Writeups

There is a very interesting article over at Mises Daily: Iceland’s Banking Crisis: The Meltdown of an Interventionist Financial System

Basically, the Icelandic banks were borrowing short and lending long and the Central Bank of Iceland had to plug the ‘maturity gap’ by borrowing heavily from overseas.

It was not the free market reforms in Iceland that caused its economy to collapse.

It was the artificially low interest rates maintained by the Central Bank of Iceland, the government guarantees behind banks and other businesses encouraging them to take on excessive risk profiles knowing they would be bailed out if it all went pear shaped.

Due to a government generated credit boom, Iceland exported financial services and imported goods instead of producing them.

They bought up large in the UK and Europe making billions of euros worth of investments, most of which have now been sold or liquidated.

Their trade deficit blew out to ridiculous proportions meaning they were borrowing even more from overseas on top of funding the massive maturity gap between loans and deposits.

All in all, a very interesting read.

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Tags: Interventionism, Iceland, Banking, Government, Economics // Add Comment »

The Finance and Expenditure committees attack on our trading banks for not passing on cuts in the OCR to customers highlights their economic ignorance.

New Zealand banks primarily depend on overseas borrowing to prop up their loan books.

Because we have bugger all savings as a nation, and like to borrow like madmen, banks must enter the wholesale debt markets.

It is economic suicide for interest on savings to be so low, artificially reduced because of cuts to the OCR.

All the Reserve Bank does is interfere with the natural rate of interest, would could be determined perfectly well in an open market similar to how bond interest rates are determined.

Sadly political control of interest rates and the money supply will continue the inflation tax, artificial booms and busts.

Banks are hardly gouging their customers on an interest rate margin of 1%.

But the government is gouging taxpayers with their high marginal tax rates, excessive spending and excessive regulation.

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Tags: Overseas Debt, Banking, Savings, Economics // Add Comment »

The truth about New Zealand superannuation is that it is a ponzi scheme plain and simple.

Current recipients are simply receiving the contributions paid in tax by current workers.

The ponzi scheme worked fine when life expectancy was low and there was a high ratio of workers to retired persons.

With the baby boomers retiring, having scorned saving for their retirement “because we’ll be able to live off super” the ratio of workers to retired persons will rise exponentially over the next few years.

There is currently a $37 billion unfunded liability for NZ Super. That is a hell of a lot of money.

The government has three responsible decisions to choose from, cognizant of the political reality that super is an untouchable holy grail of our yet to be disassembled welfare state.

It can increase the age of eligibility from 65 to 66 to 67 to 68 to 69 and so on, so that super will not need to be paid out as long.

It can introduce complete means testing so that those who wish to claim NZ Super cannot have other income above the level of super they would receive.

It can phase out superannuation over time so young people get the message that there will be no NZ Super when they retire, and to ‘compensate’ for the loss of their ‘entitlement’ they will pay lower tax rates in order to encourage them to save.

Did you know that to purchase an annuity delivering the same level of NZ Super for an individual would cost around $375,000.

That means that every individual receiving NZ Super has a moral hazard - they don’t need to save that $375,000 during the course of their working lives and thus spend it on other things.

No wonder we are dependent on foreign capital to prop up our economy. China’s savings rate is nearly 40% - watch them storm out of the current recession richer and more productive than America.

Why? Because they save. New Zealand spends and spends like a spendthrift teenager using their parent’s credit card.

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Tags: Superannuation, Retirement, Savings, Economics // Add Comment »

$131,000 salary + $14,860 expenses + $24,000 accomodation allowance = $169,860

There are 168 hours in a week, 52 weeks a year so 8,736 hours a year.

$169,860/8736 = $19.44 an hour if she worked every single hour of every single day.

That’s nearly 55% more than the minimum wage.

Melissa Lee is ridiculously gaffe-prone. She will probably be thrown out next election on her ear for the handling of the Mt Albert by-election. It is unlikely she has a future within the National party.

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Tags: Mt Alberty by-election, Government, National Party // Add Comment »

The government is going to issue $50 billion worth of bonds over the next 4 years, not including Treasury bills. This got me thinking about the cost to our economy of servicing that debt.

I decided to construct a quick table showing the volume of debt being issued after Budget 2009, the annual interest cost assuming a low 4% per annum, the company profits that need to be generated in the economy to pay for the interest on the debt assuming a 30% tax rate.

I obtained the data from the NZDMO website.

So over 4 years, $50 billion dollars worth of capital will be consumed by the government.

That is $50 billion dollars NOT available for businesses to borrow for productive investment.

That is $4.5 billion paid in interest over 4 years or nearly half the current health budget at 4% interest.

That is $15 billion in company profits that must be taxed at 30% over 3 years.

That is $12,500 in fresh government debt for 4 million Kiwis, not including current Crown debt.

That is in the middle of a worldwide recession, in an unindustrialised agrarian economy dependent on high prices for basic, low value added commodities.

It is likely that tax receipts will fall even further, meaning unless the government cuts spending drastically even more debt will accumulate.

By promising to leave “entitlements” untouched National is pussying out.

The government has been spending far too much for far too long and if their profligacy is not ended it will be far too painful for New Zealand to sustain massive interest payments if debt increases even more.

End the excessive spending.

Introduce competition into education, health and welfare.

Cut taxes drastically.

Pay down Crown debt.

Issue scrip in Crown assets to taxpayers.

Stop the borrowing. Stop the bond issues. At least the government are not monetising the debt yet.

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Tags: Budget 2009, Crown Debt, Deficit, Taxation // Add Comment »

Demonstrates fully that National are just Labour-in-blue. What a joke…

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Tags: Budget 2009, Crown Debt, Deficit, Economics, National Party // Add Comment »

There has been a lot of pontificating on the significance of the budget with respect to what will happen to New Zealand’s credit rating and the flow on effects to Crown borrowing and private sector borrowing from overseas banks and investors.

The New Zealand government has been increasing its spending over and above the rate of inflation to the tune of $18 billion over the past decade.The hospital pass budget of 2008 has set up the government for a decade of deficits and Secretary of the Treasury John Whitehead has warned that if projections continue it is likely that every New Zealander will owe nearly $40,000 in foreign debt in a few years time!But fear not - New Zealand can slash its deficit and  afford tax cuts by eliminating the following votes from the Budget:

• Arts, Culture and Heritage: $250 million
• Climate Change: $42 million
• Economic Development: $187 million
• Housing: $104 million
• Lands: $128 million
• Research: $619 million
• Sport: $63 million
• Working for Families: $2,000 million
• In Work Tax Credit: $500 million
• 20% DPB: $295 million
• 20% Invalids benefit: $250 million
• 20% Sickness benefit $116 million

So just a casual browse through Budget 2008 reveals at least  $4,554 million in savings that could be achieved.That is not even taking into account the nearly $24 billion in equity of state owned enterprises, nor the billions of dollars worth of property the Crown owns.

The Cullen fund should also be liquidated and used to repay Crown debts because it makes no logical sense for the government to borrow to invest whether the markets are going up or down when it already has a deficit issue!

This is not a time for business as usual.This is the time to slash government spending, use the proceeds from asset sales to pay off Crown debt and get the government out of the way of the private sector.New Zealand’s credit rating should matter not - the government should not borrow for deficit spending, nor should it monetise the debt via the Reserve Bank.

The government shouldn’t have any debt at all, it should be a lean, cash flow slightly positive agency responsible for law and order, justice, defence and light regulation of commerce and protection of private property rights.I hope Graham Scott and the other purchase advisors are counselling their respective Ministers to slash their budgets due to the economic circumstances.

Please let there be a 1984-esque budget delivered!When spending too much got the world into this crisis, continuing to spend as if nothing happened will only perpetuate our problems.

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Tags: Crown Debt, Budget 2009, Deficit, Financial Crisis, Freedom, Economics // Add Comment »

So in retaliation to the re-introduction of export subsidies for dairy products by the European Union, the United States has fired yet another salvo in what is shaping up to be a trade war that will further prolong the international recession that we are experiencing.

Subsidies unfairly reward uneconomic producers in the USA and Europe and punish efficient producers here in New Zealand and other countries without dairy subsidies (can’t name any off the top of my head?).The irony is that the subsidised US dairy farmer will never be as rich as the free market exposed New Zealand dairy farmer.

Our farmers will buckle down and try and reduce their costs, although when faced with debt repayments on expensive farms bought during the dairy boom and a global fall in demand for dairy products due to the recession having to face more subsidies on the world market will further contribute to their woes.The US has proved yet again that it is nowhere near the land of the free.

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Tags: Free Market, WTO, US Politics, USA, Free Trade, Socialist, Freedom // Add Comment »

http://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=10574305In an interesting opinion piece in the Herald this morning Roger Kerr shone some light on the myths surrounding regulation of our securities markets.

He draws the right conclusion - government policies have restricted private capital formation.On top of that much of our bank borrowings from overseas have been spent on consumer goods such as electronics, cars, boats and yes, residential housing.There has been a lot of investment in rural property as well - but I wonder what percentage of overseas borrowing has funded productive enterprise.

How many new factories? How much new machinery and equipment? How much new technology has been invested in?If we want to lift our productivity game we need to end our love affair with residential housing. It isn’t an investment in the economic or personal finance sense at all - its plain expenditure.

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Tags: Roger Kerr, NZBR, Commerce Commission, Securities Commission, Regulation, Economics // Add Comment »

http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10574498It is truly the mark of a dullard to attack someone physically whose arguments you cannot repudiate verbally.That said, Boscawen is the only “right wing” candidate in the race - Melissa Lee has proven herself to be a terrible choice by National party leadership and with Russel Norman splitting the left-wing vote Mt Albert is a 3 horse races between Labour’s man in grey David Shearer (who has written some fantastic articles on the use of private military companies!) the Green’s Russel Norman and ACT’s John Boscawen.

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Tags: Mt Alberty by-election, ACT // Add Comment »