Iran, happiness and men behaving badly

[Music]

Hello, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter and Columnist for the ABC.

And I'm Stephen Mayne, contributor at Intelligent Investor, Founder of Crikey and shareholder advocate.

And we are...

We are the Money Café, boss.

Good morning, Stephen.

Another wild week in the world, how are you holding up?

Yeah, I'm not getting a lot of sleep at the moment.  There's so much going on and it's very interesting and I'm looking forward to getting stuck into that, but I just wanted to tell you, I was in Ballina last week, doing a speech for Business New South Wales at the Ballina RSL - and I don't think I've been in a New South Wales RSL ever, probably...

Lots of pokies there?

Well, it's a casino, basically and it's Taj Mahal, it's unbelievably big, it's incredible, what a place.  Anyway, the Premier, Chris Minns, gave a video greeting to the people in the room and he said, "I'm glad you've got Alan Kohler there because my wife and I are big fans of Money Café and we listen to it every week."

Is that right?

Yeah.

There you go.  Hi, Chris - I'll stop calling him 'Pokie-Minns' then. 

Do you call him that?  That's very unkind.

A mate of mine ran against him in his seat who was a Clubs New South Wales whistleblower, Troy Stolz.  We got nowhere with New South Wales Labor in terms of winding back pokies and New South Wales is the pokies capital of the world.  But if he's a Money Café listener, all is forgiven.

G'day Chris and Mrs Minns.

Chris, welcome, Mrs Minns...  I will say, he is, along with Peter Malinauskas, he is the most effective Labor state political figure in the country.  People are saying they like his centrist-right pragmatic approach.  But, boy, no one can get near the South Australian bloke, what a win that was.

It was - and also it was a win for Pauline Hanson, wasn't it?

An enormous win for Pauline Hanson.  I think if that happened in Victoria, I think that One Nation would potentially have 20 seats in the Upper House and the Lower House, so 12 in the Lower House and 8 in the Upper House.

With that percentage?

Yeah, with a similar 22 per cent vote.

Crikey.

It's enormous, it's an earthquake and there's going to be a deluge of people queuing up to run for them in Victoria now, including anyone who gets rejected for pre-selection in the Liberal Party, the Cory Bernadi's of the world, the Mark Latham's...  She's a great sponsor of has-beens who get to come back, so who will those has-beens be in Victoria who get a second life, just jumping on her 20 per cent primary?

It's hard to see that going away in a hurry.

You're talking about happiness, Alan, you've got the sort of happiness surveys that you ran on the news last night and you said Australia's happiness is falling and I would say there's a direct correlation between falling happiness in Australia and the rising One Nation vote.

That's why I talked about it and I had a graph of the falling happiness in Australia and I think it's true, obviously there's a correlation.  The happiest country in the world, as usual, is Finland, which has a high level of taxation.  I think the proposition that happiness flows from low taxation is incorrect, clearly.

But I think it's also the level of public services, it's high tax and then it's a big social safety net.  No one's left behind in Finland, so everyone collectively is quite happy because they share the love around.

That's right, the services and infrastructure and so on flow from a level of taxation. 

How happy are the Iranians at the moment, do you reckon?

Not happy at all.  The whole thing is supposed to encourage a regime change and make the people against their leaders - they're probably against their leaders, but they're now more against, I would suggest, the United States than they are against their own leaders, because they're being bombed by the United States and I don't think that's very encouraging of appreciation by the Iranian people. 

And Israel, I think.  Did you see overnight, Israel said they've basically taken over 10 per cent of Lebanon and they've been trying to de-populate it and they're going to create an artificial boundary as a sort of buffer zone.  People forget, there really is two wars, it's a Lebanon war and it's Iran war, there's two fronts to the war that are going on at the moment.  

It seemed to me, the fundamental problem for the oil price and inflation and the global economy is that both Israel and Saudi Arabia see this as a historic opportunity to change the balance of power and to re-shape the Middle East and basically to remove the Islamic regime in Iran, this is what they're seeing it as and they won't give up until they've either done that or basically died trying and I think that - because the New York Times is reporting this morning that Mohammed bin Salman, the leader of Saudi Arabia, has been in Washington for a few days, if not a week, talking to Trump all the time and trying to persuade him to keep going because of this historic opportunity and Israel clearly sees the same thing.

While those two countries are still going at it, whether the US pulls out or not, the Straits of Hormuz will remain closed, it seems to me.

There's a fourth old man of the coalition 'willing old men', Rupert Murdoch.  Did you see that Bloomberg piece over the weekend that Rupert was influential and was urging Trump on multiple occasions to launch into Tehran and to join with Netanyahu.  People like JD Vance were against it and Rupert, just as he was the Chief Propogandist for the 2003 Iraq war - and I was watching Fox News a little bit this week and they're just all over... It's just a complete repeat of 2003, they're just absolutely - "Get in there, go harder, we're winning..." It's just totally onboard the war and I'm puzzled why Rupert is such a war monger, why he's urging Trump to do this, because it's not helping anyone at the moment. 

No, I don't know why, why would he do it?  You had a big go at him in Crikey yesterday, didn't you?

I just said that he's got a history...  He was against the Vietnam War, back in the day.  Black Jack McEwen rang him up the night before the decision was announced to apologise and say, "Look, I'm sorry, I know you won't be happy, Rupert, but we're sending troops to Vietnam, I know you're against it."  Then he's just gone full circle and I don't know, I find it very puzzling.  Then you've got Trump's manipulation of the markets.  When he came out and said, "We're having discussions and we're going to delay hitting their infrastructure for five days,"  I think that was just basically made up and the futures were up 1,200 and the oil price fell $8 bucks and there's all sorts of talk of people who had the tip, who were taking market positions that profited from the jerking around.  You just can't believe anything Trump says...

Apparently, that's right, that somebody did jump into the market and make a lot of money out of it.  There does seem to have been a bit of insider trading there.  I wouldn't be surprised if there's more and more troops being moved there, I wouldn't be surprised if there are some troops on the ground within a week or two as part of an operation to try and get the Strait of Hormuz opened, I really wouldn't be surprised.  Why would you be sending thousands and thousands of troops?

The Wall Street Journal is saying that Pentagon is deploying 3,000 airborne soldiers to the Gulf this morning, so as you say, that's happening.  The problem is that opening the Straits of Hormuz is much more difficult than that.  Are they going to sort of occupy it?

If so, that's going to be a long-term very messy occupation.  There's also talk that they're going to occupy the Kharg Island, which is where Iran processes its oil and exports from.  Doing stuff like that, basically invading the country and occupying part of it, whether it's the Iranian side of the Strait of Hormuz or Kharg Island, that is basically going to war. 

It's 92 million people in the size of Queensland, so you can't occupy or invade the whole country, it would just be elements of it, so you'd start with the Southern Border where you've got people launching drones and missiles and you'd have a landing there and you'd take a piece of it to try and neutralise any attacks on ships.  It's such a long border where you would have relative proximity to ships passing through and as you wrote in the ABC this week, with their dominance on drones, it'd be virtually impossible to supress.  If they want to hit ships going through the Strait of Hormuz, they will be able to do it.  It's not until you have an agreement with whoever's in charge with Iran that you can open the strait and I don't see how you can do it in a hostile way, with troops or bombing from the air.  If they want to shut the strait, they can shut the strait. 

Ship owners, insurers, people just won't go through it, but some ships are getting through because they're paying a toll, like ships going to China.  It is partially open, they want to get a Suez Canal type toll going like the Egyptians benefit from, which is another interesting long-term play.  It is the world's most vulnerable choke point, effectively, that's what it's emerged as. 

That's right.  Goldman Sachs put out a new oil price forecast yesterday, which was that the price will go to $115 dollars a barrel, this is West Texas which is currently under $100, if the Straits of Hormuz stay at current level which is 5 per cent of traffic getting through.  If it stays at that level for another six days, then that's what the price of oil does.  I imagine, if it looks like it'll be six days, the price of oil goes straight to that level.  If it stays closed or at 5 per cent traffic for longer than that, it goes to $150 dollars a barrel.  The bloke from BCA Research, Marko Papic, who I quoted on the news last night, said that if this keeps going, it'll be a pandemic or COVID-style shutdown of the global economy.  We're on the brink of something really serious.

I did see that last night on the news.  Is that a bit catastrophising, scare-mongering?  COVID-style shutdowns...  I guess you've got fertiliser, people are already saying that if the fertiliser market gets disrupted, you're not going to get crops getting planted.  We've seen Reece has already jacked up their plastic pipes pricing by 36 per cent because of the whole sort of chemicals and everything that feeds into other parts of the economy.  We're seeing if you haven't got fuel, everything shuts down, so fuel is the absolute lifeblood of the economy and particularly diesel, industry runs on diesel.  We're already seeing a few stations run dry in Australia. 

If it's only 20 per cent of the world's supply, the other 80 per cent can just be repurposed and we'll have some demand will fall if the price goes high and the other 80 per cent has to get repurposed.  LNG is even more, an even bigger share of the global LNG that goes through there...

That's right.

You are seeing some power plants being repurposed from gas to coal, so you are getting a bit of substitution on the gas coal front, but there isn't the equivalent to do that with diesel and with fuel, say, for millions of EVs, but you don't have the EVs in the trucking space with aircraft.  The airlines are starting to reduce their flights, oh boy...  I bought some Virgin shares this week, I paid $2.50 a share, I thought they'd crash from $3.27 and then they kept going down, I got hurt catching a falling knife on that one.

I hope it wasn't too many, Stephen...

No, no, it's $500 bucks' worth, I've got to go to their AGM anyway in October, so normally I just buy a month out, but I thought, oh well, I'll be going in October anyway, I'll buy them now.  I've got to do the same for Qantas, but I took my buy order off Qantas because I'm worried they could go to $4.  They were $11, they got down to $8.  How low can they go?

Talking about the stock market, the reaction so far is not that severe.  It's down a fair bit but in Australia, it's not really a correction yet.  The market is not predicting the sort of thing that that guy, Marko Papic, was talking about, some sort of global shutdown, that is not what the market's expecting, they're expecting it to end fairly soon and I just don't see that, I think it's going to go on for a while.  I think you're right, the market's going to keep falling, I think.

I agree, I think it's over-optimistic, but by jingo, these rising interest rates - if you're wondering why Australia's not a happy place?  Iran, rising interesting rates...  Were you surprised they did two months in a row, lifting official rates?

The market thinks it'll be three months in a row, on balance, I think it's 53 per cent.

Surely not now.

Well, yeah, but the problem is inflation's going to go up as a result of the oil price going up.  The Reserve Bank's going to have to choose.  If what you get is a slowdown in the economy and inflation rising, which is stagflation, the Reserve Bank has to choose which of the two problems it addresses.  High inflation or rising unemployment and it's supposed to deal with both and it can't deal with both if they're both rising.  They'll have to choose one and I think probably they'll choose inflation to tackle because I think that's the worst problem.  I think at this stage, the market is 53 per cent odds of a rate hike in May and maybe that will change by the time they meet if the Strait of Hormuz is still closed and oil's $150 and it's looking like a recession, I think you're right, they can't possibly hike rates into a recession, but that's kind of what...

If oil does get that high, I think you'll see the Government cut the fuel excise as a cost of living relief, like Morrison did back in the day, I think it was the Ukraine War.  That's a card they've got to play if it's a straight bowser pain question.  Interest rates are rising right across the curve.  The short end's obviously going up with official rates, but as you wrote the other day, the 10-year is now above 5 per cent in Australia, it hasn't been that high for many, many years.

That's right, so that's going to have an impact on the stock market as well, because it affects the valuations of shares.  Enough of all that on happiness, speaking of unhappiness, what do you make of Antony Catalano and what's going on there, before we get onto questions?

There's not many of us journalists out there, Alan, who've taken a punt and started a media business.  You were more successful than me, but he was 10 times as successful as both of us and he was probably the most successful journalist entrepreneur in Australia, probably made about $100 million initially just with his property ad giveaways, which Fairfax had to buy, but you've got a part in this story because you were the Editor of The Age who plucked him from the Sub-Editor's desk when his biggest experience was as a police reporter and at the age of 27, you made him Property Editor of The Age and he parlayed that into a property classified empire and he still owns The Canberra Times, The Newcastle Herald, he's a media mogul and none of that would have happened if you hadn't made him Property Editor in 1994.  Tell us about why you did that?

Well, because he was clearly going to be a good Property Editor, he understood property, he was incredibly ambitious and I was interested in finding ambitious, talented people and putting them into positions that were the right positions for them and he was terrific.  I must say, he was a very good Property Editor and he knew what he was doing and you're right.  I think you forget, Christopher Skase, a former journalist who did pretty well as well, although it was all a bit built on debt, wasn't it, so it went badly in the end for different reasons and Antony's gone badly.

Well, the Catalano empire may end up fully imploding like the Skase empire did, plus there may well be criminal charges obviously with horrendous family violence allegations against Catalano.  You had a small part to play back in the day - you love doing the leftfield appointments, don't you?  I remember you appointed Louise Adler as Arts Editor and everyone was a bit, "Oh, what?  What's going on here?" and she's become a superstar over 30-plus years and that was the biggest job...  What's your thing about plucking people?  'Leftfield Appointments', they call you, 'Alan Leftfield Appointments Kohler'.

[Laughs] Well, I wanted to shake things up.  In a sense, that was my job at The Age, to shake the place up and I did that, I possibly did it a bit too quickly.

You were Conrad Black's man to shake it up.

Yeah.

You didn't do it too quickly, you did a great job - and you fought Jeff Kennett back in the day, you took on Jeff Kennett.

I did and then he took me on and he got me sacked.

And he got you sacked, that's right.  You and I can both have a grievance about Jeff Kennett, there you go, goodness me.  Before we do questions, I was going to mention the European free trade agreement, so you and I, if we wanted to be entrepreneurial again, we can no longer setup a feta, a gruyere, an ouzo business, anything with Remano or Bolognia or Bavarian beer or Munich beer - out, banned, can no longer do it under this European free trade agreement.  But we've got a little bit more access to their dairy and beef markets, although if you read the commentary, it's not enough. 

The agrarian socialists in Europe haven't opened the door that much to Australian agriculture, a little bit, but it is interesting that the Europeans are madly doing deals all over the world.  They've done the Indians, Indonesia, South Americans and now us and it's all because of Trump.  Trump's gone mad, the rest of the world must deal together.  I think it's probably a good thing for the global rules based system that Australia and the Europeans, after eight long years, have finally got a trade deal done. 

I think it is a good thing, yeah.  Obviously, the Europeans have got what they want, which is stopping us having all those names of different foods and everyone in Australia, farmers and food business people are grumbling about it here, but that's the price you pay for access to the market.  I think the access is going to be important.

The Poms are not going to make us change the name of Victoria, are they?  Or New South Wales?  There's so many things in Australia that are named after the colonialists, but I guess we have borrowed a few of their European...  Europeans are different from the Poms, I guess we have borrowed far too many of their regions and their names, we lost Champagne and Beaujolais many years ago, but I'm glad they've done the deal.

I think it's very interesting and weird, actually, that they change the name of New Holland to New South Wales, why South Wales?  Why not New Wales?

Why not New North Wales?  I agree.

Yeah, I don't know, it was weird, very strange.  Anyway, before we get to questions, here's a quick word from our sponsor.

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Also, before we get to questions, this is not personal or financial advice, it's general advice, I guess, if you can call it advice, it's a podcast and don't base any of your decisions on what we say, get proper advice if you're going to.

Correct.  Mr and Mrs Minns, do not go out and do something having listened to today's Money Café.  Get some professional advice, Mr Minns.  Now, Ted says, "As you know, there is a growing cohort of Australians with strong on-paper wealth positions through property, but are increasingly constrained by rigid income based lending models when seeking new credit.  In effect, balance sheets are strong, but liquidity is tight.  It is creating some odd outcomes nationally.  People with significant assets are making overly conservative financial decisions, delaying investment and retirement or drawing down long-term savings and super, earlier than they would otherwise need to.  With interest rates elevated and cost of living pressures persisting, that gap between wealth and usable capital seems to be widening." 

Then Ted goes onto plug a particular business, which I probably won't plug, but he's right though, isn't he, Alan?  We are asset rich and cash poor and there is as many on-paper rich people who don't have liquidity and this sounds like it is affecting the way that a lot of people behave. 

Asset rich, but really, it's not a liquid asset, it's not like owning shares or something else.  Owning a house, you've got to buy another house.  I think it's illusory wealth and I'm pretty sure the banks are keen to lend as much money as they can.  I think we can be confident the banks are doing the most lending they can possibly do and their bad debts...

They're income obsessed and you say, "Lend me some money against my million dollar house..."

What's wrong with that?

But they won't lend you some money unless you can show them that you've got income as to how you're going to pay it back, that's the whole point.  I'm saying they should do reverse mortgages and if someone's asset rich, they should lend a truckload on the basis that, well, if you stop paying us back, we'll liquidate your asset.  That's the security they've got.  Why do they have to focus on income rather than asset backing when they lend?

I think that's fair enough.  You don't want to have a situation where the banks are foreclosing on a whole lot of houses and kicking people under the street.  They've got to make sure that everyone can afford the repayments, goodness me.

That's why they don't want to do it, they don't want to be kicking grandmas out of their homes to get a reverse mortgage repaid. 

I think that's a perfectly reasonable position to take.

Yeah and I guess the other point, is our super system is unique in the world.  Locking up so much of the nation's capital and you can't access it until you're 60 at the least, that is a liquidity issue, where you've got all this money on paper but you can't touch it until you're 60.  It means that people don't feel that cashed up because they can't access their cash.  Anyway, it's the unique Australian way.  

That's right.  We've got a couple of universal basic income questions, one from Lisa and one from David.  Lisa says, "I love listening to your podcast, as a Gen X woman I learn a lot from your conversations.  Lately, you've touched on the idea of universal basic income and I'm intrigued.  What if we consider that a UBI is not about replacing a full-time worker, but recognising that there are not enough jobs to work full time anymore and the idea of a three-day work week is a better way to frame it?  Is it possible to use a UBI as part payment for basic living costs, allowing many of us to move to a standard three-day work week if we choose?  I asked my old friend, Gemini, who suggested it would cost between $250 and $300 billion dollars."  Snap, what a bargain!

David talked about it in the context of modern monetary theory and he quoted some bloke named Richard J. Murphy who I don't know about, "Who is a strident supporter of UBI when implemented in an MMT framework."  David suggests that, "Many Government stimulus efforts are half-cocked attempts to run elements of the MMT playbook and if we're spending the cash, running up the debt, increasing inequality with a spectacular failure to fix the top two or three priority public policy issues, what is preventing the wholesale adoption of MMT across all levels of Government?" 

Well, look, I think the only way that they're going to come up with $250-300 billion dollars to give everyone a universal basic income is by just printing the money, I think that's correct.

Correct, MMT and UBI, I agree with David that they are connected.  You couldn't do a universal basic income and have a budget surplus, you would have to accept perpetual deficits and that's where the MMT people come in, which says it doesn't matter if you can print, you can just have perpetual deficits.

Well, of course it matters.  I've done a lot of investigation into MMT and really, you've got to pay interest on the debt, that's the fact.  Unless you find some way to have debt that isn't interest bearing, the more debt you have the more you're in...  Already, interest payments are the second-highest or perhaps even the highest now item of Government, category of Government spending.  The whole idea is just completely ludicrous.

MMT?  But if you're printing, can't you just print money and repay the debt?  That's the whole point of it, is that the Federal Government - we own a trillion dollars, the Federal Government can just create money out of nowhere and just nominally pay it back.  But if they did that, the Australian dollar would crash and there'd be a financial meltdown because there'd be a loss of confidence in the system.  All these governments were printing during the GFC and particularly during COVID, but no one's ever written off the debt by printing, that's the thing that doesn't happen.  We all nominally have this debt that will never ever get repaid.  Is the $37 trillion dollar US federal debt going to get repaid?  No.  Is Victoria ever going to pay their $160 billion dollars of debt?  I can't see that happening in the next 100 years, can you?

No.  Then the question is, okay, what about inflation?  Because if you flood the system with all this newly printed money, whatever you do with it, whether you're repaying debt of you're just using it to pay people a wage for doing nothing, then obviously it'd be inflationary, I imagine.  I just don't think it's that simple.  Most of the people I talk about who are true MMT bond monetary theory people, they don't talk about it in terms of adopting MMT, they talk about it as being a description of the way the system works already, which is that governments do print money now in order to pay their bills and then they use taxation to get money out of the system to prevent inflation. 

That's really what the core of MMT is,  it's not something that you adopt, it's simply a description of the way it works, which is when the Government pays its bills, it actually just sends an instruction to the Reserve Bank to pay the bill and the Reserve Bank, in order to do that, prints the money.  The government separate to that, imposes taxation in order to remove money from the system to stop inflation.  MMT isn't, as far as I'm aware, something you just adopt.  People don't talk about it as being, "Oh well, we're going to do MMT..." which is that we're just going to allow constant endless deficits and/or print money to deal with debt and endlessly print money, because I think everyone would understand that that's going to be inflationary. 

That's the thing about UBI.  If you just give everyone a salary for doing nothing, how does that work?  Where does the money come from and what does it mean for inflation.  I think that UBI is fine, as long as you're kind of restructuring the whole tax system in order to raise the money from whoever's making it, which is presumably the rich people who own the AI companies, that are sending people out of work. 

I thought that the biggest constrain on MMT was just the resources on the economy and as long as you don't overly print such that the resources get scrambled for and there's massive inflation, you can print.  The other point is, as long as everyone's doing it...  The Americans, because they're the world reserve currency, if the Americans are printing and they've been printing massively, then that's a green light for everyone to do it and the only reason you get the Zimbabwe or the Weimar Republic thing, is that you get people printing currency when the others aren't doing it and then their currency crashes and that contributes to the hyperinflation as well. 

But if the whole world is agreeing to print lots of money, as long as they're printing to a level that's not causing a massive scramble and competition for resources, I guess conceptually, you won't have a massive breakout of inflation, as long as you don't print too much.  But I can't see it working.

That's right.  MMT people agree with you, Stephen, that really what it's all about is the ability of the economy to produce the products that will be demanded by the people who have got the money, that's kind of what it's about, as you say, it's the resource base of the economy, the ability of the economy to produce the goods and services.  The problem in Australia is that the low productivity has meant that the output capacity of the economy is low.  We keep talking about the speed limit of the economy, which is 2-2.1 per cent GDP growth, which is why we've had two rate hikes this year because the economy's hit its speed limit. 

The Reserve Bank keeps going on about productivity being low which is what the problem is.  Really, you start to get down to, well, the only way you're going to do all this and have universal basic income and all that, is the productivity of the economy goes up - and maybe it will.  Talking about AI, there's talk about huge increases in productivity as a result of AI. 

And robots and self-driving cars.

Yeah, sure.

6 per cent of all jobs are driving, so if you take all those jobs out, you will have massive productivity gain for the people who are controlling the self-driving cars and trucks and vehicles, but what will those 6 per cent of the workers do for not driving?

Yeah, Macquarie had an interesting piece of research I had on the news last night about the use of AI by banks.  It did some predictions of how much staff cuts that the banks will do in order to get their costs down using AI and the base case, what they think is likely, is 18 per cent reduction in staff.  As I pointed out last night, there's 185,000 people employed by banks, so 18 per cent is 33,000 people. 

Everyone can expect lower mortgage rates going forwards and lower net interest margins because they will be able to smash their wages bill by 20 per cent, but pay massive licence fees to the AI companies, presumably, all of whom are based offshore.  Sack the local workers and pay lots of money to big tech.

Now, you can read Ben's question.

Ben says, "I've been struck by the decline in the price of gold over the period of conflict in the Middle East, down 25 per cent for the month.  For the last year we've been told everyone is buying gold as a safe haven in an uncertain world.  I wonder if you might be able to speak to what's happening there?  Wasn't this meant to be the very circumstance for which everyone was buying gold?"  Well, I think you've got a bit to crow about here, boss, haven't you?  Because you said it was a speculative bubble and that's what it has proven to be.

Yes, in the second half of last year it became a speculative asset, not a safe haven asset and it was particularly for Chinese speculators and it was mostly in the south of China, the Shenzhen and the Shanghai commodity exchanges, the Chinese were going mad for gold and they were speculating like crazy and it was a bubble and it's burst.  What happened as a result of the war in the Middle East, is that all speculative assets were sold off, or what they call risk assets, it became a risk-off picnic, is what they call it and that included gold and silver, down they went.

Do you think they're going to keep falling though?  It is still a real thing that gold is a safe haven, so you'd have to think that it won't plunge as much as some other asset classes.  But, yeah, you're right, it can't go from $2,000 to $5,000 just because of Trump.  Trump was considered the risk and then but you're right, it was just a speculative bubble driven by a lot of ETFs, a lot of people moving away from US dollars and into hard gold assets.  Do you think it's going to keep falling?  People are pretty shocked by the fact that gold's come off 25 per cent when it's meant to be a safe haven.  In a shocking world, the crunch in gold has been one of the things that surprised me, it didn't surprise you, you said this was going to happen, but do you think it's going to keep falling?  Not that you're giving financial advice, of course, boss.

I think the froth has come out of it, I really don't know how far it falls, but it was rising pretty strongly before it became speculative last year and the reason for the rise was largely central bank buying to replace US dollars and US treasuries in their foreign exchange reserves because as a result of Donald Trump, people were losing faith in the US dollar and the US treasuries and also because of the very large US debt and deficit.  That hasn't gone away, that's still the case and I think that there will be a floor for the gold price because of central bank buying for that reason, what exactly it is, I don't know, but I think we're probably approaching it. 

The central bank buying also relies on strong sovereign balance sheets and that's an interesting part of the Iran war, is there's talk of Abu Dhabi and Dubai and Bahrain having to liquidate some of their offshore investments because all of a sudden, they've got a cash flow crunch from the loss of oil sales.  I think it's the Abu Dhabi Investment Fund that owns 20 or 30 per cent of the Brisbane toll roads in joint venture with Transurban.  It's the same with gold, if you're Russia you haven't got the spare cash to keep your gold reserves, you've got to sell gold to fund your war. 

In a war situation, where there's also risk of a global recession, there is an element of all holders of gold, including central banks and governments needing to liquidate into cash to repurpose those assets for other more pressing needs, so I think central banks probably can't afford to keep stockpiling gold in the current environment.  Your turn!

We might have to skip Felix's question, we're starting to run out of time.  We'll go to Yass, who says, "Some countries use income splitting to apply income tax at a household rather than individual level.  Given how common it is for a household to have one high and one low income earner, e.g. with kids and someone working part-time, would this work to make tax fairer and ease the cost of raising children?"  And he gives an example of two people earning $100k and one person on $200k and so on...

Yeah, Yass, I think that would be one way to reduce income taxes, that's just simply another way of having a tax cut and I think that it's true that we tax incomes too much, the top marginal rate of tax kicks in too low.  I don't think the marginal rate is too low, it's 45 plus the Medicare levy and that's okay, but it just kicks in a bit too low, don't you think, Stephen?  They need to cut it in some way and maybe that's one way to do it. 

Yeah, we're over-reliant on income tax and you need to reduce that reliance, so this would be one way of doing it, but it would also make divorce more complicated and how does it work for de facto couples.  Just allowing couples to co-mingle from a tax and an income point of view, it would add complexity to the system.  A lot of people say that the problem with Australia's system is there's too many deductions and it's too complex and we'd be a whole lot better off if the overall tax rates were lower and there were less deductions, so I'd probably be against adding further complexity with an income splitting model, albeit we need to cut income tax overall because it's punitive and the top rate kicking in at 190,000, as I've said before, is outrageous and leaves a lot of people hard up.

Alistair, our last questioner, he's one of those people who's talking about that.  Alistair's story is that he is worried about the changes to the capital gains tax that's likely to be announced in the budget.  Alistair is 40 years old, doesn't own property and as a small business director, most of Alistair and his wife's net worth is tied up in their start-up business and while it's doing well so far, he's paying a significant amount of income tax on the profits that the business is making and then he goes on to talk about many of his friends who've put their money into buying a house and the house has gone up in value and they're doing better than him because the family home is so much more tax preferred than someone like Alistair, who's taking a risk, employing people, being productive...

But he's finding that the system is punitive against him and he's very worried that it's going to become even more punitive because they're going to reduce the capital gains tax discount if he was ever to sell his business to perhaps try and buy a house, he'd be paying 20 per cent capital gains tax if he was on the top rate.  What do you think, Alan?  I agree that it's too tough on business and I would support taxing the family home to provide a bit more income to make life less tough for small business and just general income earners. 

But do you think Alistair's running a fair argument to not reduce the capital gains tax discount, because people always think it's just on investment properties, but it's actually on all investments including small businesses.  It's not just negative gearing on housing, which would be affected by a reduction in the capital gains discount. 

I think capital gains tax is particularly tough on start-up businesses because their base is zero, right?  They're starting from nothing and that was the case when we sold our business, the Eureka Report and Business Spectator, we started off the base value was zero and we sold it for whatever we sold it and the tax applied to the entire sale price.  It's not as if we'd bought the asset and then sold it so that the base was the buying price, like you do with most things.  I think capital gains tax is particularly hard on start-ups for that reason and increasing it would really be a blow to start-ups.  Maybe there's a way of doing it so that if you have a start-up business, you're still on 50 per cent discount, but if it's an asset you've just bought maybe it comes down to 33 per cent.

There's a case for going back to inflation adjustment rather than a simple discount, which is what it used to be before 1999, you just deducted the CPI on the basis that you shouldn't have to pay tax on the increase and the value of your asset that's come about as a result of just inflation.  The idea of the discount of 50 per cent was simply to replace that, it's much simpler but it's too big a discount probably.  I think there's a case it's probably worth about 33 per cent now, which is what they're talking about cutting it to.  But I think the thing is, that will change again over time, inflation goes up. 

If the inflation rate goes to 5 per cent, then the 50 per cent discount is correct, is the right discount for a CPI adjustment.  But when inflation is 2.5 per cent, which is what the Reserve Bank wants it to be, then it really ought to be less than 50 per cent.  The thing to do would be to go back to inflation adjustment, even though it's complicated, accountants can do it, it's not too hard.   

Just finally, I won't read the whole of Felix's question, but while we speaking about inflation, he was challenging the 2 to 3 per cent target.  I thought I'd ask you, Alan, why isn't it a zero to 1 per cent target?  Where did we settle on 2 to 3 per cent?  Because there's a lot of people who are angry with the 2 to 3 per cent and that's the people with all the mortgages who are copping these rate rises because inflation is above this 2 to 3 per cent target and they're saying, as Felix says, "I don't care if inflation is 4 or 5 per cent, don't smash us with all these interest rates."  Why are we so obsessed with this 2 to 3 per cent and if we're so obsessed about inflation, why isn't zero to 1 per cent?  Where did 2 to 3 per cent come from?  Why is that acceptable, it should be zero, shouldn't it?

Basically, they're saying that they want to have some inflation, they want prices to rise every year because if prices don't rise, then people tend not to spend.  If you think the prices aren't going to rise...

So you wait for them to get cheaper, effectively is what they're saying, so you've got to have some inflation, otherwise people will keep waiting for the price to fall or something of a non-perishable product?  Wow, that's interesting.

Yeah, I think there is that sort of argument, that's why they're going for 2.5 per cent, it's actually not a 2 to 3 per cent target anymore, they say it is but actually what they're going for is 2.5 per cent.  My view of the 2 to 3 per cent target is that it should be allowed to go below 2 per cent.  I think that the target ought to be something like zero to 3 per cent because when inflation was 1.5 per cent between 2015 and 2020, they tried to get it up to 2 per cent by cutting interest rates.  The result was, we went into the pandemic with the cash rate at 0.75 per cent and they had nowhere to go. 

They were cutting rates drastically over five to 10 years to try to get inflation up to the target and it just took away their room to move. When we actually had a crisis, they could only cut the cash rate to 0.1 per cent and then had to print lots of money and it was a mess.  

The thing I can't work out is they accept the past blowout in inflation and never try to claw that back.  When inflation peaked at 6 or 7 per cent, post-pandemic, shouldn't the target have been reduced to - and next year we want prices to come down by 3 per cent to get back to that long-term average of 2.5 per cent?  But they just bank the 6 per cent and then they just bake it in and they say, right, "2 to 3 per cent from here..."  I think, overall, inflation has been too high since COVID and there's been no ambition to get it back to what pre-COVID adjusted to 2.5 per cent a year.  People just accept we had a bad year and now let's just keep rising on top of that bad year, whereas you should be clawing it back.

If you're going to claw it back, prices to fall, you have to have a recession, no one ever wants that, what are you talking about, Stephen?

If the price of milk goes from $2 dollars to $3 dollars, then it should go back to $2.20 when the price shock is finished.  COVID was a price shock, but the prices never came back down after the shock - some of them did, oil and others, but overall it didn't.  Anyway, I know I'm on a hiding to nothing here, boss, but I just thought I'd have a quick rant.

You are, you're absolutely on a hiding to nothing.

Hiding to nothing, as usual.

Give up, Stephen!

[Laughs] All right.  Great to talk to you, Alan.

Great to talk to you, Stephen, thanks very much and thanks to everyone for listening to today's Money Café, I'll be back next week with James Thomson, send in your question at themoneycafe@intelligentinvestor.com.au.  Until then, I'm Alan Kohler, Editor-at-Large of Intelligent Investor and Finance Presenter and Columnist for the ABC.

And I'm Stephen Mayne, look forward to talking to you in a fortnight.

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