commodity or anything of value. The areas of malinvestment will still exist; this will just prolong their survival at the expense of the entire economy, transferring wealth from creditors to debtors. This just the obvious issue though, there is something much more sinister about inflationary policy which I'll touch on below.

"In the opinion of the public, more inflation and more credit expansion are the only remedy against the evils inflation and credit expansion have brought about." -- Ludwig von Mises, Human Action

Hayek noted that inflation is much more than just a transfer of wealth from creditors to debtors, as inevitably some people receive the new money first. This causes a distortion in the price structure: some goods and services increase in price first (the first to get the 'new' money) with the rest to follow in succession. Investment will pour into these sectors as they appear to be more profitable thanks to the increase in price, creating further malinvestments, all of which are dependent on an ever-increasing rate of inflation. This distortion in the price system will only cease some time after the end of the inflationary policy. When that time comes, the jobs created in these industries -- the ones which had an inappropriate amount of resources allocated to them due to this new money hitting them first -- will be destroyed. The only way to keep this going is to keep inflation going at an ever increasing rate, one which eventually has to bust -- and the fall will be far more painful the longer this policy is continued.

There are two outcomes from continued monetary expansion: Firstly, if these policies are continued indefinitely, we'll get hyperinflation. That one is straightforward. The other option is what we've had over the past few decades -- a stop-start inflationary policy; a continuation of the boom-bust cycle, or as Hayek said, one "in which from time to time the authorities get alarmed and try to brake, but only with the result that even before the rise of prices has been brought to a stop, unemployment begins to assume threatening proportions and the authorities feel forced to resume expansion."

It's unlikely the central banks will allow the onset of hyperinflation. The latter, on the other hand, is subject to diminishing returns (each stop-start becomes less effective and the recessions will last longer) and unless there are fundamental changes to the way in which we operate -- changes to the way unions, fiat money, central banking and so on exist -- we're doomed to either hyperinflation (with inevitable bust) or larger, more frequent boom-bust cycles.