Gold Down Under

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You might not
know it, but the big brown land down under has issues. When Paul
Hogan
slipped that shrimp on the barbeque, he reinforced our
national stereotype as the relaxed land of the long weekend (LOTLW).
True, we have just twenty million people spread over an island continent
only slightly smaller than the US. We also have more ounces of gold,
silver and base metals in the ground per person of population than
probably any country in the world.

Despite this
abundance of natural wealth, we are also blessed with a current
account deficit of over 7% of GDP, net foreign debt of four hundred
billion dollars plus, median house prices of over six times average
annual earnings and one of the highest levels of casual employment
in the OECD.

Donald
Horne
once famously described Australia as a lucky country run by second-rate
people who share its luck. Could this be true? Our political masters
once described us as "relaxed
and comfortable
" about our station in life. Are we convinced
by smooth talk telling us what we want to hear, or are the words
of Horne closer to the truth?

Origins

Terra Australis
was first noted by Portuguese and Dutch explorers. The name translates
as the great south land of the Holy Spirit. Currently, there would
be less than 10% of the non-catholic population that might be contemplating
this each Sunday. But religious origins aside, gold has strongly
influenced our development in the brief two hundred years of settlement.
Our first intrepid white settlers were ingloriously dumped here
as a last ditch penal outpost by the British in 1788.

The first involuntary
settlers would likely have benefited from a sound de-briefing after
their "assisted passage" halfway around the world. Forced
incarceration by the State and a re-location 10,000 miles across
hazardous oceans in leaking boats can be detrimental to your mental
and physical health. Of the convicts who survived their economy
class passage, some behaved and "redeemed themselves."
These were eventually written pardons. These newly liberated men
(and women) and a small number of free settlers set out to do the
usual thing of a free people – survive and thrive.

Without recounting
the details of our history (see for example, here
or here),
it is safe to say that the early settlers were survivors. From nearly
starving, the growth of industry, agriculture, farming and grazing
helped an infant economy to grow and to prosper a resilient populace.
Sure, there was the occasional drought, economic downturn, and mixed
fortunes of all capitalist countries. There was even an interesting
period during which rum
was used as the preferred currency of choice. But it is the freedoms
enjoyed by those early settler citizens (those not still in literal
chains to the State) that would likely surprise many of us familiar
with the civility of today's LOTLW.

In our current
era of democratic "freedom", Australians are accustomed
to inflation, taxes, surrendering firearms, using a fiat currency,
displaying de-facto national identity numbers and enduring compulsory
voting in elections.

It wasn't always
like this. Gold played a pivotal part in the story of our national
development, and we are much the poorer for its withdrawal from
our national consciousness. Its contribution to our development
is rarely acknowledged. Like the relatives you know you have, but
don't talk about much. Gold stars as a major celebrity in the story
of our national history, in strong contrast to the walk-on bit parts
it currently captures.

Gold
Rushes

The land down
under is still today one of the world's biggest producers of the
shiny yellow metal. In 2004 Australia produced 261mt
of gold, second only to South Africa. Yet this is hard to appreciate
by a cursory look at our financial indices. Of the dozens of listed
gold companies, only a few actually mine, produce and smelt the
majority of our gold production. So we can easily under-estimate
gold's influence on the development of a modern Australia.

Gold was discovered
at various sites in Victoria, New South Wales, Western Australia
and Queensland beginning in the early to mid 1800s. These discoveries
had a dramatic effect. During the gold rushes of the 1850's alone,
the national population nearly trebled,
from about 440,000 to nearly 1.2 million souls.

Large groups
of people literally "rushed" from one area of excitement
to another, in the hope of striking it rich. Thousands of people
literally put down their tools, left their families and hiked their
way to the fields. In our contemporary world of electronic banking,
on-line accounts and virtual money, it is hard to contemplate the
effect that gold had.

Our cities
suffered the normal growing pains of many a teenage adolescent;
oddly shaped new growths appeared as if from nothing. The provision
of services was a difficult task; the cost of building materials
and the resultant reliance on cheap timbers often meant that fire
was an ongoing risk to permanence. The difficulty of obtaining a
reliable water supply might have meant that a burning timber structure
was readily abandoned. After all, there was plenty more timber where
it had came from.

But in areas
near the fields where gold money flowed, there were many fine stone
buildings constructed. Visit any of the big former gold mining towns
such as Charters
Towers
, Bendigo or Ballarat, and you will be struck by the permanence
of much of the main street frontage, still there today in these
regional towns.

The goldfields
themselves were chaotic; think of a large but leaderless group all
seeking the same end product. The irresistible lure of gold drew
men away from their labours, and the law of supply and demand priced
their wages accordingly. Labour shortages appeared across many industries.

Many of the
hopeful were ultimately disappointed by the quick disappearance
of shallow alluvial patches of gold. As the shallow near-surface
gold was exhausted, underground mining became necessary to continue
extracting the rich veins of gold. Companies were formed to acquire
the capital and infrastructure required of a mining operation. The
numbers of men working the shallow surface scratching of individual
claims declined.

Whilst the
workers continued to chase their fortunes, many of the capitalist
elite feared what gold might do to their labour force and the social
strata of the community. According to these folks, accumulated wealth
was fine provided you ran in the right circles and knew the right
people. But give a working man the chance to grow rich, and he would
become u2018pernicious, demoralised, and succumb to a form of gross
self-centred materialism.' Or so was said.

To the contrary,
the tremendously positive effect of gold is little recognised nor
realised by most Australians. Gold is largely responsible for the
impetus of much of our development. Literally, it was the discovery
and extraction of gold that helped propel the country into one of
the highest standards of living in the world by the early 1900s.
Although we continue to move forward, it is interesting to note
our relative performance has slipped quite dramatically ever since
Federation. Of course, the formation of a central government in
1901, the central bank that followed in 1911 and our subsequent
decline on the OECD standards of living table for the last one hundred
years, might have just been coincidental. Maybe.

Tensions
and Taxes

Being true
to nature, Governments sought to profit from the productive wealth
being claimed from the earth by the industrious. Permits to mine
gold were imposed by law. The disquiet of the miners eventually
resulted in an unpopular government enforcing law, order and taxes
at the point of a gun. This event was later dubbed the Eureka
stockade
of 1854. Ideological ownership of what took place has been in dispute
ever since; suffice to say that libertarian ideals took quite a
battering. See here
for a fuller coverage of this fascinating episode in Australian
history. It was only the second armed insurrection in Australian
history, the first
being some fifty years earlier.

Yet in the
1850s, it was more than libertarian ideals that experienced pain.
The recent racial
tensions
of Cronulla-Sutherland
(Sydney) have nothing on the racial tensions experienced one hundred
and fifty years ago. The gold rushes had prompted a surge of immigrants
to Australia from countries all over the world. Foreign languages
were commonly heard. As the shallow alluvial gold was exhausted,
non-Caucasians were blamed for "stripping the goldfields of
their wealth, to the injury of the colonists" (Readers interested
in further examples of self-interest can refer to "Petition
from the Meroo", Votes and Proceedings of the NSW Legislative
Assembly, 1858, vol. 2, p. 947).

Chinese immigrants
were often targeted for blame. Originally brought here as indentured
workers for pastoralists, many succumbed to the lure of gold. By
the mid 1850's, the increasing numbers of Chinese immigrants had
become an easy target for scapegoating, as a result of the Royal
Commission into the Eureka Stockade. Once again, leviathan demonstrated
its ability to deflect blame from itself. In addition to "normal"
arrival taxes, an additional "landing fee" was imposed
on all Chinese immigrants.

In 1858, one
ship of Chinese immigrants was met by stone-throwing youths. Some
newspaper commentaries described the new settlers as being "unchristian,
immoral people" who would "contaminate" the character
of existing European settlers.

At several
gold fields in the 1860s, Chinese settlers were forcibly directed
to remove
their camps from other settlers. The Lambing Flat gold field saw
the formation of the "Miners Protective League", a group
self-defining its membership as "men of all nations, except
Chinamen." In tense standoffs, Chinese miners were driven off
various mining sites during 1861. Tensions continued until 30 June
1861, when Chinese in the Lambing Flat area were attacked and their
pigtails, a symbol of the Manchu
culture
and the Qing dynasty, shamefully cut off. Over 1200
Chinese fled, leaving their camping gear behind, which was subsequently
gathered and burnt in several large bonfires by the several-thousand-strong
crowd.

Following the
riot, the colonial separatists succeeded in forcing restrictions
on immigration by Chinese nationals. During the following decades,
the numbers of Chinese on Australian soil gradually declined. For
those remaining acceptance was a slow process; Australian law excluded
Chinese from the more recently discovered gold fields that offered
better prospects for shallow alluvial mining. Crossing the boundaries
to these newer gold fields resulted in fines or jail time for Chinese
"offenders."

By 1867 the
bill that virtually halted Chinese immigration was repealed. Many
gold fields were now workable only by underground techniques, methods
beyond the resources of individual men. Chinese immigration was
minimal until sparked by further gold discoveries in the 1870s and
1880s.

Current
Economic Status

Jump forward
to the present. Contemporary Australia has its share of problems;
we have a housing boom, a stock market bubble and a declining manufacturing
base. Our dollar is known as a commodity currency, a status that
is usefully blamed for our boom and bust growth cycles; in reality
these are normal outcomes of a fiat-fuelled post-industrial society.
Any Austrian economist could explain this; sadly, we're stuck with
mostly Australian ones. Despite the similarity in spelling, Australian
economists have little in common with their Austrian counterparts.
Our local number crunchers have been all too willing to repeat the
mistakes of their industrialised cousins. Just like the Britons,
our sophisticated central
bank
sold 167 tonnes of our gold just three years ago, near
the twenty-year bottom of the gold market.

Central bankers
in this country have a rather tarnished image as bad guys. They
are seen as the men in suits who raise interest rates to make houses
more expensive. Raising interest rates will make housing loans unaffordable
cry the ill-informed voices. Never mind the actual ticket price
of admission to the housing market; it's the monthly payment that
matters to the financially illiterate.

In the last
ten years Australia has experienced double-digit credit creation.
Amongst other things, this has contributed to double-digit house
price increases. It is common for media scribblers to complain less
about housing prices than about the last "recession
we had to have
." This sentiment simply fuels the incorrect
supposition that rising house prices are tantamount to economic
prosperity. Who in their right mind wouldn't want their house to
go up so they could feel rich? And then borrow against it to confirm
the illusion?

Australia has
suffered fifteen years of economic expansion; many people would
praise this as a positive outcome. It is tempting to agree; but
closer examination of the details should correct first impressions.
Banks have borrowed overseas to support a housing boom; most of
the participants were existing home owners intent on playing musical
chairs. All the while, many people lost financial ground whilst
incurring larger mortgages and acquiring newer cars at generationally-low
interest rates. This outcome was achieved because in the land of
the long weekend, the Adjustable Rate Mortgage (ARM) is king. The
monthly payment is the only figure of concern; the actual debt size
amount seems of less relevance.

In a time of
lower interest rates, Australians have managed to increase their
personal indebtedness. This is in contrast to previous behaviours.
Most people used to avoid being so heavily in debt. Paying the house
off used to evoke celebrations; now it provokes a flood of offers
to refinance.

Our first credit
cards were introduced in the early 1970's. This coincided with a
noticeable loss of blue-collar employment. Job loss for white-collar
workers trended up with the downsizing of the eighties. Like most
post-industrial countries, this has resulted in people who want
full-time jobs having trouble finding one. This is particularly
true since the last recession of the early nineties; the structural
component of our unemployment became much more noticeable.

During the
full employment era of the 1960's, to be long-term unemployed meant
you were out of work for maybe twelve weeks. The current
definition of Long-term unemployment is to be out of work for 52
weeks or more. Government "assistance" barely covers the
cost of renting in most major cities; being out of work is now more
financially damaging than ever before. The increased take-up of
personal credit for discretionary purchasing to maintain living
standards also leaves the out-of-work vulnerable to defaulting on
their credit card balances.

Not realising
it is often the cause of the unemployment problem, Government decided
to do something a few years ago. After the tech bust of 2000, a
change to capital gains taxes prompted a nationwide housing boom
which boosted jobs for builders, mortgage brokers and real estate
agents.

Parents no
longer wanted their children to grow up and become cowboys;
jobs in the blue-collar trades suddenly became fashionable, at least
for males. But career pathways to the trades have eroded over time.
Socialist central planners of Canberra had seen to that by reforming
and regulating apprenticeship training schemes. The resulting low
supply of tradespeople soon resulted in the six-figure home makeover
as the demand for skills raced ahead of supply. The moral hazard
of financing it all at low interest rates was ignored.

Frisking
for Fiat

Wikipedia defines
moral hazard
as increased risk of problematical (immoral) behavior and a negative
outcome (“hazard”) because the person who caused the problem doesn’t
suffer the full (or any) consequences, or may actually benefit.
One might argue that moral hazards become recognised when the unintended
consequences of policies such as low interest rates or capital gains
tax concessions become apparent in housing bubbles and spiralling
personal indebtedness.

Unintended
consequences abound in socialist democracies. The source of many
of these edicts is our own national capital. For a large country
with the population of New York State, Canberra is an expensive
luxury. As a tourist stop, Canberra has all the museums, bikeways
and places of interest you could wish for. The city came about in
1901 because the citizens of Sydney and Melbourne could not overcome
their traditional rivalry; instead of ditching the whole Federation
idea (as would have been sensible), they instead decided to spend
our loot on creating a new national capital city somewhere between
the two. It was to be away from the coastline to be safe from enemy
shipping fire. In retrospect, this is a quaint idea in the age of
the ICBM.

The formation
of Canberra, now a city of several hundred thousand public servants,
was described
as "a good sheep paddock ruined." But we implicitly support
the bureaucratic edicts that spring forth from this upgraded paddock.
For example, some might say we need Canberra to help us fight terrorism
by snooping into money flows in, out and between our shores. Australian
law calls this money laundering. This has nothing to with washing
machines; it refers to the movement of cash suspected as being from
the black economy, from trafficking of drugs, or being the proceeds
of crime. At our airports, we are all under suspicion, as ordinary
people are the suspects in this bizarre game. Here's how it works.

We used to
have a gold standard. This died and was put to rest in 1931. With
our increasing sophistication, we apparently need just the funny
money, the unbacked fiat paper. Our erudite readers will know that
fiat currencies are inflated over time and they progressively lose
their purchasing power. To buy the same goods, the purchaser needs
to present increasing amounts of the same currency. Under a gold
standard, gentle deflation was the norm. But under fiat, the opposite
is the case. Whether the inflation is gentle or otherwise simply
reflects the rate at which the "money" loses value.

Travellers
commonly take credit cards for many of their purchases. But they
also need cash for those times when nothing else will do. When the
phone lines are down, or to keep an innkeeper happy, cash is priceless.
But be warned about how much cash you have with you. If you bring
too many unbacked promises into the LOTLW, or try to take too many
out, official people will get upset and you'll be in trouble.

This came about
in the year of our two hundredth birthday of white settlement; we
celebrated by giving away some of our freedoms. This was achieved
through the enactment of the Financial Transaction Reports Act of
1988. The principal object of this Act was to "facilitate the
administration and enforcement of taxation laws." Transactions
of $10,000 and over are reported to the Australian Transaction Reports
and Analysis Centre. "Suspicious" multiple transactions
just under this limit can also be noted to AUSTRAC.

When arriving
and departing the LOTLW, there are apparently plenty of signs that
tell you 'fess up if you are carrying "excess" currency.
Anything that converts to more than $10,000 or more in the local
fiat is classed as "excessive." When the FTRA was introduced,
ten thousand dollars was a lot of money. It could buy a new car,
or put a deposit on a house. Now, it is barely enough to pay your
teenagers annual phone bill.

The rather
odd observation that can be made about this situation is that the
funny paper money is subject to restrictions. Yet anybody with a
pulse can leave the country with their bags laden with gold and
silver with few questions asked. Under our burgeoning police state,
how long will it be until precious metals dealers are required by
law to keep customer registers?

When travelling
in or out of the LOTLW, tick the right boxes for the kindly folks
at the customs barrier if the total of your cash is equivalent to
AUD$10,000 or over. The smiling officials will take your details
but will leave your unbacked fiat promises intact to travel.

Conclusion

From the penal
colony at the end of the world, Australia has evolved from a harsh
gaol to a soft, socialistic nanny-state democracy. It might be fairly
said that our citizens are highly indebted, use fiat paper as though
it were real money, and have forgotten the golden catalyst of much
of their national heritage.

Our national
origin was as a penal colony. In some ways this is little changed.
New police powers include recently enacted stop and search capabilities;
you may be frisked by officials for appearing suspicious. Curiously,
there is little dissent to these laws. Civil libertarians are viewed
with suspicion; vocalising dissent to the loss of liberty merely
gets you labelled as "un-Australian."

Not all of
us are happy with this state of affairs. Some act out their frustrations.
Racial tensions were blamed for recent disquieting riots. But the
financial inequities experienced by high unemployment in low socio-economic
areas continue to be ignored. Forced wealth redistribution will
not fix this problem.

Our fair brown
land has been in the grip of a housing mania, fed by cheap credit
and relaxed capital gains laws. This will soon end. When the credit-rich
generation realise their "assets" are brick and mortar
albatrosses, the stampede for the exits will begin. This may take
some time. Australians have a cultural affinity to bricks and mortar.
They have forgotten how to differentiate an asset from a liability.

Whether this
decline of the housing market feeds into a new metals boom is impossible
to predict. Since the Reserve Bank began a cycle of rising interest
rates almost three years ago, the Australian stock market has leapt
50%. Yet metals shares are yet to see anything like the comparable
growth of their US counterparts over the same period.

Regardless
of the short to medium term outcome for investors, gold bugs and
conspiracy theorists, gold will very likely continue to offer asset
protection for the long term. We used to appreciate the shiny yellow
metal a lot more then we do now; like distant cousins, we barely
remember what it looks like.

But it is time
that we did: we are becoming older, more indebted than ever, and
more susceptible to the deceptions of our rulers. The concentration
of wealth in fewer hands is no accident; we need to cease the futile
berating of the rigged capital markets that brought it about. Instead
of talking, we need to take action.

Our future
lies not in selling houses to each other; our future lies in recognising
the necessity of living within our means. Incurring debt is not
the road to riches that many think; capital gains tax laws that
made investment housing popular can be changed before you can say
"Parliamentary recall."

Earlier I stated
that we as a nation have issues. One of our chief issues is that
we fail to appreciate the financial dangers of debt. This is the
Australian cultural notion of "she'll be right, mate."
If all the stars align, maybe we will be. But the dangers to our
financial well-being are not just from outside our borders.

“By a
continuing process of inflation, governments can confiscate, secretly
and unobserved, an important part of the wealth of their citizens.
There is no subtler, no surer means of overturning the existing
basis of society than to debauch the currency. The process engages
all the hidden forces of economic law on the side of destruction,
and does it in a manner which not one man in a million is able
to diagnose.”

~
John Maynard Keynes, Economic
Consequences of the Peace
(1920)

We are a small
number of highly indebted people. There are nearly three billion
savers joining the first world in our generation. We ignore their
appreciation of all things precious at our own peril.

January
18, 2006

Darren
Tulk [send him mail]
has too many university degrees to be viably employable, so he works
for the Government.

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