Zombie Bureaucratic Socialists Attack in Daylight

Tuesday, June 22, 2010
By Paul Martin

By Dan Denning
June 22nd, 2010

In the movie Zombieland with Woody Harrelson, there are certain rules you must follow in order to survive in a world taken over by Zombies. The first rule is “cardio.” Zombies are slow. You can outrun them. But only if you’re in shape. Start running.

The second rule is to always shoot a Zombie twice in the head to be sure you’ve killed it. The third rule is to beware of bathrooms. You can never let your guard down. The fourth rule is to always wear a seat belt. Zombies are hungry, but not smart. They will crash right through a windshield if you hit the brakes. The fifth rule is to have no attachments.

These rules are worth reviewing because an army of wealth-stealing Zombies from the government are now on the march. They walk amongst us in broad daylight. And their ludicrous proposals to impose super taxes on every industry and to bludgeon free people into unthinking submission are starting to become a real threat to personal freedom and your ability to achieve financial independence.

In today’s and future Daily Reckonings, we’re going to try and come up with some rules for defeating these Zombies. But first, what about financial markets? The optimism that China’s de-pegging of the Yuan would benefit everything was short lived. U.S. markets were up triple digits during the day, but closed lower. Gold was off to as traders took profits and reassessed the currency landscape.

Will Chinese investors use a stronger Yuan to buy more gold? That’s one possibility. You don’t imagine they would be using the stronger currency to buy more U.S. Treasury bonds. This is one reason we believe long-term U.S. rates are headed up. In the shorter-term, though, what would happen if the Chinese bought fewer U.S. Treasury bonds?

Keep in mind the U.S. government has nearly $4 trillion in new debt to sell in the next three years. It’s a combination of new deficits run up by the free-spending Obama Administration and short-term debts run up by the free-spending Bush Administration. If the Chinese don’t buy it, the Fed will. But if the Fed does, it will be more quantitative easing…which is USD bearish.

And you wonder why other central banks are adding to their gold holdings right now. The World Gold Council reported over the weekend that Russia’s central bank bought 26.6 metric tons of gold in the past quarter, taking holdings to 668.6 tons. The Philippines increased holdings by 9.5 tons in March to 164.7 tons. The Saudi Arabian Monetary Authority reported last quarter that it “modified from first quarter 2008” its holdings to 322.9 tons. That was an upward adjustment from 143 tons.

All of this should suggest that the current state of the world economy is not nearly as placid as the vapid press releases from public officials would lead you to believe. Behind the scenes, governments know that paper isn’t money. They’re accumulating precious metals as a hedge against the inevitable debt monetisation in Europe, the U.K., and the U.S.

Meanwhile, here in Australia, Treasurer Ken Henry has again gone on the front foot regarding super profits tax. Zombie hungry for greater share of national wealth. Zombie smash! Zombie frustrated!

Henry apparently wants to hit all Australian businesses with a “super profits tax”, according to today’s Australian. According to the paper: Background papers prepared for the Henry review explain that this [super tax applied to all businesses] would allow companies to earn a return on their equity investment, which should be no greater than the government bond rate. Profits higher than this would be treated as a super profit or economic rent, and would be taxed at a higher rate.”

Is this guy for real? They would “allow” companies a certain return on their equity investment. Quick. Someone check Lenin’s tomb.

What you’re seeing here is the counter-attack of the Zombie bureaucratic class (the people that run the Welfare State) to the global financial crisis. Like Kevin Rudd, Henry would like to use the crisis as an excuse to indict the failures of the free market and expand the power of the State in the economy and public life. That, at least, is what it looks like to us.

But it is not shopped that way. The Prime Minister and the Treasurer call this “reform.” It’s not reform at all, though. It’s legislated robbery. The government is effectively seizing anything it considers to be surplus profits in the economy. There is nothing modest, sensible, or even-handed about this. It is a power grab.

To be fair, it is more of a money grab. This is a move driven by an institution (the Nation State) that has too many liabilities and only one way to pay for them (taxes, coercion, theft, thuggery, and shakedowns). These people are mad. And bold.

Incredibly, Henry is frustrated that people and corporations don’t willingly go along to their own financial slaughter. At a conference in Sydney he lamented that so many people are being so fussy about the whole tax thing. “Whenever an idea is ventured publicly by a person,” he said, “whether that person is a policy adviser or whether it’s a government minister, there’s at least a handful of academics who will contest it.”

Heaven forbid far-reaching wealth-destroying tax proposals should be contested in a free and democratic society. Honestly, what sensible person would dare to question the judgment of a career bureaucrat and a career diplomat? Aren’t both (Henry and Rudd) in a better position to know what’s best for man, economy, and State?

“I’ve seen it on both sides of politics – this is not a partisan comment at all. But for governments, government ministers who are seeking to get ideas legislated, it is unbelievably frustrating, incredibly frustrating…’It is a great strength of economics as a discipline … But I think there are occasions on which economists might, at least for a period, put down their weapons and join a consensus.”

Bring that big noggin over here you tax animal. Just lay our head right over here on the chopping block if you would. That’s it. Hold on…could you expose your neck…I can’t get quite the right angle to chop your head off. Ahh…there you go.

Henry’s comments display a shocking level of certitude that it’s right and better for the civil service and the government to be so deeply involved in the economy. Speaking as an outsider and an American, we find this kind of easy-going reasonable tone about such a radical role for government to be quite shocking (and infuriating). We can hardly take it seriously that someone really believes any corporate profits above the long-term bond rate are “super profits” and should be confiscated by the government.

If this kind of confiscatory, centrally-planned, Statist, nanny-state thinking is typical of the Australian civil service or of Australian politicians, then the country is a lot further down the road to serfdom than we ever imagined. With policy leaders like Ken Henry, Australia will quickly become a failed experiment in some bogus “third” way socialism that leads to capital flight and lower standards of living.

Maybe we’ve misunderstood the Treasurer’s comments, though. And if so, it’s our fault. But if we’ve understood him correctly, then you should have a cold chill running down your spine. It means the government of Australia doesn’t want you to get rich. And if you are rich, it doesn’t want you to stay that way for long.

And meanwhile, an interesting side effect of the RSPT is that it’s effectively driving Australian miners, hat in hand, into the hands of state-owned Chinese enterprises with the cash to finance projects that banks and debt markets will no longer touch (thanks to the government’s greedy, grasping fingers).

This might seem like an odd conclusion to reach after the government presided over the signing of $10 billion in deals between Chinese partners and mostly Australian resource companies. That would seem to vindicate the Prime Minister in saying that the RSPT would not affect foreign investment in Australian resource projects.

But Chinese investment in Australian projects has never been about delivering a profit to Australian shareholders. It’s been about resource supply security for Chinese steel makers. The coal and iron ore projects will deliver reliable and low-cost steel-making ingredients to Chinese producers. When you’re not investing with the goal of making a profit, the super-tax isn’t an issue; it’s an opportunity to get a lower price because you’re competing with fewer investors.

Nice work, comrade.

Not that we’re bashing the Chinese for sewing up a good deal. You’d expect them to look after their own interests, just as you’d expect the Prime Minister to look after Australia’s interests. But if the goal of the Rudd tax was to deliver more of the profits from rising resource prices to Australians, yesterday’s deals didn’t help.

Quite the contrary. In its current trajectory, Australia’s resource industry could become a subsidiary of China Inc., run to meet the needs of Chinese companies, not Australian investors or businesses.

You always got the feeling that Kevin Rudd wasn’t, in his heart of hearts, ever opposed to a back-door nationalisation of the resource industry (which is what the RSPT accomplishes). But we always thought the Australian government would be the principal partner. Not the Chinese.

Yesterday we promised to show you how the RSPT could also affect the availability of housing finance in Australia. We haven’t forgotten. But we’ve rambled on too long already. We’ll get to it tomorrow.

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