The Daily Reckoning Australia.]

What a

A bunch of market glitches on Thursday caused some panic in the US. target="_blank">Bloomberg reports on how the Greek bailout has calmed nerves in the European bond market - or not:

European Central Bank council member Axel Weber said Greece's fiscal crisis is threatening "grave contagion effects" in the euro area as stocks fell around the world and riots in Athens left three people dead.

Axel is the guy who should have Jean-Claude Trichet's job at the European Central Bank (ECB). He is the German representative and thus the resident inflation hawk.

"The legitimate aim of preventing contagion effects in Europe's financial system doesn't justify using every means," Weber said. "Measures that damage the fundamental principles of the currency union and the trust of the people would be mistaken and more expensive for the economy in the longer term."

The ECB is likely to be the target="_blank">increasing bond yields, is the following quote:

"Spanish Prime Minister Jose Luis Rodriguez Zapatero yesterday dismissed as "complete madness" speculation that his government would need a Greek-style bailout."

Complete madness indeed. Rumours are spreading that Spain is already in bailout discussions with the IMF.

The real crisis measuring stick, gold, reached recent target="_blank">

Pascoe also comments on what Kevin did come up with...

"The main superannuation change of increasing the super levy went specifically against the Henry recommendations. The business tax rate trimming and small business write-off sweetener were mere shadows of Henry's suggested improvements."

So why bother with a review in the first place? Well, if nobody reads the thing, it makes the suggested reforms look a lot more intelligent, no matter what the review actually said.

The only people who bother to read these reviews are ones with a vested interest (i.e. mining executives and their accountants) and they thus cannot be trusted for their opinions.

So goeth the political game. Tax one industry at a time and you only encounter resistance from a small number of people, who are easy to discredit, because they are the ones being taxed.

But if the Henry Review isn't particularly important, and the legislation hasn't even been drafted, nor is it likely to be before the election, why all this hubbub?

Well, Kevin has come up with a very clever scam. He proposes to increase compulsory super contributions, while making the Australian mining industry the most taxed in the world. Sounds great if you're a socialist, right?

Dan Denning pointed out otherwise on target="_blank">here.

The fact that Australians who have given up time and money to invest in an ore body extraction should pay Australians who haven't done either is just silly. If you want a stake in Australia's resources, buy a BHP share. Don't allow the government to force you to do it though.

"The Australian has learnt that at least one major fundraising by a Chinese company for investment in an Australian mining company has been put on hold as analysts branded the country risky...

"It is understood there are concerns within Rio that its Argyle diamond mine in the Kimberley region of WA could also become a casualty of the new tax. The mine is a major employer of indigenous people in the region and has been used by the Rudd government as a model for engagement between the mining industry and Aboriginal communities...

"Origin Energy said yesterday the proposed 40 per cent "resource super-profit tax" would push up "retail energy prices" by making gas and coal to drive power plants more expensive."

Oops.

Oppose What Exactly?

So where is the Opposition in all this?

http://clicks.portphillippublishing.net//t/AQ/AAGGiw/AAGNNg/AAG-WQ/AQ/AgMlFg/mQsC" target="_blank">Enter Hockey

, the forward thinker: What happens when the mining boom is over? Australia will be stuck with the deficits from Kevin's government expansion and won't have a way to fund it. Keeping in mind that Dan

Hockey even managed some brilliant eloquent language to describe the situation: "...standing the Government Budget on quicksand."

Again, Dan reckons we may be in too deep already.

Interesting Rates

Even the target="_blank">idiotic central bankers would consider creating funds out of thin air to then use those funds to purchase assets from the real economy. As the Germans and Zimbabweans will tell you, it doesn't end well.

But wait, what is this we hear from http://clicks.portphillippublishing.net//t/AQ/AAGGiw/AAGNNg/AAG-XA/Ag/AgMlFg/8WxS" target="_blank">article, ECB President Trichet assures us that, "at this stage, we have absolutely no decision on the purchase of government bonds." What that really means is one thing, but it's not like the Frenchman feels bound to stick by the rules anyway. "Trichet yesterday diluted rules for the second time in a month to guarantee the ECB will keep taking Greek government bonds as collateral for loans."

So what is stopping him from diluting the Euro, along with the rules?

The Germans!

Surprise, surprise, they haven't forgotten the hyperinflations of the past. Using the printing press is a "red line which the German government would not allow to be crossed," target="_blank">Paul Krugman, esteemed former Enron advisor, has picked up on some rather obvious facts regarding the Euro's future. His conclusion is about as useful as his economic advice: "I think I'll go hide under the table now." The rest of the target="_blank">otherwise:

"This is not an attack on Greece but on the euro, and it will fail, for two reasons. Firstly, because the euro zone is solid ... and then because we have demonstrated solid solidarity in favour of Greece"

Dan reported on target="_blank">Reuters reports that one in two Greeks will be taking to the streets in protest. One in two! Protesting against their own bailout!

Now that the deal is done, the protests are beginning. With

Super Contributions

Kevin has indicated he would like to increase compulsory super by 3%. Where would that 3% come from? One of two places, the Austrian School of Economics tells us. Firstly, from business budgets, resulting in less employment, and secondly from disposable income, resulting in less discretionary spending. In what proportion this cost is carried by the two is something up for debate.

As we are true capitalists and care about the wellbeing of the poor more than the rich (because there are more of them), let's examine the effect on those who struggle to make ends meet.

If 3% of your their income suddenly disappears, and you were only just making ends meet, what happens to you? And consider the rates on mortgages are rising as well. The sickening thing about this is that Super's return thus far is so bad that you would be better off taking your Super contribution and paying down the mortgage.

Brown Knows

Gordon Brown's last ditch effort at persuading the British public he represents change comes after his ten years as Chancellor of the Exchequer (Treasurer) and three as PM. But that wasn't the problematic part of his speech.

Those tea partiers in the US who think Obama is a socialist would have been shaking in their boots if they listened to Gordon's

Gordon's heralded achievements include introducing the minimum wage to the UK. "Justice for the low paid" and all that. But what was the actual effect of this?

Nobel Laureate Milton Friedman

"There is never a good time to raise the minimum wage. Just ask the people working in low-skilled jobs that are laid off as a result."

I.M.F.'ed Take 2

If you would like to know more about the IMF's track record, check out this Understanding Personal and Economic Liberty. And after having sponsored the Australian visit of Austrian Economics hero FA Hayek, Ron would know.

[Editor's note: The content of this article was first published in 2005]

Reform and Prosperity in Post-war West Germany

In 1945 at the end of the WW II there was no nation on earth more devastated than West Germany - ports, rivers and canals clogged with sunken ships, sunken barges, railways and communications devastated, six million of her most capable young men killed in battle, six million of her most productive people, the Jews, killed by Hitler's henchmen, heavy and light industry practically bombed out of existence, and 12 million refugees seeking a safe haven from socialism.

After three years of military occupation, inflation, controls and rationing, the ensuing chaos ruled supreme. At that time the Economics Minister, Ludwig Erhard, was a product of the Classical School. After serving in WW I he was trained as an economist by Walter Eucken, Franz Oppenheimer and Wilhelm Ropke. He knew that inflation and large state bureaucracies could not cure their problems. He knew that they were the problem.

Erhard was averse to everything authoritarian. Having carefully laid his plans, with agreement from the supervising Allies, he announced on June 19th 1948 that inflation was finished. A new currency would be issued. In round figures it was exchanged ten of the old marks for one of the new ones. The limit was 400 per person. 'And', said Erhard, 'there will be no more money printing'.

Then, knowing that he would never ever get agreement from the supervising Allies to change policy, he decided upon unilateral action. On Sunday July 8th, only three weeks later, he advised the public that he was to address the Nation between 11 pm and midnight about the problems which they faced and with which they were struggling. He advised them that in their own interest everybody should listen to what he had to say. He knew that ideology cannot be destroyed by force so he was persuasive.

He knew that everybody was sick of controls. He knew that everybody was sick and tired of being hobbled and kicked around by bureaucrats. He had also previously expressed his views in many speeches, and his speeches were always well reasoned. He was a master of his subject.

He announced to the population that he had, as from midnight that night, abolished all rationing, wage controls, price controls, government control and regulation of foreign exchange rates. He was also reducing taxation and heavily reducing tariffs.

The burden of supporting tens of thousands of bureaucrats was, in one stroke, removed from the taxpayers' shoulders. The following Tuesday (Monday was a holiday) Erhard was instantly called to book by General Clay, the Commander of the resident US occupying force. Clay quickly came to the heart of the matter, 'Herr Erhard, my advisers tell me that what you have done is a terrible mistake.What do you say to that?' Erhard's reply came swiftly and without hesitation: 'Herr General, pay no attention to them, my own advisers tell me the same thing'.

Under the terms of the surrender no changes were to be made to Allied policy without consultation with the conquerors. An economist Army Colonel on Clay's staff shouted at Erhard, 'How dare you unilaterally relax our rationing system and price controls when there is a widespread food shortage!'. Erhard replied courteously, 'But Herr Oberst, I have not relaxed rationing and price controls, I have abolished them'. It had not occurred to the bureaucrats that such a thing could possibly happen.

Erhard went on to say 'Henceforth, the only rationing ticket the people will need will be the Deutschmark. And they will work hard to get these Deutschmarks, just you wait and see'. He was confident, as reported in his book Prosperity Through Competition, and he abolished taxation on all income tax on hours worked over 40 hours.

A taxation policy which accumulated capital by the billion was '7-D' of the tax code. Under 7-D any German who invested in shipping and ship-building was granted a tax exemption. By 1953, 7-D had already attracted DM 1.5 billion out of the DM 2 billion invested in ship-building. Money came in from all over Germany. Another tax incentive which applied to all industries as well as shipbuilding was the remission of taxes on profits earned from export sales.

After giving the General a good sales talk about how successful his free market, low taxing programme was going to be, the ebullient, good natured Bavarian Professor departed from General Clay's office with the Military Governor's stamp of approval for his abrupt change of policy.

Under the 'glorious' socialist rule of the Fuhrer and his Nationalist Socialist policies, Germans worked only 38 hours a week. Many uninformed people who marvel at the recovery wrought by West Germany, attribute the recovery to the fact that 'The German people are great workers'. And so they are - but it is a curious anomaly that until the Berlin Wall fell in 1990, the process of recovery did not start in East Germany.

However to return to West Germany - immediately after Erhard's implementation of new policy, working hours commenced to voluntarily increase. Productivity increased dramatically as the people, free from the fetters of bureaucracy, and excessive taxation, went to work. Empty shop shelves filled almost overnight. With free labour markets, and free from Government Control and Regulation of Exchange Rates, the world's scarcest commodity, Capital, flowed like water into West Germany and together with a free people, went to work.

Freed from excessive taxation, savings accumulated rapidly providing immense capital resources for the mighty engines of industrial production. An occupying witness later wrote 'Within a week, there was a new light of hope in the eyes of the German people'. A German who was there told me 'There was a new light in the eyes of the German people next day. We knew that if we were free of the bureaucrats we could really go to work'.

Erhard was constantly plagued to indulge in just a little government planning. His good natured riposte was 'You can no more have a little government planning than you can be a little bit pregnant'. By 1953 half a million homes were being privately built annually - and by 1957, that is in eight years, the Federal Republic had accumulated the largest gold reserves of any country in the world except the USA.

Erhard would not permit unbridled bureaucratic activity or money printing. Millions of German entrepreneurs emerged and went into business from barber shops to ship building. Foreign capital poured into Germany, bringing innovation, productivity and prosperity to the once destitute population. 'In order of importance, Germany has replaced the bureaucrat with the businessman', Erhard declared.

In five years, West Germany was producing more than all of Germany produced before the war. Not only that, unemployment fell from 50 percent to 6 percent. In ten years not only was unemployment at zero, but it was necessary to import five million new workers from Greece, Turkey, Italy, Spain and France. Although opposition to all of Erhard's policies continued, the voices of the opposition were smothered by the success of his policies.

Detractors claim that it was Germany's share of Marshall Aid that brought on the recovery. But as reported by Henry Hazlitt;

Nothing similar happened in Great Britain, for example, which received more than twice as much Marshall aid. The German per capita gross national product, measured in constant prices, increased 64% between 1950 and 1958, whereas the per capita increase in Great Britain, similarly measured, rose only 15%.

Erhard reported in his book Prosperity through Competition that hordes of businessmen constantly called at his office seeking and even demanding privileges. Tariff protection and subsidies were their favourite subjects. Although he was pressured by many powerful industries, he did not capitulate to their demands. He replied that they had an ample, intelligent labour force willing to work hard, they had technical skills equal to any anywhere, his good policies attracted capital and the people were saving new capital, and under a regime of secure property rights, honest money, no protection or privileges, competition on a national and international scale produced strong industries. In turn, strong competitive industries were best placed to capture world markets. And strong competitive industries were the best insurance the nation had to keep her people employed and to provide constantly rising living standards.

The success of his philosophy is now history. After Erhard's reform, Germany had Europe's strongest currency, and one of the world's strongest currencies, until the establishment of the Euro. It boasted one of the world's highest living standards. The Bundesbank was Europe's strongest bank and the Deutschmark the currency against which all other European currencies were measured.

And this was the case for many years. In Erhard's book Prosperity Though Competition he titled Chapter 12 'Welfare State - The Modern Delusion'. In 12 pages he warned the West Germans to avoid the welfare state, as, if implemented, it would bring economic and social disaster. Unfortunately vote seeking politicians did not listen to his wise words and now Germany is paying the price.

Ronald Kitching