Sharpen Your Pen

  • Closing soon
  • Repressed

Fanfare please.

In an important media release, the Reserve Bank of Australia (RBA) today announced:

The Reserve Bank of Australia has launched this year’s RBA/ESA Economics Competition, in conjunction with the Economic Society of Australia (ESA) and the UNSW Economics Society.

The competition invites students to write an essay on a topical economic issue.

This year, the topic of the essay competition is economic policy options at low interest rates. With interest rates at historic lows in a number of advanced economies, are there limits to what conventional monetary policy can achieve? Students should explain the channels of monetary policy transmission and discuss the effect, if any, that low interest rates may have on these channels. If there are limits to what conventional monetary policy can achieve, what other economic policies could be used to support growth of economic activity and provide impetus to inflation?

We’re especially fond of the closing sentence. It’s clear beyond any doubt that the argument is over when it comes to inflation.

Central banks of the world, including the RBA, have concluded that only inflation is good for an economy. Whatever thoughts the student may have about ideas for economic growth, the student must ensure the idea will result in inflation.

If you want to enter, you have to be a student. But heck, if the RBA is after ideas on what it can do after it eventually cuts interest rates to zero, we’re sure they won’t mind entries from non-students.

As for our contribution to the RBA’s effort, we’ll just tell them that supporting economic growth is easy: just leave it to the free market.

That’s all it needs. Nothing else. No government intervention. No central bank intervention. And least of all, no madcap ideas from gormlessly brainwashed economics students, either.

Now, on with the show…

Markets

Overnight, the Dow Jones Industrial Average fell 34.72 points, or 0.2%.

The S&P 500 index gained 1.55 points, or 0.08%.

In Europe, the Euro Stoxx 50 index added 18.99 points, for a 0.65% gain.

Meanwhile, the FTSE 100 index fell 0.18%, and the German DAX gained 1.12%.

In Asian markets, the Nikkei 225 index is up 334.97 points, or 2.07%.

China’s CSI 300 index is up 10.67 points, or 0.35%.

In Australia, the S&P/ASX 200 index is currently up 17.8 points, or 0.33%.

On the commodities markets, West Texas Intermediate crude oil is trading for US$43.36 per barrel. Gold is trading for US$1,265 per ounce.

The Aussie dollar is worth 73.3 US cents.

Closing soon

The doors close on our newest trading service at midnight this Saturday. We don’t know when we’ll be able to reopen them again.

To avoid missing out, go here.

Repressed

Let’s get back to that RBA economics competition.

We may have mentioned it in a glib way, but it’s actually a serious issue.

The RBA is right, interest rates are at historic lows. By that, we’re not talking about one of those made-up time frames: ‘since federation’, ‘since the Second World War’, or ‘since 1970’.

We’re talking about historic lows through all of recorded history.

Interest rates have never been as low as they are today.

That’s not hyperbole. It’s fact. And we have the chart that shows it. This chart, compiled by Bank of England chief economist, Andrew Haldane shows long-term and short-term rates going back to…3,000BC:



chart image

Source: Business Insider
Click to enlarge


You will note one thing. The x-axis has zero as its base. Since Haldane drew this chart, interest rates in many Western economies have sunk below zero.

For the first time in history (granted, it’s possible that rates were lower in the Pleistocene period, but I guess we’ll never know for sure) interest rates are negative.

Hats off to the modern central banker on such an honourable [cough] achievement!

But as I say, this is no laughing matter. The hammering down of interest rates is indicative of a much broader and more troubling trend across the world.

In fact, it’s the theme of the 2016 Port Phillip Publishing investment conference, to be held in October this year.

The theme is ‘repression’. It’s the repression of people and interest rates in an effort to ‘save the bacon’ of the world’s bureaucrats, bankers, politicians, and elites.

They know the current money experiment (paper money, rather than money backed by gold or silver) can only survive in a world of inflation.

Why else does the RBA’s economics competition highlight the need for a policy that provides an ‘impetus to inflation’?

Without inflation, governments can’t continually tax and spend. Western economies are figuring that out now. The problem isn’t, as some think, that there aren’t enough investors to buy government debt.

The problem is that lower inflation means there is less money coming into circulation to buy the debt than governments and central banks need.

The skyrocketing of debt over the past few decades is directly correlated to rampant inflation. By ‘rampant’, we don’t necessarily mean hyperinflation. Governments and central banks simply need a level of inflation that will allow them to repay old debt, plus interest, and then issue new debt…plus extra debt in order to pay for new spending promises.

This neat ruse has worked for more than four decades. But after the financial collapse in 2008, things changed. Even rampant inflation, debt and spending has to stop somewhere.

2008 was when it was supposed to stop. And, if the market was left to its own devices, and banks and businesses had been allowed to collapse, the worst of it would have been over by now.

But, as we say, governments and central banks couldn’t allow that to happen. Why? Because they would have been the biggest victims of the collapse. It would have exposed them and their system for what they are.

The result was the mass financial bailouts worldwide. Worst of all, it’s the repression of individuals as governments and central banks manipulate interest rates, forcing savers to take bigger risks for lower returns.

An investor who has saving $500,000 for retirement, hoping for a 6% income stream from a term deposit, is now lucky to get a 3% income stream from a term deposit…unless that investor moves along the ‘risk curve’ and invests in riskier assets.

In short, this is a new era for investors. Look at the chart from Andrew Haldane again. Today’s low interest rates are unprecedented in history.

At no time during the past 5,000 years (at least) has any investor had to face the same issues as you have to face today.

That’s why we’re making this the theme of our investment conference this October. We’ve assembled what we believe are some of the finest minds in finance to talk to you and discuss with you what’s going on in the financial world today.

Will we have all the answers? Probably not. Remember, this is new to us too. We can’t tell you exactly what to do, because none of the speakers has been through this setup before.

But just talking about it, and most of all, listening to the various ideas that our speakers will put before you, could help you come up with your own ideas about how to deal with today’s markets.

We’re putting together the final details for the conference now. If all goes to plan, I expect to send you information on registering for the conference next week.

So, keep your eyes peeled. If you’ve been to our previous conferences, you’ll know that we don’t do things by halves. And if you thought those conferences were good, and had a tip-top list of speakers, this year’s conference is set to beat them all.

Details soon.

Cheers,
Kris