Aidan We agree, I think, that we have the start of a problem of economic stagnation. I think more Govt spending would be fatal and tip us over and anyway would only be a temporary measure until your second cure is put into place. Lower taxes and low interest rates and of course a balanced budget which means heavily reduced expenditure. Will even Campbell Newman dare to do it ?

Next para. Govts are borrowing because reduced economic activity is producing less taxes and so far they have not cut expenditure nearly enough to make it balance. Then more delightful optimism from you --- “economic activity gets back to normal, there will be plenty of tax revenue” ---- No, economic activity cannot get back to normal under the present fiscal regime. You are getting it arse about ! As you are in treating Gold as a “luxury” Gold jewellery is a luxury and only a small amount of the gold in the world is made into jewellery. Gold is an insurance policy only, NOT a luxury. As soon as the world gets it all right again and has credit backed by serious assets, not promises printed on paper, then the gold can be sold, except for central banks and the proceeds invested in profit making companies making something there is a demand for.

I consider default as occurring when no one will accept your currency as it is so debased. Two sides really of the same coin

What are your views of the Swiss Bank reversal. I think they were only waiting until their referendum on gold was voted down. If this had come before, the referendum might well have passed, and the results would have been considerable and world wide. This is the Swiss returning to having a proper hard currency whatever the cost, as that has proved so profitable in the past. And they are in effect saying that Mario Draghi is going to do it all wrong and they are not prepared to be dragged along any longer.

Dickybird,

<<We agree, I think, that we have the start of a problem of economic stagnation.>>
No, I don't agree it's the start. It started in America in 2007 and spread to the rest of the world in 2008.

<< I think more Govt spending would be fatal and tip us over>>
Fatal to whom and why? Tip us over what and how?

<<and anyway would only be a temporary measure until your second cure is put into place. Lower taxes and low interest rates and of course a balanced budget which means heavily reduced expenditure. Will even Campbell Newman dare to do it ?>>
A balanced budget is NOT part of the cure, and trying to force one exacerbates the disease!

Next para. Govts are borrowing because reduced economic activity is producing less taxes and so far they have not cut expenditure nearly enough to make it balance.>>
No, not to make it balance but to revive the private sector. If you then want a balanced budget, the thing to do is to then slowly cut back so that the private sector can take up the slack. But when the private sector is weak, balancing the budget is futile and trying to do so will only weaken the economy.

<< Then more delightful optimism from you --- “economic activity gets back to normal, there will be plenty of tax revenue” ---- No, economic activity cannot get back to normal under the present fiscal regime. You are getting it arse about ! >>
Keynes famously worked out what it would take to get the economy back to normal. There's no feature of the present system that would prevent economic activity from getting back to normal.

<<As you are in treating Gold as a “luxury” Gold jewellery is a luxury and only a small amount of the gold in the world is made into jewellery. Gold is an insurance policy only, NOT a luxury.>>
Technically it's a hedge rather than aninsurance policy. And anyway, an insurance policy is a luxury.

<< As soon as the world gets it all right again and has credit backed by serious assets, not promises printed on paper, then the gold can be sold, except for central banks and the proceeds invested in profit making companies making something there is a demand for.>>
Silly comment! Gold can be sold any time.

<<I consider default as occurring when no one will accept your currency as it is so debased. Two sides really of the same coin>>
Default is failure to honour your debts. A collapsing currency is a separate problem.

<<What are your views of the Swiss Bank reversal.>>
Overdue! I don't think they should've capped the value in the first place. A sovereign wealth fund is a much better way of dealing with an overvalued currency.

Aidan. Let me finish some sentences for you. “Economic stagnation..... spread to the rest of the world in 2008” and hasn’t recovered since.

“Tip us over what and how” Into recession and collapse of confidence because credit is being issued with no assets to legitimise it.

“ But when the private sector is weak, balancing the budget is futile and trying to do so will only weaken the economy” The private sector is weak because confidence is slipping in Govts and central banks. Govt must balance budgets to try to restore confidence.

Swiss Bank reversal. You are looking at it from a personal point of view and you are probably right over investing in a sovereign wealth fund for individuals, except all of these types of funds came under a cloud in the 2001 crisis like LTCM. I am more interested in trying to guess the effect the Swiss action will have on other central bank Chairmen. Will they dawn that the most successful country financially is not following them into more QE

Gold “Technically it's a hedge rather than an insurance policy. And anyway, an insurance policy is a luxury.” Call it what you will – It is the holding of last resort, when all else has failed. You don’t need to own any when everything is going well, as it has done for years, but since the beginning of this century the solution to all crises has been to create more money to solve it. This solution only delays the crisis it for a few years and then the problem re-emerges. It has not been solved, only deferred. The world is now one economy and the laws of nature apply to the world as they used to in the 19th century if you were setting up a High street bank. I am spelling out below what happened in the 19th century to a little bank and as we are all one economy now, it equally applies to the world economy in the 21st

You start a High street bank by taking in deposits on short term repayment contracts and lending the money out again long term. This is inherently unstable and only works provided that two conditions hold. There must be Overall Confidence and secondarily, you, the bank manager, must ensure that your long term loans are backed by assets, not by thin air or people who are spending their loans on wine, women and song or the modern equivalent, socialist giveaways to voters that are unable to even pay your interest. In the 19th century there was no one to back you up, you were bust. In the 21st century the world is all one economy and if you are now Chairman of the Fed, there still is no one to back you up ..........

Too many people have been wasting your loans and Confidence is slipping, particularly in Zurich it would seem. Should it all “tip over” the only holdings worth while are probably real estate and gold and possibly blue chip companies, but they will be worth half what they were.

My advice, for what it is worth and I am well aware you don’t think it is worth anything, would be to hold a large percentage of your net assets in gold or gold related holding until the powers that be have found a solution. This is not issuing more unsecured credit when the problem is basically caused by issuing insecure credit. What that solution is I have no idea. You appear to think it is more credit but can you explain to me how more of the same medicine is going to work. Surely you need to try a different medicine. After the crisis gradually sell your gold and related holdings and invest in blue chip shares. You will be buying them at half price

Dickybird,

<<“Economic stagnation..... spread to the rest of the world in 2008” and hasn’t recovered since.>>
True. And the really annoying thing is that it came close to recovery in Australia but the combination of unnecessarily high interest rates, the high dollar and the government trying to rush back to surplus wrecked it again.

<<“Tip us over what and how” Into recession and collapse of confidence because credit is being issued with no assets to legitimise it.>>
False. As someone else pointed out earlier, the loans themselves are assets. Plus the banks have to comply with the Basel requirements.

<<The private sector is weak because confidence is slipping in Govts and central banks.>>
Completely false and utterly ridiculous! Loss of confidence in governments and central banks would weaken the currency but not business. Business is weak because of a lack of opportunities to make money.

<<Swiss Bank reversal. You are looking at it from a personal point of view and you are probably right over investing in a sovereign wealth fund for individuals, except all of these types of funds came under a cloud in the 2001 crisis like LTCM. >>
I don't understand what you're saying here, and I suspect you don't either! Sovereign wealth funds aren't hedged investment funds like LTCM, they're state owned by definition. See http://en.wikipedia.org/wiki/Sovereign_wealth_fund

<<I am more interested in trying to guess the effect the Swiss action will have on other central bank Chairmen. Will they dawn that the most successful country financially is not following them into more QE>>
Will it dawn on you that success removes the need for QE?

<<You don’t need to own any [gold] when everything is going well, as it has done for years, but since the beginning of this century the solution to all crises has been to create more money to solve it.>>
That's the appropriate solution to the problem of insufficient money. And make no mistake, the problem is one of insufficient money, not insufficient assets or insufficient gold.