Plenty of amusing stories are making the rounds today. Like the bond salesman who fooled Royal Bank of Scotland into thinking he had access to wealthy clients. After touring their trading floors and meeting clients and executives, it turned out the oddly named KK Ho wasn't a bond salesman after all. Just an employee facing an imminent layoff.

A false flashy business card and name dropping is all it takes to fool a bank these days. It's not much of a surprise though. The bankers do work for the government, with RBS 81% government owned.

The funniest part is that Ho's story only emerged because of a court case brought by a former RBS trader. He alleges he was wrongfully dismissed for manipulating internal pricing systems. (Bankers are only supposed to manipulate external prices.)

With people like these in the finance industry, what can go wrong? The latest addition to our editorial team, Vern Gowdie, has more on that tomorrow. He also has a solution to evading the Australian financial industry's fee rort. And Vern would know, having steered his clients through the bog when he was one of Australia's most successful financial advisers himself. Now he's gone rogue.

In case you missed it, Greg Canavan interviewed Vern here. You'll also find Dan Denning's interview in your inbox soon. In it Vern makes a shocking forecast for the Australian dollar.

Speaking of which, our central bank is set to continue making Vern's prediction come true today, with a rate decision due at 2:30. The rate cutting crusade is doing real damage to the dollar. It was down below 89 cents yesterday - the lowest level in three years. As our family nears its trip to Steamboat, Colorado, it would be just their luck if the Aussie continues to tumble, making all that cold Colorado craft beer even more expensive. (No, that wasn't a recommendation to short the Aussie dollar.)

The cost of French cheese, overseas travel and petrol are set to rise as the Australian dollar continues to fall. Australia already has an absurd cost of living. American research firm Concur calculated the world's most expensive places for an international business traveller. Brisbane topped the list, then Tokyo, then Sydney and Perth, with Melbourne in seventh. To be clear, Australia's capital cities are the world's most expensive places to do business.

Of course, part of the results were due to our high dollar, and that's even taking into account the recent drop. Further falls should make things cheaper for foreigners, but even more expensive for us. Which begs the question, if cost of living relief for Aussies doesn't come by way of currency moves, how will it come? We'll take a look at the recently released Grattan Institute's report on the effects of the Aussie's moves tomorrow to try and find an answer.

For now, unless you're an exporter, you're going to feel the cost of living crunch as the Australian dollar drops.

But all this is nothing compared to the crunch going on in the Australian shadow banking sector.

We've already documented Australia's version of the sub-prime crisis. And you might have heard about China's dangerous Wealth Management Products and how they're supporting China's property boom into new and unoccupied heights. Greg has been forecasting the demise of China's property and finance sector for months.

Well here in Australia, the collapse of the very same sector has been underway for years. Instead of Wealth Management Products, the story focuses on Unlisted Unrated Debentures (UUDs). If you haven't heard of them, or think they're insignificant, just ask yourself whether you heard about American sub-prime mortgages or thought they were insignificant in 2006.

The collapse in Australia's shadow banking sector is happening in slow motion, mostly delayed by Australia's epic bureaucratic and legal shenanigans. But it's happening nonetheless...

-Unlisted Unrated Debenture providers Banksia, Gippsland Secured Investments, Australian Secured Investments Limited, Wickham Securities, FinCorp, Westpoint, the Cherry Fund, Cymbis Finance, and many more have all failed.

We googled the names on ASICs list of debenture providers, and got more 'in liquidation' and 'administrator appointed' in the results than not. Angas Securities could be next, with S&P downgrading the firm's credit rating and ASIC requesting it stops issuing new debentures.

UUDs arewere a favourite amongst retirees because they were often marketed as 'bank like' investments offering a slightly higher return than term deposits. But they don't have a government guarantee, as people are learning the hard way.

All this reeks of the beginning of the American subprime mess. Peripheral finance companies going bankrupt because of dodgy mortgages while the banks sit pretty, claiming their bad loans are at perfectly normal levels.

But why did the UUD's get left with all the dodgy mortgages? We reckon it's because of the LAF scandal we wrote about. Bankers and mortgage brokers just inflate people's incomes and assets on loan paperwork to make sure their loans are approved. A sub-prime loan becomes a prime loan on paper. The shadow banking industry buys the 'prime' loans and packages them into investments for you and me to lose money on when the mortgages turn out to be dodgy.

If you factored in all the defaults in the UUD loans, what would the state of the Australian housing and finance industry really be?

For a hint, you could look at New Zealand. Seven years into its own debentures debacle, $3 billion is missing from 200,000 deposit holder's accounts. The taxpayer was on the hook for another $1 billion.

Here in Australia, debentures make up a whopping 7% of total deposits and debt securities. In other words, a crisis in the debenture markets, if it's recognised as such, could cause real problems for the banking sector, not just the shadow banking sector.

Unfortunately for investors in the Aussie UUD market, there hasn't been a government bailout...for now. Of course, the real question is whether this virus comes out of the shadows and into the real banking sector.

Enough bad news. Here's something pleasant. Remember when smoking was a problem? Well now it's become a solution.

The government's biggest individual tax increase, according to the Australian Financial Review, is a 60% hike on tobacco. The $5.3 billion dollars raised in the next four years is set to return the budget to surplus by 2017. Huzzah, another promised surplus at some point in the future!

But what if people stop smoking? The surplus would be in real trouble. And that would be a problem.

Funny how things change, isn't it?

Anyway, the measure means your editor will take up a serious smoking habit as far as Australian Customs are concerned. At least that was the plan until we found out you can only bring two packs in at a time duty free these days. Or about 5 cigars.

Regards,

Nick Hubble+
for The Daily Reckoning Australia