Gold News

The Economic Illiterati

Watch for a truly spectacular bubble in misallocated capital...

NO NEWS is good news, says Dan Denning for The Daily Reckoning Australia.

Or rather, good news is not news at all.

Either way, the Reserve Bank of Australia departed from the global interest rate playbook this week. It left the cash-rate unchanged at a 45-year low of 3.25%.

Why? The "Australian economy has not experienced the sort of large contraction seen elsewhere," wrote RBA Governor Glenn Stevens in the note that went out with the announcement.

"The Australian financial system remains strong and the monetary policy transmission process is working to deliver large reductions in interest rates to end borrowers."

Blah, blah, blah...

What has changed? Well, this is not the best news in the world for first-time home buyers, nor for pensioners or anyone living off a fixed income. And the stock market doesn't seem especially enthused about it either, dumping yet again.

The only positive reaction – short term – came from the Aussie Dollar. Because with Aussie rates fixed for another month, the yield advantage over the US currency might (maybe) make the Aussie attractive to the last three risk-taking traders on the market.

Although, given the current global state of fear, we're not expecting a carry trade to resume any time soon.

There was an absurd reaction though, among the economic illiterati. The RBA's relatively reassuring assessment of Australia's current status seemed to please most of the pundits on TV last night.

"We have it bad, true," you could imagine them saying, "but not as bad as everyone else...

"In fact, we have it so not bad, we're not going to cut rates – just to show you how not bad we have it!"

See? Some real good news there. Right?

The bad news is that the global system of delivering credit and capital to businesses that can put it to efficient and productive use is broken. It's a giant sucking wound on the body economic. Or, if you prefer, a mangled limb.

Rather than amputating it, regulators and politicians are pouring more public resources into propping up the people and institutions that have failed. Whether they are doing it out of ignorance, ineptitude, collusion, or genuine conviction is irrelevant. They are effectively stealing future resources away from productive activity and using them to prop up unproductive activity for the sake of engineering GDP numbers that give the illusion of growth and normality.

Boo! It will be important to think about other ways to grow your income in the coming years that don't involve buying and selling securities. Real skills may come back into vogue, in which case your editor may have to pick up a second job. In the meantime, you have time to build those skills while the professional policy makers juggle plates.

We've been told that AIG and certain other institutions are too big to fail. But it's obvious that the financial system as it is, with all the government bailing wire and chewing gum, is too broken to work. Transferring income, raising taxes, borrowing more money...none of this gets us any closer to a new production possibilities frontier.

But we've said all that before. What does it mean for markets? Lower stock prices and higher government bond prices. Government bonds, especially US Treasuries, will increasingly be seen as the last best hope for capital preservation on the planet. Really intrepid investors would take advantage of higher yielding corporate bonds.

Of course, that just leads to a concentration of savings and capital in the government bond market. It could make for a truly spectacular bubble in misallocated capital.

Best-selling author of The Bull Hunter (Wiley & Sons) and formerly analyzing equities and publishing investment ideas from Baltimore, Paris, London and then Melbourne, Dan Denning is now co-author of The Bill Bonner Letter from Bonner & Partners.

See our full archive of Dan Denning articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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