*Pic: Treasurer Hockey and Finance Minister Cormann … and those cigars, pre-first-Budget …

“So it has come to this.” – Last words or something similar of just about everyone from Ned Kelly to Homer Simpson


Or note the item about real estate in China in the following – all Australian markets are especially vulnerable to downturns in our #1 trading partner although they and a more muted mortgage availability saved our own housing market in 2008 from the US experience of the ‘jingle mail.’


The trouble began a long time ago with modern banking – speculative booms and busts have always been with us but it was only in the last century with fractional reserve banking that interest rates began to be set by governments rather than markets. Previously they had to make do with coin clipping and other confidence games and thereby exploit a time lag in market smarts. But now we have easy money; it’s always a crowd pleaser and boosted GDP by twice the amount thrown onto the bonfire but was kind of like drug addiction – it stopped being productive or pleasurable and became a necessity. The world was hooked and we need free money now just to keep our heads above the water, puddling around as we do in our oceans of debt. So with exponentially growing populations needing employment to pay for exponentially growing consumption while money supply and velocity and credit facilities have to grow similarly; eventually consumer and national debt; bloated inventories and productive capacity can be pushed no further and there has to be a breather. Normally this is recession and bankruptcies but that is politically intolerable and so we have to dance with the protracted death of money. Fed Chairman Bernanke famously promised to throw bundles of it from helicopters if necessary. But that doesn’t mean the lucky finders will be able to buy anything with it.

Hard money theorists have a smug answer that gold and free markets will solve the problem of inflation and the boom/bust cycle. Maybe it did once outside of the Spanish anomaly when they plundered the new Americas and forged their own social ruination in the process. Maybe it could do now with a limited human population in an infinite world of resources but even gold has hit the wall – we are now mining half a gram per tonne of the stuff where once mines needed grades 20 times better than that. And as before, its scarcity is a function of depleting mines and rising mining costs For those low grades costs and profitability is increasingly being defined by the rising cost of energy. There has to be a better safe harbour for our diminishing fortunes.

Next to come on the Joe Hockey series: “Safe as Houses.”

Read more, George’s blogspot here