The worst you can get from a government is tyranny. Tyranny comes in many forms, such as excessive taxation, reckless foreign wars, and persistent legislative attacks on individual liberty by psychopathic political meddlers. The best you can hope for from any government is that it's so shambolic and disorganised that it inadvertently does the best thing possible, which is absolutely nothing! In that spirit, we begin the final reckoning of the week in praise of Australia's Labor party!

May it continue to do nothing, especially if it's going to do it in such an entertaining and comedic fashion. The conventional wisdom is that financial markets don't like uncertainty. But if markets could be sure that the government would be paralysed by stupidity from now until September, well then we'd be off to higher highs for sure. A government that does nothing is surely better than a government that tries and fails at everything.

For the stock market, the political theatre is a sideshow anyway. The main act in financial markets is still 'Helicopter' Ben Bernanke. The man's largesse knows no bounds. The Fed will keep buying $85 billion a month in Treasury bonds and mortgage backed securities, according to the statement released after its meeting earlier this week. Long live the punchbowl! May it be ever bottomless!

The Fed said the US economy has strengthened 'moderately' but that unemployment remains too high for its stimulating policies to be removed. The trouble for the Fed - and for any central bank really - is that when you try to create inflation, you can't control what people do with the money and credit you've made possible. It never goes where you want it.

For example, the S&P 500 is up 130% since the diabolical low of 666 in March, 2009. Its rise has added $10 trillion to the value of US stocks. On paper, US households are richer. And unlike the market top in 2000, this near-top (the index is still a few points below an all-time high), was a broad-based rally. It wasn't only the financial sector or the tech sector leading the index higher. It's been a genuine rally in stocks as an asset class.

That's what you get, though, when you crush bond yields and force savers to take risk. The Fed - like the Bank of Japan - wants to get cash moving in the system. You do this by buying up so many bonds that yields fall and otherwise conservative investors abandon caution and jump into the rally. The question now is when the rally ends. How much money is still on the sidelines?

What's interesting is whether the Western world will go broke before the developing world has a chance to get rich. Over in Cyprus, the authorities have come up with a new plan to recapitalise the banking system and stave off depositor flight. The latest plan is to restructure the problem banks (all of them) into good banks and bad banks.

By moving all the bad assets (mostly Greek government debt) into the 'bad banks,' the Cypriots can restore liquidity from the European Central Bank (which was cut off on Thursday) and recapitalise the healthy bank so it's less exposed to catastrophic losses. And donkeys might fly.

Cypriot banks remain closed. And part of the plan includes restricting all non-cash transactions, freezing all cheque cashing, and limiting withdrawals from banks. Withdrawals are already pretty limited, given that the banks haven't been open since March 15th and aren't scheduled to open any time soon. You can't open the banks until you're sure you can prevent a bank run. But the longer the banks remain closed, the more likely a bank run will result anyway.

It's not good news for the people of Cyprus. What it means for the European Union is less certain. In principle, this shows that restructuring bad debts is not a real solution, especially when the assets in a banking sector dwarf the resources of a government. It also shows, in principle, what all governments will do when push comes to shove; namely confiscate your money or make it impossible for you to move it across borders and into a safer currency or store of value.

But hey, the S&P 500 is near an all-time high, so why worry?!

And while we're on the subject of festering fiscal problems that you ignore in polite company, how about that extra $32 billion Wayne Swan will have to borrow in the next two years, according to analysis by RBC Capital Markets? Australia's fiscal deficit, once non-existent, keeps growing to new and 'unexpected' heights.

RBC says the Australian Office of Financial Management (AOFM) will have to issue $16 billion worth of new Commonwealth debt in each of the next two years. The borrowed money will paper over the fact that this year's deficit is likely to be around $20 billion, instead of the $1 billion surplus the Treasurer first promised last year.

What's worse is that lower commodity prices than 'expected' and lower tax revenues are leading to larger deficits than 'expected'. Expenses have increased but national income has not. That is not a good formula if you're trying to keep the nation's fiscal house in order. If you love spending other people's money though, we suppose it's a sign of success.

The rising government debt may actually be good news for investors, at least in the short-term. Because the Reserve Bank of Australia doesn't look like lowering interest rates much more, foreign investors may continue snapping up high-yielding Aussie assets. And with new Bank of Japan governor Haruhiko Kuroda committed to inflating new bubbles in Japan through a weaker Yen, we'll have to see if the Aussie dollar/Yen relationship maintains its correlation with the ASX/200.

Yes. It's all happening now. But what? Well, that's the question, dear reader. It's a giant battle between financial markets that want to deflate and central bankers who want to prevent that. So far, the central bankers are winning in some markets and losing in others. How does it all end? Stay tuned.

Regards,
Dan Denning
for The Daily Reckoning Australia