In Australia, we seem to have a cultural view that our 'material abundance will last forever'. What people don't seem to realise is that our material abundance, and our ability to take advantage of this material abundance, doesn't come close to covering the bills we're racking up in the pursuit of a high standard of living.

And the economic ignorance of our leaders is astounding. In a classic case of 'pride coming before the fall', Julia Gillard came out with this pearl at last night's annual Business Council of Australia dinner in Sydney:


'Australia's budget is one of the seven economic wonders of the modern world'

Riiight...

As we recall, Spain's budget was in OK shape too just a few years ago. It may have even taken up one of the other six spots in the economic wonders of the world. But then its overheated property market crashed and the government had to use its balance sheet to bail out the banks. All of a sudden wonder took on a different meaning in Spain.

To proclaim Australia's budget as an economic wonder is just pandering to the fact that we are in better shape than the economies of the northern hemisphere, where the economic crisis first hit.

In their ignorance, our politicians think that through some special powers of economic management we managed to evade the crisis. We haven't, we didn't...it's on its way.

While the government's budget might not be an economic wonder of the world, our dollar certainly is. Let's compare the (former) Aussie battler with other such lauded currencies, the Swiss franc, the Norwegian krona and the Singapore dollar.

To set the scene, we have a chronic trade and current account deficit, meaning we need to import capital (sell dollar assets or dollar-denominated debt) to maintain our standard of living. It's been this way since the 1970s. Despite the biggest commodity boom in our history, we are still running trade deficits. As we said earlier, we're not utilising our resources enough to support our high consumption.

Norway runs a perpetual trade surplus. It produces more than it consumes. Since roughly 2003, Switzerland churned out a growing trade surplus, more than covering its standard of living with its productive capacities. Likewise, Singapore is a trade surplus nation.

Currency strength on the back of living within your means makes much more sense from a fundamental perspective. But markets don't always operate on fundaments. The savers of the world look to Australia and its attractive 'yields' and snap up our debt, buying dollar denominated assets in the process. The portfolio managers who make these decisions probably don't think about the fact they are funding a profligate over consumer. They are thinking about quarterly performances, a bonus, and maybe hanging onto their job.

But the 'fundamentals', that pesky word for long-delayed reality, eventually come to the fore. Judging from the last few weeks' trading action, that process may be underway. The market is under pressure, but the Australian dollar remains impervious to the carnage. We don't expect that to last.

What do you do in such an environment? How do you go about protecting your wealth in what is essentially a broken system? Dan Denning reckons that in such a busted market, a good way to make money is to take well researched contrarian punts. His latest recommendation is exactly this, and it's one of the few commodities in the world about to enter a phase of global shortages. Sometimes you just need to look where no one else is looking.

Regards,

Greg Canavan
for The Daily Reckoning Australia