Oliver Blanchard, of the International Monetary Fund (IMF) has come out saying that countries that can afford to use stimulus, should do it just to spur growth.

Here we go again.

It was only a week ago that Paul Krugman was telling us the stimulus package in the US wasn’t big enough and that he demands more! And now we have another so called expert suggesting that countries borrow more money from its people to maintain and encourage growth.

Sadly, I don’t think there is an emoticon to express rolling your eyes.

Think about, we’re only just starting to see the real effects of what happens when stimulus wears off. Growth in the US has pretty much stalled, the housing market is almost non-existent and the unemployment level is high.

So yes, the first lot of stimulus did give a little boost to the economy. But the government can’t simply keep printing money every time it gets a batch of economic numbers that it doesn’t like.

As Blanchard said in a recent interview ‘The recovery in the best of cases is not next six months or a year.’ Later adding that it will be ‘…relatively slowly in the US, maybe faster in Europe but it’s going to be there for a long time.’

So why not just throw some money at the problem so it goes away?

Oh, right. That’s because it didn’t work the first time. So let’s just try one more time to make sure it really doesn’t work.

It is almost easy to understand the current financial state of many countries of the western world when you have experts telling you that if you can go into debt, you should, just to save the people.

If this is what these leaders are being told now, imagine what they were being told before the financial crash.

‘She’ll be right. Things are different now.’ Or maybe something like, ‘Don’t worry mate, we’ll just print our way out of it’?

But, you have to ask, what determines whether a country that can afford stimulus? What qualifies as a country that should create further debt to enable further growth?

And why keep recommending it as the solution when it’s clearly not working?

Volume still lighter than normal.

For the past couple of months, many market commentators have made a reference to the fact the volume on the exchange in America is still much lighter than normal.

Yes, over the holiday period in the US it is light, however it should have returned to normal, which is about nine billion shares a day.

So what has been going on?

Volume has been hovering around the six and a half billion mark on the days the US sees a rally, which is just over two thirds of the amount normally traded. The lack of punters in the market suggests that not as many people believe in the rally.

But even on the days when the market drops into the red, the amount of shares traded still hasn’t reached what’s considered normal levels.

While I’m certainly no expert on the US market, a reporter in the US has produced a quick break down of where the trades are coming from.

Interestingly, institutional traders in the US are backing out of the market. Mostly because the investors they trade on behalf of, are pulling their money out of the funds they manage.

And the hedge funds have had lighter trading volumes lately, for the sole reason that stock selection hasn’t been as successful this year, so they have slowed down the frequency of their trades.

Is the lighter volume a new normal or just a sign that no one really knows what direction the market is about to take?

Now let’s have a look what happened on the market’s yesterday…

The S&P/ASX 200 closed at 4,582.20, higher by 45 points. Positive employment data helped pushed the index higher as the unemployment dropped to 5.1%. The data showed that 53,100 full time jobs were created.

The Dow Jones Industrial Average finished 28 points higher to 10,415.25. Despite the financial sector trying to drag the Dow down, the latest statistics showing unemployment claims were lower managed to boost the market.

However there have been some suggestions that the data may be incorrect as people weren’t able to submit their first time unemployment claims in time for the Labour Day holiday.

Despite the UK’s trade deficit widening, the FTSE still closed 64 points to 5,494.16. Imports of chemicals and oil drove the deficit to its highest level in two years.

One economist called the figures ‘a disappointment’ and the Prime Minister Nick Clegg reminded everyone that the recovery will be ‘choppy and uneven’.

And finally the Nikkei added 73 points to end the session at 9,098.39.

The price of spot gold in Australian dollars is trading at $1,348.87 while in US Dollars it is trading 1,245.03. The price of silver in Aussie dollars is $21.33 and in US Dollars it is $19.69.

The strong jobs data for Australia pushed the Aussie dollar higher yesterday.

The Aussie dollar versus the US dollar was USD$0.9236, and against the Japanese Yen JPY 77.56.

Crude Oil closed at USD$74.88

For the biggest movers on the market yesterday click here…

That’s all I have you this Friday, have a great weekend.

Shae.

“Swan firm on mining tax… Independents, Greens want change” – Australian Financial Review

“The first cracks have appeared in the Gillard government’s alliance with the crossbench MP’s, with the Greens signalling they may side with the Coalition on some issues…” - The Age

So yet again your editor finds himself agreeing with former Labor Party leader Mark Latham. Excerpts from Latham’s column in today’s Australian Financial Review include:

“[E]lection results in Australia are determined by voters who are blasé about politics: those who visit a polling booth only because of the coercion of the state, the threat of fines and court action under Australia’s compulsory voting laws…

“Up to half the bureaucracies, rules and regulations of the state could be abolished without any noticeable impact on the life of the nation.”

Blimey! That’s almost something we could vote for. Although we think Latham is being a bit too kind on the Canberra bureaucrats, “Up to half”, we’d argue you could get rid of 99% of them and it wouldn’t have any negative impact on the life of the nation.

However, as for democracy, we tend to agree with Doug Casey’s view:

“Democracy is no solution – it’s just 51% bossing the other 49% around. For God’s sake, Hitler was democratically elected. Democracy is just mob rule dressed up in a coat and tie.”

Maybe Mark Latham is becoming more libertarian as the years pass? Although we’re sure he’s still lugging around plenty of socialist baggage, so we won’t big him up too much.

But enough of that, more of this…

Several Money Morning readers have pulled us up on our views about the Christchurch earthquake. Their argument has been that the earthquake actually will be positive for the New Zealand economy. How?

Because most of the cost of funding the rebuilding will come from insurance claims.

Therefore there won’t be any drain of funds from the private sector. The household that had $10,000 in the bank account will still have $10,000 in the bank account because all they need to do is file an insurance claim and the insurer will pay for the rebuilding or repairs to the home.

So, because of that the householder will be able to spend or save their money as they wish.

The other argument goes that it will also be positive for the economy because it will draw additional labour into the Christchurch area, most probably from overseas due to a skills shortage in New Zealand and that this will lead to more spending and more job creation.

All of which will be good for the New Zealand economy.

Apologies for bringing up this subject again, but we do like to tie-up loose ends where we can. So, are the insurance and job creation arguments reasonable?

In short, no. Let me explain…

First off, as usual, those that use the insurance argument only address half the story. Insurance is, well insurance. It’s there to insure against the worst. Insurance isn’t supposed to be profitable.

As soon as you consider the profitability of something then it becomes an investment, not insurance.

For instance, your editor generally views gold as being an insurance policy against the worst. We hold gold – and silver – on the off chance that inflation will go haywire, or political instability cause social breakdown then gold is a good insurance policy as it would surely become a valuable method of indirect exchange.

However, we don’t actually want that to happen. We don’t actually want there to be hyperinflation, because if that did occur it’s most likely to result in a lowering of our quality of life.

Abolition of coercive governments and bureaucracies is a different thing. That would be a positive.

But even the most bearish of bears is unlikely to wish for hyperinflation or social breakdown, unless of course they have bought gold as an investment rather than as insurance.

Then they should see their investments rise in value. But if there wasn’t hyperinflation or social unrest then their investments may not perform as well as if they’d invested in shares or bonds or property.

For most people, including those that hold gold, they are most likely to be better off without hyperinflation or social unrest. The gold holdings serve as an insurance policy should the worst happen.

It’s the same with insurance policies and earthquakes. Very few people in Christchurch right this minute, or even in the medium term will be thanking their lucky stars that an earthquake flattened the city.

Even with insurance, it’s likely that most people will be worse off now than they were three weeks ago. While they may be able to claim insurance for rebuilding or repairing their house or business, it doesn’t avoid the fact that they house or business has been destroyed.

It doesn’t avoid the fact that they’ll have to live in temporary accommodation for several months. Accommodation that will most likely be of a lower standard than their home before it was damaged.

Aside from that, how will the businesses generate revenue if they have no shop or factory to operate from?

How will individuals generate income if their employer doesn’t have a shop or factory to employ them in?

Again, maybe they have insurance policies to cover for this, but it’s unlikely to provide them with the same level of income as they’d get from their fully operating business or job.

As we recall, personal income protection only covers a maximum of 75% of your salary anyway.

And are the people who worked in the shops or factories skilled enough to get a job as a builder, carpenter or glazier so that they can “benefit” from the supposed economic boom from the earthquake?

Or, just as builders, carpenters or glaziers may descend on Christchurch in their droves looking to profit from disaster, is it not equally likely that shop workers or factory workers, dentists and hairdressers may leave Christchurch in order to get work they are qualified for elsewhere?

Not to mention the fact that insurance companies aren’t charitable organisations. Sure they may be able to pay claims from reserves, but odds are they will want to rebuild the reserves. And that means potentially increasing future premiums for those that have claimed, and perhaps those that haven’t claimed.

And finally there’s the issue of the demand for scarce resources. With hundreds or thousands of buildings to be repaired or rebuilt this will naturally cause the price of building materials to rise.

Because earthquakes happen so suddenly there obviously isn’t the time for building merchants or timber yards to prepare in advance for the increased demand. Therefore prices for timber and bricks and bathrooms and kitchen units will be higher than they otherwise would have been without the earthquake.

That means households in other New Zealand cities will also have to pay higher prices as the demand increases and as businesses realise they are able to increase prices to meet the demand.

Naturally, higher prices for these goods means less money is available to be spent or saved elsewhere in the economy – remember even those not covered by insurance will now have to pay the higher prices too.

And due to the higher demand and higher prices it may be that to rebuild the same house would actually cost more than the amount it was insured for. So you may be in the position of having to rebuild a smaller house as a consequence of the increase in building costs.

Remember, building insurance is based on an insured amount, not whatever the cost is to replace it with an identical building.

Look, the fact is, despite the claims made by the economic ignoramuses in the mainstream, a disaster is called a disaster because it is, well, a disaster.

The idea that a disaster provides an economic benefit appears to be some sort of perverse Keynesian inspired invention to support the equally fallacious claims about make-work projects.

You know the ones, paying one group of people to dig a hole and then another bunch to fill the hole back in again. Because on the surface it appears to create jobs it’s deemed as a positive to the economy.

It’s no different with natural disasters.

Would anyone seriously have argued two weeks ago that it would be good for the New Zealand economy if they blew up Christchurch and then built everything from scratch? We wouldn’t have thought so. But if it is such a good idea why didn’t anyone suggest it?

They didn’t suggest it because they know that it would be madness.

Whether cities have been destroyed by natural disaster or by man makes no difference. Destroying something for the sake if it doesn’t result in a positive outcome for the economy.

The reality is it’s a drain on the economy as resources have to be diverted from elsewhere.

We’re not making complicated arguments here. All that’s required is to think about the associated consequences of particular events, not just the immediate effects.

It’s something that unfortunately most of our chums in the mainstream press are completely incapable of doing.

Cheers.
Kris Sayce
For Money Morning Australia

Coming out today about 11.30am is the labour force data from the Australian Bureau of Statistics. An earlier survey of economists has predicted that employment will have risen by 30,000, leaving the unemployment rate about 5.2%.

The Dow Jones Industrial Average finished at 10,387.01, up by 46 points.

The Fed released data from its Beige Book yesterday, which showed that out of the 12 regional banks, five regions showed growth was slowing and another five showed only moderate growth. This data is another sign the ‘recovery’ in the US may be slowing.

Overnight, the UK market spent most of the day in the red, however the positive opening on the US markets helped the FTSE to close higher by 21 points to 5,429.74.

Banking stocks in the UK dragged the index down, however most stocks enjoyed a small rally after a successful bond issue for both Portugal and Poland.

The Nikkei lost 201 points in yesterday’s session, closing at 9,024.60.

The price of spot gold in Australian dollars is $1,367.97, while in US dollars it’s $1,256.66. The price of silver in Australian dollars is $21.70 and in US dollars it’s $19.93.

The Aussie dollar versus US dollar is AUDUSD 0.9182 and against the Japanese Yen it’s AUDJPY 77.10.

Crude Oil closed higher, at USD$75.05.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

Or is it? Anyway, all we do know is that there’s $43 billion of fibre optic cable heading your way. And you’re getting it whether you want it or not. And whether you need it or not.

It all rather takes our mind back to the dot-com boom.

Back then optic fibre cable – or is it fibre optic, we’ll use both just to confuse you – was all the rage. It was the thing that would be the making of technology companies.

It was the thing that would bring fortunes to the telco firms. And even boring old electricity companies were destined to get in on the act.

What? You may ask, electricity companies? Don’t you remember?

Anyway, I’ll get on to that in a moment. First, as you may remember, the telcos thought the internet was a licence for them to print money.

All they had to do was get all this optic fibre cable stuff out there and they’d be rolling in cash.

And to make them believe they were on the right track, customers were demanding it too. Not just big companies, but small ones as well. For instance, internet service providers were popping up all over the place.

There were the big players of course, Telstra had its Bigpond service and Optus had Optusnet. But there were others too.

In the midrange market we recall an upstart ISP called Eisa bursting on to the scene and attempting to buy what was then the second largest ISP, rival Ozemail.

It wasn’t a happy ending. We can vaguely recall that Eisa made the bid near the top of the dot-com boom and then either went bust or was bought up in a fire sale not long after. What became of Ozemail we don’t recall, and frankly we don’t care.

Then there were all the small bit-part players. The ISPs set up by local computer stores as they recognised an opportunity to make some easy passive cash. Aside from selling and fixing computers they could get an extra income stream from selling internet access.

And there were also the tech boffins who realised they could run the whole show from home.

All they had to do was get a bunch of optic fibre cable connected to their house in Rowville, Sunshine or Moorabbin and they could run their very own ISP from the spare bedroom – lookout Bigpond!

That’s how things were between 1998 and 2001.

The internet was paved with gold. Or they thought it was… but as with any bubble, it’s always bound to burst. And as you know, that’s exactly what happened.

But not before Australia was swamped with a massive oversupply of fibre optic cable. You see, the funny thing was, that anyone could put in an order with Telstra to get a fibre optic cable connection.

You could have got it connected to your home if you’d wanted to.

And even funnier, you didn’t even have to pay for it!

That’s right. Back then Telstra offered a fibre service that would provide the equivalent of 30 digital phone lines into a premises – more if you asked for it.

For those thirty lines you’d get the equivalent of thirty times 64k, or a speed of around 2Mb. Back then that was more than enough for a budding ISP to provide internet access to customers that were using dial-up modems.

But here’s the thing. Under its universal service obligations, Telstra was compelled to provide fibre just on the basis of a customer phoning up and asking for it. And if you wanted the 2Mb service, then fibre is what you’d need.

Yet, if there wasn’t fibre in the street then Telstra would still provide it. They’d let the customer know it would take a few weeks, but they’d get the fibre there eventually.

What would the customer have to provide in return? A deposit? Sign a contract committing to using the service perhaps? Er, actually nothing. In fact, the customer had no obligation at all. Telstra could roll out the fibre and then the customer could just change their mind and not install it after all.

Telstra would be left with a big bunch of fibre between the exchange and your home.

And not surprisingly this is exactly what happened when the whole dot-com farce collapsed. Even now we dare say there’s plenty of unused fibre laying idly underground connecting exchanges with ex-ISPs.

But it wasn’t just homes in the suburbs that were getting an oversupply of fibre optics. That’s where the electricity companies – especially in the CBD areas – developed their grand plan.

It was fool proof. It couldn’t possibly fail… or could it? Of course it could. Businesses make rubbish decisions all the time, and this was one of them.

What the power companies figured was that they were in a perfect position to directly challenge Telstra. They had something which no other technology company – except Telstra – had… building access.

The power companies had the same access to every building in Australia’s CBDs that Telstra had. All they had to do was use the same conduits that they use for the electrical wiring and hey presto, they could directly challenge the big Telstra behemoth for some of its most profitable business.

Unfortunately the fibre optic dream didn’t turn out as well as everyone had hoped.

The dot-com bubble burst, and the internet – while useful – wasn’t then the massive moneyspinner that 99% of businesses thought it would be.

Even today we question how many businesses really get the internet working for them.

But ultimately, it was the development of Asymmetric Digital Subscriber Line (ADSL) services put the handbrake on fibre. Why? Because ADSL services could be delivered to the home using… the good old fashioned ‘copper pair’ wires.

Yep, the copper wires that probably 99% of households had going into their homes from the exchange, and which have been used since day one of telephony, are now being used to give you access to one of the best technological innovations of the last 100 years – the internet.

ADSL could be provided via all the ducts and pits and conduits that already lead into the home. And it was good enough to give internet users speeds of up to 12mb.

Why on earth would you bother with fibre when you’re getting ten, twenty or fifty times the dial-up speed just from having a different bit of hardware on the end of your phone line?

And why would the telcos bother with expensive fibre roll-outs when they can just sell their customers a box that can be plugged into the existing RJ45 socket on your wall?

But now, times have changed of course, and the race is on for Australians to have the best of the best. And that means fibre optic cable connected into every single home in Australia.

Whether or not you want it or need it.

You’d be tempted to think that as a business which relies on the internet to deliver our daily, weekly and monthly newsletters that we’d be supportive of anything that could potentially help our business.

But you’d be wrong. For a start, $43 billion is a lot of money. As we noted a few weeks ago, that works out as around $4,300 per household to get a fibre connection to the home.

Not that you’ll pay that directly, you’ll be paying it through your taxes.

But not only that, what are the odds of the project coming in on budget or even under budget? The odds are pretty long we’d say. But we’ve covered that before. More importantly…

During the dot-com boom, some of the brightest and savviest IT folks bet their businesses and their reputations on rolling out fibre to businesses and homes.

Yet even they failed to anticipate the impact that ADSL technology would have on the provision of internet services.

Surely if they can’t figure it out, what chance does the combined “brain” power of the Canberra bureaucracy have of anticipating the next technological development for the internet?

We’d say the chances are slim and the odds are long.

Let me be clear, in our opinion, the internet is the most liberating invention for humans since Johannes Gutenberg invented the printing press. In fact, possibly more so. The ability for anyone with just a few dollars to create a website and make their view known is wonderful.

So wonderful that the violent and oppressive regime in China is determined to stop it. Not forgetting our own Stephen Conroy who appears to be equally scared of freedom of speech.

But it’s not just about freedom of speech, it’s also about the ability for small companies to compete almost on a level playing field with much bigger companies in providing goods and services to individuals or other businesses.

The problem we have with the government controlled fibre roll-out is that it will ultimately burden the taxpayer with a much higher cost than otherwise would have been incurred if it was left to market forces.

And right now, market forces are saying that individuals don’t value a fibre connection enough to pay $4,300 for it. If they did then they would, it’s that simple. Instead, individuals would rather pay about $200 for an ADSL connection.

In fact many households don’t even want to pay that, so they go without internet access. Not everyone wants access to the internet so why force them to have it. Just in the same way that not everyone wants to read a newspaper (we can understand that) yet so far no-one would suggest that buying The Age or Herald Sun should be made compulsory.

However, as usual, government thinks it knows best and so rather than allowing you to make up your own mind on how your money is best spent or saved, the government will make it up for you…

And then send you the bill later!

Cheers.
Kris Sayce
For Money Morning Australia

The RBA kept rates at 4.50% yesterday, and of the statement from Glenn Stevens, one currency trader said, ‘Large chunks of the statement were copy and paste from last month, but it does seem a little bearish on Europe.’

The Dow Jones Industrial Average dropped 107 points, closing at 10,340.69.

The market declined on news that major banks in the US may have understated their holdings of government debt during the ’stress test’ earlier in the year. While the report continued very little information, it reminded traders that the debt problem hasn’t gone away.

In a desperate attempt to get business spending, it’s been reported that President Obama will offer business the ability to write off 100% of all plant and equipment purchased in 2011.

Overnight, the FTSE finished at 5,407.82, lower by 31 points. Mining stocks were lower amid fears of the MRRT will be implemented by the Labour government.

The Nikkei lost 75 points to close at 9,226.00. It’s predicted that the index will spend another day in the red after the Yen hit a fifteen year high against the US dollar overnight.

The price of spot gold in Australian dollars is $1,377.01, while in US dollars it’s $1,255.25. The price of silver in Australian dollars is $21.75 and in US dollars it’s $19.83.

The Aussie dollar versus US dollar is AUDUSD 0.9107 and against the Japanese Yen it’s AUDJPY 76.26.

Crude Oil closed at USD$73.80.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

Yesterday the stock hit the skids following news that the company expected profit for the current half to be 25% lower than the same time last year:

The shares closed at $35.25, and today are trading another 1.5% lower, meaning the company’s shares are now trading 40% below its 52 week high from October last year. And over 60% lower than the all-time peak in early 2007.

Of course, on the bright side, if you’d bought in when the shares were trading well below $20 early last year then you would have doubled your money by today… which just goes to show there’s always good news to come from bad news.

And what better news can there be for an economy than an earthquake:

“[I]t could actually be positive for growth. You will probably see a massive lift to the construction sector, which has been dwindling in recent quarters… It’ll create tens of thousands of jobs, most of which will have to be sourced from outside of Christchurch… It should give a pretty big lift to household spending, and should have some knock-on effects throughout the economy.”

[Your editor weeps]

The above quote is attributed to Helen Kevans, economist at JP Morgan in Sydney. We’re sad because Kevans always seemed to your editor to be one of the few sane mainstream economists.

Yet the above comments have just undone all her good work. And now Kevans joins the team of other mainstream economists who we simply cast aside into the basket of Keynesian irrelevance.

You’ll have to excuse our naivety. When we wrote about the fallacies surrounding natural disasters in yesterday’s Money Morning we focused on the misplaced urge among commentators to get the government involved.

However, we didn’t mention how many people will consider the Christchurch earthquake to be a positive for the New Zealand economy. We didn’t mention it because in our naivety we’d assumed that no-one believed in that stale old chestnut anymore.

But apparently they do. Kevans at JP Morgan for one.

And Michael Janda, so-called business reporter at the ABC is another. He notes:

“[O]ver the next year or two, the earthquake looms as effectively a giant stimulus package to New Zealand’s struggling construction industry.”

Oh dear.

But Janda doesn’t leave it at that. He moves on to address a number of other economic fallacies not worthy of someone called a “business reporter”.

Take this comment, “You see, in capitalism, someone’s misfortune often registers as someone else’s gain. A company’s surging profit is usually reported as a positive, although it often comes at the expense of redundant employees, cut wages, or customer price gouging.”

Oh dear again.

Words that could only come from a poor soul who has been subjected to years of learning economics at Australia’s statist-loving universities. Probably the same economists who wrote the open letter lauding the government stimulus programmes.

In that letter they wrote:

“Just as a major corporation goes into debt to invest in its stock of capital, so does a government. Just as many householders have a debt to a band or a mortgage company, so does a government. A government has a budget deficit and a government debt, but it also has capital assets (roads, ports, better equipped schools, Broadband, etc).”

To which they should have added, none of which produces a positive cashflow to the government. Take a look at the open letter using the link above, you’ll see every one of them is a university lecturer or professor.

Not one of them we’ll guess – without having done background checks – has any experience of earning a living in the private sector, free from government grants and awards.

If they’d bothered to think just for a second, a business goes into debt because it believes the extra investment will generate additional cashflow or capital growth. A household goes into debt because of the same reason, or because they believe the debt will somehow improve their lives in other ways.

The point is, both businesses and households generate an income so they can repay the debt. Government doesn’t. Government debt is different and a burden because it is paid for by others.

Government is not a profitable enterprise. Increasing government debt does not ever lead to an increase in government “profits”. It simply means the government needs to take money away from the private sector.

For these Profs to argue that government debt is similar to private sector debt is a nonsense.

But anyway, back to Janda’s comment. While it’s true that misfortune for some can mean a gain for others, as we wrote yesterday. That’s not what you’d call the driving force of capitalism or free markets.

The reason capitalism is so successful is that, contrary to Mr. Janda’s belief, in almost all instances both sides of a voluntary transaction gain.

It’s only when a transaction in involuntary that you have winners and losers – taxation, compulsory healthcare, etc. In those instances the consumer is left with no choice. The winners are the firms and government bodies lucky enough to receive the money that has been expropriated from the consumer, while the consumer loses out.

In a voluntary exchange, both sides win. Using yesterday’s example, you buy a ham sandwich from a sandwich shop and both sides win. You get to eat, and the shop owner gets rewarded with cash for correctly anticipating that consumers desire ham sandwiches.

Janda talks of what is really a half-baked argument around the multiplier effect from spending on construction to rebuild Christchurch, yet ignores the real benefits of capitalism.

Instead Janda suggests that profitable businesses are only profitable because they sack people, enslave the remaining workforce or stitch up the consumer.

A more illiterate understanding of free market economics we’ve yet to come across.

Has it not crossed Janda’s mind that companies who pursue profitable ventures actually provide a benefit to the economy. That those companies with capitalists who are prepared to put their money on the line may actually employ more people the more profitable they become.

That workers may achieve higher wages as a result of increased skills thanks to the employment they’ve received from the capitalist.

And that the more profitable a business becomes the greater the ability for that same business to cut prices, or for competing firms to charge lower prices.

Yet you read the arguments by Janda and others and they seem to believe the only way to economic growth is through destruction – and I don’t mean Creative Destruction either, that’s where new technologies or new ways of doing business result in an improvement of product or service to the consumer.

Creative destruction is a positive for an economy.

But what Kevans and Janda are referring to is what can only be described as the opposite to Creative Destruction, and that is Destructive Destruction. And if you’re an English language expert, we’re aware of the tautology – if that’s what it is…

Anyway, not only are they lauding the earthquake as a boom to the New Zealand economy, but as can only be expected, a reference is drawn to what the Keynesians seem to believe is the greatest economic stimulus of all time – World War 2:

“Perhaps the greatest historical example of tragic economic stimulus is the Second World War, which many economic historians credit far more than Roosevelt’s New Deal for lifting the US out of the Great Depression.”

It’s an argument we’ve seen repeated on countless occasions. So Janda isn’t the only economic amateur to get it wrong.

The Second World War was no more of a positive economic stimulus to America or anyone else, than is the current Iraq War or Afghanistan War or the Vietnam War or the First World War or the American Civil War.

We only wonder why the Second World War that is championed as the saviour of the American economy. Why not the other wars? If war is an economic booster then surely that would be the case for all wars.

You only have to look at current US defence spending and the mess they’ve created for themselves in the middle east to see how war is anything but a an economic booster.

So let’s get something straight. Destructive Destruction isn’t a positive for any economy. Destruction is only positive when it’s creative. An earthquake and a war most certainly aren’t creative.

The fallacy of it can easily be compared to an individual household. If you accept that WW2 was a great stimulus for the broader economy, then you must also accept that if you smash your television, DVD player and stereo to bits with a hammer then it must be great news for your household economy.

The reality is it isn’t is it? Because now if you want to enjoy the same level of entertainment you’ve got to use your savings to buy a new television, DVD player and stereo.

Sure the likes of Harvey Norman or Dick Smith might benefit from this destructive destruction, but you lose out. You lose out because you now have fewer saving. Savings that you may otherwise have spent elsewhere.

It’s exactly the same principle with the so-called ‘War Stimulus’. Building things in order to destroy them or use them to destroy other things isn’t a positive stimulus to an economy.

As several posters to Janda’s article suggest, a reading of Frederic Bastiat wouldn’t do him any harm in understanding the “broken window” fallacy.

Anyway, this kind of destructive destruction merely takes scarce resources from other industries that may need them in order to build bombs, tanks or fighter planes.

Just ask anyone who lived in Britain during the Second World War whether they thought that the war was a stimulus. Sure the economy produced a whole bunch of stuff, but it also starved the economy and the consumer of things they really wanted – such as food and clothing.

While resources were being tied up with fighting off the Hun, resources couldn’t be used elsewhere.

Being issued with ration books so that you can only eat as much as the government tells you to eat is hardly the sign of a flourishing economy.

Perhaps Janda would prefer a life without capitalism and see how that looks. If he’s lucky he could try out Venezuela where president Hugo Chavez plans to introduce what he calls a “Good Life Card”.

According to the Miami Herald, Chavez said:

“‘I have called it a Good Life Card so far,’ Chávez said in a brief statement made on the government television channel. ‘It’s a card for you to purchase what you are going to take and they keep deducting. It’s to buy what you need, not to promote communism, but to buy what just what you need.’”

You buy what you need based on what the shopkeepers are told to stock.

We’re pretty sure that Venezuela is an economy where private companies aren’t making the kind of surging profits Janda bemoans.

We may grumble about the government encroaching more and more into the lives of Australians (you noticed have you?), but at least for now Australia still operates a broadly market-based economy.

How much longer that will be the case is anyone’s guess.

But with the foolish Keynesian economic viewpoint appearing to gain more ground by the day, and the impotent mainstream press prepared to cheer for more not less government intervention in the economy, Australia is most certainly on a slippery slope to socialism.

Cheers.
Kris Sayce
For Money Morning Australia

It has been widely tipped that interest rates will remain on hold this month.

Credit ratings agency Standard & Poor’s have confirmed that even without a government, Australia still holds its AAA credit rating.

This news that we retain our rating is supposed to be of comfort to international investors, however America still have their AAA rating despite all of their problems…

The American markets were closed yesterday for the Labour Day holiday.

President Obama announced yesterday the USD$50 billion (AUD $54.6 billion) stimulus package. The package will ‘assist’ the economy by creating jobs by upgrading airport runways, railways and national roads.

The FTSE closed at 5,439.19, higher by 11 points.

The Nikkei added 187 points (2.05%), finishing at 9,301.32.

Gold has slowly crept higher in the wake of the jobs data released from the US last Friday.

The price of spot gold in Australian dollars is $1,365.35, while in US dollars it’s $1,250.66. The price of silver in Australian dollars is $21.68 and in US dollars it’s $19.86.

The Aussie dollar versus US dollar is AUDUSD 0.9166 and against the Japanese Yen it’s AUDJPY 77.12.

Oil dropped off overnight as the ‘driving season’ which s the end of the summer holiday period, came to an end. Crude Oil closed at USD$74.10.

For the biggest movers on the market yesterday click here…

That’s all I have for you today, see you tomorrow.

Shae.

WHATEVER’S LURKING in Andean Resource’s data room – opened to suitors for two years, but now closed after GoldCorp trumped Eldorado’s US$3.3bn bid – it must be pretty spectacular.

Because on published figures, and at current spot prices, GoldCorp’s offer equals 74% of the gold and silver resources indicated and inferred at Cerro Negro. Based on viable reserves alone, the bid is priced at 1.5 times proven and probable ounces!

That suggests real confidence not only in the precious-metal bull market, but most spectacularly in Andean’s exploration projects.

Southern Argentina certainly looks compared with the world’s better-developed but fast-ailing gold mining sites. A marginal producer at the top of gold’s last long-run bull market, South America has since overtaken Australia, North America and South Africa, and now spits out twice as much gold per year (according to GFMS’s 2010 forecasts) as the world’s single largest gold-mining nation, China. Extraction costs are also alluring, doubling since 2006 to around $350 per ounce (GFMS again) but undercutting North America’s average cash costs by well over $100 and slashing South Africa’s cost in half.

As for the timing, 2010 has already overtaken full-year 2008 with record spending on gold mining mergers and acquisition. The sector’s third-largest corporate action takeover of the year to date, GoldCorp’s agreed offer – which may still see revised bids from other suitors, according to the newswires – follows Newcrest’s US$8.4bn acquisition of fellow Australian firm Lihir in May, and last month’s $7bn purchase by Kinross of the 91% of Red Back Mining it didn’t already own.

This size of takeover led the mining world table in 2008, when precious-metal producers didn’t even figure in the top 10 deals, despite it being a bumper year for gold M&A. And as for last year, gold’s biggest takeover in 2009 was for the $1.7bn purchase of Sino Gold by Eldorado – Andean’s disappointed suitor today.

So what about price? Well, Newcrest’s takeover of Lihir in May was priced at just 22% of proven and probable reserves, equal to 12% of indicated and inferred resources – a real bargain compared to Kinross’s merger with Redback. Even with spot gold trading near all-time highs, that cost nearly 25% of potential resources, equal to fully 38% of proven and probable ounces. Little wonder perhaps that ISS on Friday called Kinross’ bid too rich; J.P.Morgan says Redback would needs to near-double its resources to make the offer worthwhile.

But with gold mining firms bloated with cash and bleeding reserves as they continue to mine, could one-third (or so) of proven-and-probable ounces set a useful benchmark for acquisitive majors? Andean may be sitting on a further 4.2 million ounces of “potential” gold, reckons Credit Suisse’s Michael Slifirski. In which case (and not forgetting South America’s low extraction costs), GoldCorp’s bid would fall to 35% of total resources at current prices.

Together with the Kinross-Redback deal (and only if both complete), that might suggest a base level for M&A pricing in a world losing 4 million ounces per year in new discoveries since 1980.

Adrian Ash
For Money Morning Australia

Adrian Ash is head of research at www.BullionVault.com

Strictly speaking, the video isn’t about how to make a bucket load of cash from the New Zealand earthquake or Victorian floods.

But it does show you that even during the worst financial crisis in most people’s living memory, there’s still plenty of chances to make a quick profitable killing from the markets.

If you want to check out what I’ve got to say on the subject click here now…

But let’s be honest, disaster capitalism is a fairly emotive subject. The idea of people making money from a tragedy is enough to make most people scream with rage about the immorality of it all.

In fact, there’s a chance you may even find what we’ve written so far to be tasteless and inappropriate. If you do then can I suggest you stop reading now, because you won’t like the rest of what I’ve got to say either…

However, thankfully, when people are actually faced with a tragedy or a disaster or just something plain unpleasant, those same people are usually pretty grateful that someone’s on hand to help out – even if those ’someone’s’ are so-called profiteering.

For example, it’d be a pretty messy state of affairs if no-one thought to profit from death or murder. It would be awkward if no-one thought to profit from divorce or family breakdowns.

It would be fairly inconvenient if no-one made a buck from vehicles that were in an accident where someone has been injured.

Yet people do. Undertakers, barristers and psychologists all profit from one or more of death, murder or family breakdowns.

And scrap yards and panel beaters make a tidy sum just from the fact that a driver has had the misfortune of crashing into another car or crashing into a tree.

We’re sure we could come up with plenty of other examples of disaster profiteers if we put our mind to it.

But I think you get the picture.

The point is, undertakers, barristers, psychologists, scrap yards and panel beaters provide a service. A service that people would perhaps rather not use, but which they have to use when the occasion arises.

Right now, we imagine that disaster profiteers of all kinds are heading towards Christchurch and Victoria purely for the purpose of providing a service that’s needed and in return they’ll make a profit from it.

But what are the odds that at some point over the next week we’ll read and see stories in the papers and on the news screeching, “Profiteers to profit from misery” or “Unscrupulous businesses to profit from flooding deaths”?

We’d say the odds are close to even… perhaps odds-on.

The general conclusion is that during times of emergency the only organisation that can and should be relied upon is the government.

That only the government can truly care for the sick, the wounded, the homeless, and yes, the dead.

Yet despite that viewpoint it’s obvious to the point of incredibly obvious that that shouldn’t be the case at all.

The simple facts are that individual selfishness and a profit motive are the single best solution for human disasters. Just in the same way that individual selfishness and a profit motive are the single best solution for everyday living.

We’ve used the example before – we think – about the sandwich shop. That the owner of a sandwich shop doesn’t open his or her doors out of charity. He or she doesn’t prepare ham or chicken or salad sandwiches because they know that humans need food to survive.

No, the sandwich shop owner prepares ham, chicken or salad sandwiches because experience tells him or her that that’s what people want. And that if people continue to want in the future what they’ve wanted in the past, then fingers crossed, the sandwich shop owner is in a position to make a profit.

In other words, the sandwich shop owner is acting out of selfishness. The impact of his or her selfishness is that people get to buy sandwiches without having to make them for themselves.

If there wasn’t the opportunity to profit from making sandwiches then odds are no-one would go into that line of business. Or if they did they’d need to rely on charitable donations or government subsidies in order to supply the sandwiches.

The impact of that would either be a lower standard of service to the customers, and/or a lower return based on the dollars spent.

Knowing that he or she is going to get paid regardless, there’s less incentive for the shop owner to meet the needs of the customers. Perhaps he or she will use a lower standard of bread, or rather than premium ham and chicken, they’ll use the offcuts.

When your income is guaranteed – ie, by government subsidy – there’s little incentive to provide a superior service to the customers. Because not only is the income guaranteed, but there’s also a good chance that the government has provided a favour for the firm that wins the contract by prohibiting competition.

Charitable organisations are different. In that instance you’re more likely to receive a lower standard of service, but a service nonetheless. Charities – typically – are more conscious about not wasting money when they know they’re relying on donations.

Whereas governments know they have the power of taxation to extract the money from the taxpayers.

Only the private sector can provide both low cost and the level of service demand by the consumer.

Think about it. After every instance of government intervention there’s always the sordid aftermath – the revelation about how incompetent, corrupt and costly the government intervention has been.

Do I really need to reel off the examples? The Victorian bushfires, the housing insulation scheme, the school building programme… again, that’s just off the top of our head in five seconds. There are countless others we haven’t mentioned – the Victorian public transport network, that’s another…

Everything the New South Wales government does… and so on…

But even so, as a tragedy is unfolding, it’s always the “disaster profiteers” that draw the biggest criticism. Those that attempt to pounce on the scene of despair – often trying to push aside the television cameras who themselves are looking to profit from disaster, the bigger the disaster the bigger the ratings and the higher the advertising revenue – in order to provide a product or service that the people there desperately need.

Yet ten times out of ten, the screeching begins and government informs everyone that profiteering will be outlawed and the government will save the day – “No-one should profit from THIS disaster!”

However, someone does inevitably profit from the disaster. Only it’s the firms that the government has chosen to profit from it. And needless to say, because competition is outlawed, the cost of providing the services is much, much higher than would otherwise be the case.

It usually ends up as a carbon copy of how the Federal Emergency Management Agency (FEMA) acted in the immediate aftermath of Hurricane Katrina back in 2005.

According to a report by Corpwatch in 2006 titled, “Big, Easy Money: Disaster Profiteering on the American Gulf Coast“:

“When bloated bodies floating down the streets of New Orleans were broadcast live on national television days after Hurricane Katrina, a frazzled federal government put the call into Kenyon International Emergency Services for help.”

There’s your disaster capitalism at work. Or it would have been if the US federal government had opened the door to New Orleans and allowed any emergency services firm to enter the fray.

Instead, what the people of New Orleans got was Disaster Fascism. The report goes on:

“In the two months Kenyon worked in New Orleans, Kenyon recovered 535 bodies (about one third the total number of confirmed Katrina casualties in Louisiana) and billed the state of Louisiana well over $6 million for its services; or about $12,500 per victim. In the months since, dozens of bodies that Kenyon missed continue to be found by local authorities and in some cases, family members. Meanwhile, local black morticians volunteered their services to help in recovery and processing of bodies, but were turned away by Federal Emergency Management Agency (FEMA).”

The part to highlight is the last sentence. That “local black morticians volunteered their services to help in recovery… but were turned away.”

Now, whether the local firms would have been any more effective or efficient than the larger firm from interstate is anyone’s guess. The point is, government intervention ensured that the price was high and the quality of the service was low.

Of course, the other point to be raised is where the profit motive would be for private firms to get involved if there wasn’t a massive handout from the US federal government. Perhaps it would have been worse if there wasn’t a government subsidy.

If no-one was working for a profit then maybe it would have taken even longer for the local morticians to recover the bodies. Who apart from government would have paid for the clean-up? Hence the requirement for the government to get involved because no-one else would have paid for the recovery of bodies.

It’s almost a convincing argument, but not quite. No-one wants dead bodies lying around stinking the place up. There’s a much better than evens chance that other private sector firms, or charitable organisations would have got involved if it wasn’t for FEMA preventing them from doing so, or at least making it darn hard.

Surely businesses in New Orleans would have been happy to chip in if it meant getting their business up and running again as quickly as possible.

Look, so far – from what we’re aware – there aren’t bloated dead bodies lying all over the place in Christchurch and flooded Victoria. But there are people who we dare say are in urgent need of supplies.

If past experience is anything to go by you’ll soon sure to read about so-called exploitative capitalists profiting from disaster. Yet the real story, the story of public sector incompetence is only likely to surface long after the governments have made a bad situation even worse.

Cheers.
Kris Sayce
For Money Morning Australia