As violent as a mugger

  • $1 trillion and counting…
  • Cheaper bread, pricier homes
  • The great scare campaign
  • The full ‘Overnight Dividends’ story available tomorrow

Inflation is one form of taxation that can be imposed without legislation.’

Milton Friedman

When the RBA meets next Tuesday, Australia’s lowest inflation figures in 17 years will confront governor Glenn Stevens. Consumer prices are up just 1% over the past year. And, apparently, that should alarm you.

As you probably know, the RBA’s inflation target is fair bit higher. The Bank aims to keep prices rising by 2–3% per year. Every year. Forever.

You’re meant to accept this as a good thing. If you don’t believe me, try finding any mainstream sources touting, say, 0% inflation as a superior target. Good luck. God forbid your dollar is worth as much next year as it is today.

Admittedly, the rationale for the 2–3% inflation target makes perfect sense…from the government’s perspective. According to the RBA, government debt stood at $406 billion in January this year. It’s certainly even higher today.

If you were in debt to the tune of $406 billion, wouldn’t you try to chip away at the debt pile by a handy 3% each year? It’s a brilliant figure really — not so high as to be alarming. You’re unlikely to lose sleep over the fact that today’s dollar will only be worth 97 cents next year, right?

But here’s the catch. Just as compounding interest can see your savings grow exponentially over time, inflation will see your savings shrink exponentially. Or your debts, of course.

Which brings us back to the government’s $406 billion liability. At an unassuming annual inflation rate of 3%, the government can halve its debt load in just 24 years. And they don’t have to do anything. Except, of course, manipulate fiscal and monetary policies with abandon.

I’ll get back to that in a moment. But first…


Markets were mixed in the US yesterday. The S&P 500 finished up 0.16%, the NASDAQ gained 0.39%, while the Dow Jones Industrial Average lost 0.09%.

Over in Europe the markets all lost ground. The FTSE 100 closed the day down 0.44%, the DAX shed 0.43%, and the CAC 40 fell 0.59%.

Closer to home the Nikkei 225 is down 0.24% at time of writing (3:15pm AEST) while the Shanghai Composite is flat. And, following a strong start to the day, the ASX 200 is currently down 0.21%. That leaves the index up 0.77% for the week.

In commodities, West Texas Crude is down a touch at US$41.12 per barrel. Gold is back on the rise, trading for US$1,338.73 per ounce. And silver is at US$20.21 per ounce.

The Aussie dollar is buying 75 US cents.

$1 trillion and counting…

Now where were we?

Right, the RBA’s mandate to inflate away government debt.

Of course it’s not just our trusty government that’s living beyond its means. Banks and large corporates have happily piled on debt as well. So much so that Australia’s national debt — the money we owe foreigners minus the money they owe us — topped $1 trillion back in December.

According to The Sydney Morning Herald,

Of our trillion dollar net foreign debt, one quarter is owed by the public sector – including all federal, state and territory governments and their government-owned enterprises. The remaining three-quarters is owed by private sector corporations, mostly banks and large corporates.’

Throw in all the homeowners with six and seven digit mortgages and you can see how the government has some powerful backers for its inflation mandate. That’s also why you’ve likely had a difficult time finding proponents of the 0% inflation target I mentioned earlier.

Cheaper bread, pricier homes

Australians now hold the dubious, erm, honour of being the world’s most indebted citizens.

From The Australian,

Australian households overtook the Swiss as the world’s most indebted this year, with outstanding debt equivalent to 125 per cent of GDP and no let up in sight. Combined owner-occupier and investor loans outstanding have risen from $1.2 trillion to $1.6 trillion in the past five years.’

With skyrocketing property prices in Sydney and Melbourne, these figures shouldn’t surprise you. Australia consistently ranks among the most expensive property markets in the world. According to ABC News, housing costs Down Under are second only to Hong Kong.

Yet, despite the low inflation figures released earlier this week, rising property prices — and rents — are still part of the picture. The Age states that Sydney housing prices are up 6.8% while Melbourne prices climbed 3.5% in the last quarter alone. Rents (nationally) rose ‘only’ 0.7% over the past six months.

I’ll let you decide for yourself what effect lowering the benchmark interest rate from 1.75% to a new record low of 1.5% will have on the Aussie real estate market.

But prospective home buyers and renters, fear not. Your weekly loaf of bread should now cost you 2% less than this time last year. Cha-Ching!

According to The Age,

In the past year, a raft of prices have fallen, including bread (by 2 per cent), milk (1.3 per cent), coffee (4.6 per cent), wine (2.6 per cent), books (1.3 per cent), men’s clothing (1.1 per cent), electricity (2 per cent), cars (3 per cent), and petrol (11.6 per cent).’

Now I’m not going to touch falling milk prices. I’ll leave that one — and the host of related reader emails — to your regular Port Phillip Insider editor, Kris Sayce. But I will say that the price of books, electricity, cars, and petrol in Australia are shockingly high…at least when compared to the US. So you won’t find me gnashing my teeth over any modest declines.

The great scare campaign

But, I hear you asking, aren’t we treading dangerously close to the much dreaded spectre of deflation? And won’t that bring our economy to a grinding halt as everyone decides to delay their purchases, knowing they can buy their goods cheaper next year?

This is precisely what you’re supposed to think. Precisely the fears that have been so well seeded and nurtured by our indebted government and its powerful, equally indebted supporters. But it’s nonsense.

Whether prices are rising or falling, you still need to put food on the table. And petrol in your car. And replace worn clothing. And — let’s face it — drink wine.

When it comes to discretionary goods you do have more leeway. But let me ask you this. Say we’re experiencing 2% deflation across the board. If you’ve decided to replace your ratty old fridge with a $1000 shiny new one, would you put it off for a year knowing you’ll only pay $980?

Of course you wouldn’t.

How about a $30,000 new car? Wait just one year and you can have it for $29,400. Now $600 isn’t insignificant. But if you’re like me, once you’ve made up your mind to purchase a new car, you won’t wait an entire year to save 2%. Especially if deflation takes hold and you know that you’ll be facing the same scenario a year down the road. Meaning you could continue to wait, and wait, and…

But the mainstream media steers clear of this argument. Instead they happily assume that any deflation will in fact act as hyperdeflation.

Now I’m sure you’ve heard of hyperinflation. Run away prices in 1923 Germany (the Weimar Republic) and Zimbabwe in 2008–2009 are two classic examples. And it’s with this picture in mind that deflation is consistently presented.

But hyperdeflation — which my spell check tells me isn’t a real word — isn’t on the cards for Australia. Low inflation — or very modest deflation — is what has the government’s panties in a wad.

And this may well see the RBA decide to lower rates, once again, next week. Despite the fact that following the series of previous cuts, inflation figures are at a 17 year low. Will another cut spur inflation and the wider economy?

I certainly don’t think so. And neither does former RBA board member Warwick McKibbin. According to the Financial Review he warned that,

‘…adopting the zero rate polices of Japan and Europe won’t fix the economy… [and] focusing only on keeping inflation within its target range would also lead to more house price distortions.’

Not that the RBA is likely to take this advice. If they don’t cut next week, I’d expect them to cut in September or October. Central banks and debt laden governments the world over will keep tinkering with the system until they get some ‘healthy’ inflation figures.

I wonder what Ronald Reagan would think about that. Back in 1980 when he moved into the White House, US inflation figures topped 14%. He said at the time, ‘Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hit man.

Be careful what you wish for.

The full ‘Overnight Dividends’ story available tomorrow

Before signing off, Kris Sayce just shot me this note from his email cannon. Rather than put the sentiment in my own words — it’s getting late — here’s Kris’ email in full:

Subject line: URGENT — Let them know this…


Just a quick note while I remember. The full details on “Overnight Dividends” will be made available tomorrow, to a select number of Port Phillip Publishing subscribers.

I believe the “Overnight Dividends” investment strategy is the most important advice we publish — and as you know, we publish a lot of stuff.

I want to make sure as many of our subscribers as possible know about “Overnight Dividends”. It isn’t for every investor, but it’s something that every experienced investor should at least consider.

Tell the readers to click on this link, so they can make sure they’re among the limited number of our subscribers who will get to see what the “Overnight Dividends” strategy is all about.

I can’t emphasise enough, how important this is.

Hopefully I’ve given you enough time to write about it in today’s Port Phillip Insider.

Can you reply to this so I know you’ve received it?



Just so you know, I did reply. And no, there wasn’t enough time to write about it myself. But I have gotten the insider’s peek into the ‘Overnight Dividends’ strategy. And for experienced investors, it’s a cracker.