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From Dan Denning at the Old Hat Factory:

--In today's Daily Reckoning we take up the question of what happens when the central bankers decide to ramp up quantitative easing in order to ward off a deflationary depression or simply prop up the domestic housing market. But before we get to that, we suppose we should deal with the possibility that everything's gonna be alright.

--"The bears are throwing in the towel, and the Aussie [dollar] is undervalued," Paresh Upadhyaya, a fund manager in Boston, tells Bloomberg. "Asia is still going to expand, and China and India will have growth above 5 percent. That's fuelling demand for commodities, so Australia's exports are holding up much better than the rest of the G-10 countries."

--Paresh was also referring to the 21% rise in the Aussie dollar versus the U.S. dollar since February 25th. That's the Aussie's fastest rise against the greenback since the currency floated in 1983. Some analysts are taking this as evidence that Australia's currency and its economy are going to benefit more than any other Western nation from China's nearly $800 billion stimulus package. So China and Australia have decoupled from America and recoupled together, you might say.

--All of that may be true. Or it may be a heaping helping of wishful thinking. But for today, anyway, it doesn't seem to matter at all. Today, the Aussie share market is dealing with the resumption of covered short-selling on financial stocks. It's also dealing with the possibility that the deal between Rio Tinto and Chinalco may be scrapped.

--That's a lot to deal with. And when you've got the Dear Leader cooking off nuclear bombs in North Korea, it's enough to be a rally killer. Shares are lower at today's open.

--What about the economy? Is it getting better? Are structural fiscal deficits a good thing? RBA director Warwick McKibbin warned yesterday that deficit spending driven by political ideology is not a good cure for recession. "The danger is you add too much to the fiscal deficit," he said. "Sure, some of it is temporary, but a lot is structural because it is based on ideology."

--He was referring, we assume, to the idea of borrowing money that you then give a way to be spent because you think what the economy needs is "stimulation." It doesn't increase productivity. "Most fiscal policy doesn't do anything except switch spending from one period to another," he added. When you change fiscal policy, all you do is stimulate the economy today out of future possible growth."

--This is what the first home buyer's grant does, by the way. It "brings forward demand." But really, how generationally selfish is it to go into debt today so you can maintain your standard of living? That stimulus spending will have to be paid for. Taxes will have to rise. Or, more of the government's tax takings will go to pay off creditors.

--Either way, isn't there something inherently greedy about the whole idea of deficit spending? Households, businesses, the government...all of them take excessive risks in the boom phase of the credit expansion. Then, rather than reckoning up the investments, taking the losses, and moving on to the next cycle of economic growth, they try to have all gain and no pain.

--They do this by borrowing a little. Then a little more. Then a lot. It all sounds very textbook and officially appropriate. But all of it is to "fight" the very recession that is a natural part of the business cycle anyway. When you get right down to it, there is something tawdry and small spirited about it. Think that your avoidance of consequences allows to put future generations in debt is also just plain vulgar, materialistic, selfish, and not honourable.

--And let's not forget deceptive! Here we're talking about the first home buyer's grant again. "The average loan size for first-home buyers has risen by $52,000 - or 23 per cent - in the past two years, raising fears that the much-publicised government incentives for young buyers are artificially inflating the market," report Nick Tabakoff and Joe Kelly in yesterday's Australian.

--Prices at the bottom end of town are moving up because of the grant. This is forcing those new buyers to take out even larger loans. We can see how this is good for real estate agents, lenders, stamp duty collectors, and mortgage insurers. We can't see how it's good for first home buyers to see the entire value of the grant tacked on to the price.

--And while we're at it, it's hard to see how getting into the housing market at the bottom of the rate cycle with huge question marks in the economy about employment, is, you know, a smart, safe, financially prudent thing to do. But if the government says it's a good idea, it must be true.

--And of course, we're certain the banks have been prudent in keeping the strictest lending standards. They would never, ever make a loan to someone who might have trouble servicing the debt. That just wouldn't happen in Australia. Impossible.

--Of course you could make the argument that keeping house prices inflated by whatever means necessary is a policy goal in Australia, just as it was a policy goal in America. With the stock market in a secular bear phase, the idea of financial and personal security from ownership is one of the most powerful remaining myths in public life (the idea of retirement is already under attack, once you do the demographic math.)

--So it IS possible the government will do even more to support house prices. But it is also possible there is nothing the government can ultimately do to support house prices if they really are seriously unaffordable, as we believe they are. You can keep interest rates low, make grants, guarantee loans, or even buy securitised mortgages. But you can't make prices affordable by throwing more money at them.

--Yet throwing more money at the economy through quantitative easing is just what the U.S. and the U.K. are doing. It is a back-door devaluation of the currency which is directly reflected in the recent performance of both the pound sterling and the greenback.

--What you need to know as an investor is that governments will ALWAYS choose the path of radical devaluation and inflation over accepting recession or deflationary depression. That is why gold and other forms of tangible wealth are the best ways to prepare for the coming re-devaluations. They are on their way.