By Bernard Hickey
John Key says there's nothing he can do about the high currency. See more here in Alex Tarrant's report.
He means there's nothing he wants to do about the high currency.
There's plenty he (and others) could do in the short and long terms to help our productive sector.
How on earth is he going to get the transformation he has talked about for the last two years with a currency at almost 90 cents?
Here's 10 suggestions.
1. The government could stop sucking in foreign capital to fund its budget deficits. That means cutting spending on the likes of Working For Families, Interest Free Student Loans and 20 hours of free early childcare. It means raising taxes, either income taxes or by imposing a land tax.
2. The government could run budget surpluses and use that to build some sort of stabilisation fund to reduce the pressure of capital inflows on the currency. That is obviously after it had repaid the government's foreign debts.
3. Or the government could use those surpluses to buy back assets sold to foreign interests, which mean those dividend payments stop acting as a drain on the national accounts.
4. The government could impose a tax on foreign borrowing by New Zealand companies, not least of which by those state owned enterprises such as Kiwibank, Transpower and the power companies. This, again, sucks in foreign capital and pushes up the currency.
5. The government could ban the sales of large assets, in particular land. The Chinese do it.
6. The government could encourage the Reserve Bank to use its macro-prudential tool kit to take the pressure off the currency.
7. These include the Core Funding Ratio, which discourages the use of 'hot' foreign money to fund lending in New Zealand. The RBNZ could increase it beyond the current target of 75% by July 2012. It increases term deposit rates here and encourages local saving.
8. The Reserve Bank could introduce a maximum loan to value ratio for property and land lending. The banks have again begun lending up to 95% in recent months in an attempt to restart lending growth. They are also offering interest only and 30 year loans.
9. The Reserve Bank could force the banks to match their local New Zealand dollar lending with New Zealand dollar funding. This would have to be done over a long period of time, given the scale of the foreign debts held on our behalf by the banks. See more here on this in this suggestion from Victoria University Economist Geoff Bertram.
10. The government could encourage local procurement by its own departments and SOEs to reduce the scale of the current account deficit which is driving our currency higher.
Updated with link to article detailing Geoff Bertram's idea.
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41 Comments
Useful backgrounder here from Geoff Bertram
http://dl.dropbox.com/u/11111592/Bertram%20July%202011.pdf
cheers
Bernard
Grant A - read Geoff's preso.
If RBNZ, having surveyed banks b/l's, were to specify a minimum domestic funding % - that was the average of all, as a start point - then said they would progressivley increase that %, what effects would that have?
Cheers, Les.
Three things that need to be realized in NZ:
1. Realize that the rise in the NZD is completely disconnected from the core NZ economy. All the inflation is imported for the US right now and has nothing to do with an overheated or vigorous domestic economy. There is no magic manufacturing happening right now and exporting milk and animal parts doesn’t explain any of the inflation figures. And making the NZD cheaper to export even more milk and animals parts isn’t going to help anything. It’s just kicking the can down the road of ruin. No agrarian society becomes rich exporting flora and fauna. With all the inflation being exported from the US, circa 2000 terms, the NZD is still only pricing at $0.50-0.60 USD...so if anything the NZD is still severely undervalued. So any manipulation would make the NZD too cheap.
2. Realize Rates in this country are ridiculously cheap and need to be increased. (Yeah! I said it!) In terms of my home value to rates ratio I’m currently paying only 0.1875% in rates per year. That is a joke! My rates in San Diego were 10X that amount per year.
2a. If you don’t want to increase rates on primary residence at least increase the rates for any secondary or tertiary residents 100-150% higher. If you’re going to make a living owning homes you better pay the barrier to entry fee on the back end!! This should free up property for first time buyers.
3. There needs to be a capital gains tax on any property flipped within 24 months of purchase. Again you’re going to make a living owning homes you better pay the barrier to entry fee on the back end! Hopefully #2 and #3 will stop the homeowner circle-jerk currently ruining the domestic economy.
We need to control the incentives in this country. You want to see real, tangible wealth creation we need to shift the focus of investment from property to equities. A house in my area just recently sold for $1.6 million and that is a F$%ing travesty. There is no reason for it. The house in question is probably actually worth $500,000-$600,000 …at most! It’s the most unsustainable business model I’ve ever seen. But I’m seeing perfectly profitable business listed on the NZX for less than $4.00/share. You want to see actually growth stop selling depreciating assets like property and invest in business that actually make S#!T!!
Just looking at comment #2 Troy.
Rates depend very much on where you are and what type of property you own.
Less than 10 years ago I bought a rental in Dunedin, at the time annual rates were nearly 10% of its value. I also bought some vacant land at that time with rates of about 30% of the purchase price.
In smaller districts, vacant land often sold for less than annual rates (Gore, Southland, Waitaki etc for example in the South Island).
We have a multi-unit property in Timaru where the rates are 3.5% of the value (rates are nearly $5kPA). The rates for the property are more than the rent of one entire flat!
The fact residential rates are low in Auckland is simply because values are high and a lot of charges there (like water) are done on a user pays basis which makes it very cheap for high value properties and very expensive for low value ones.
But it has given me a brilliant idea! BERNARD, QUICK SUGGEST WE IMPOSE AN "AUCKLAND TAX".
1. Tax Aucklanders with an additional property land tax.
2. Make it highest in the old Auckland City, with lesser rates in surrounding old council districts.
This would cut demand for property in central Auckland, move people to other regions, limit speculation and lower property prices. It would also free up land for development as it would discourage "landbanking".
And best of all the rest of the country would vote for it.
The rate as you suggest Troy, could be 2% of land value per annum in addition to council rates. That could perhaps raise an extra $2b a year. All good news! Quick make me Finance Minister!!
As a JAFA import…I would vote for an Auckland tax as long as the capitol is moved here!! Would a 1-2% rate on value hurt…Damn right it would hurt…and maybe it would make me think twice before acting like a typical Baby-boomer and buying 2,3, or more properties. Oh and BTW the capital gains tax would need to apply on all extra properties, so no 24 month grace period. If you by anything more than a primary residence then you’re an investor and need to pay capital gains accordingly. You don’t like it then find alternative investments!!
My main argument wasn’t about housing or property as it was about deincentivizing property as the ONLY investment option. Kiwi’s are hard wired to think two things are Gawd given rights 1) An OE after 2 years in the workforce and 2) Property is the only stable investment option.
There is a serious problem developing in the NZX that I think most Kiwi’s are completely unaware of. With so much monies tied up in property there is a vacuum developing in companies that actually produce products and crate wealth. There are too many NZ companies listed on the NZX that are severely undervalued. Now why is that a problem? Well the problem occurs when you have these successful companies that actually manufacture stuff do not have a market cap equal to their comparators worldwide. This makes them ripe for take over from foreign corporations. And once foreign corporations take over local NZ companies that are profitable you can say Bye-Bye too all the jobs. So if anything Kiwi’s should be investing in Kiwi companies to keep their market caps competitive and have the ability to fend off hostile takeovers.
Oh Bernard! Apart from RBNZ intervention, your other ideas would all make the domestic economy stronger and an even higher dollar more likely.
If our economy was strong with big surpluses we would be challenging the AUD at $1.10+!
The only way to make our dollar go down is to make us look weak, feeble and useless.
The best way to do that and get some benefit is to print money - a little QENZ! Then use that printed stuff to repay foreign debt, we'd be US60c in no time!! And if not we'd be debt free in no time!! How could we lose?
If economic success relies on having the lowest value currency then the meaning of success should perhaps be redefined to include not being able to afford other country's goods and also impoverishing its citizens so they can't afford to travel outside their borders.
The high NZ dollar is here to stay for now. As a result growth will be weak and interest rates low for longer, despite what banks and bank economists think this week.
Most of my friends in Auckland have been laid off over last couple of years and cant find a job no matter how hard they try. All of them are well educated with vast experience in their fields. This sounds to me like an economy going down the tubes- surely raising interest rates would be insane in these circumstances. Am I missing something - is NZ secretly doing well and it just so happens that all my friends have just been unlucky.
Seems its hard in the sole trader one man band sector, and typical clerical work area as well.
Taking a long term view, so the q has to be asked why are they working in an area that only offers work in a good economy? I used to work in building / facilities management type work and it was only job secure when the demand was high, once dropping, it was no work to be found. So I retarined myself and moved to a new sector, had a good job for the last 11 years, best decision Ive ever made.
regards
That was my point about the faux inflation numbers. It's not internal NZ inflation but external inflation being thrust upon us. So lowering the NZD is going to do damn thing. So best to raise interest rates and make money worth something again. I think our need to borrow monies oversees vastly outweighs out export sector. If we are going to keep interest rates this low for this long we might as well take advantage of these historic lows and start investing like crazy in infrastructure and R&D. NZ’s future is in making stuff the world wants not planting crops and selling animal parts. NZ needs a silicon valley. NOW!
The problem with raising interest rates is the damage it does to our economy....businesses etc.
"If we are going to keep interest rates this low for this long we might as well take advantage of these historic lows and start investing like crazy in infrastructure and R&D." Who the Govn? like they have any idea?
"NZ’s future is in making stuff the world wants not planting crops and selling animal parts. NZ needs a silicon valley. NOW!" Hmm I think there is the case that agriculture will perform well and be valuable, but yes to raise productivity we need hi tech, low energy use jobs...not low paid, high energy use ones in say, tourism..
regards
These suggestions make sense when considering what makes the Kiwi attractive:
The New Zealand dollar through the global financial crisis
http://www.rbnz.govt.nz/research/bulletin/2007_2011/2010sep73_3cassinowallis.pdf
Drop the OCR and compensate with other ratios, some mentioned above in Bernard's list.
No mention of the elephant in the room. This is the new millenium. Trillions of dollars slosh around the globe every night. $50 billion of hot money passes through NZ every day. Where does it go? Does it go straight out every day? Does any of it stick? What is it doing? Why? The proposals above deal only with domestic issues. It's not domestic. RBNZ must know where its going. JK must know where its going.
Bernard. In the past (a) you have briefly dealt with money laundering and (b) I have commented on OS money being laundered through NZ using property due to the simplicity and ease with which it can be done under the radar, which in turn puts a premium on NZ property. Wont repeat it again.
Examine the embryonic anti-money laundering legislation in NZ. Until you investigate the impact on the NZD of being a participant in the global hot-money go round it is difficult to see anything other than the hot-money setting the price. I agree with Troy.
Reuters: SHANGHAI - China's central bank has stopped offshore yuan borrowing by domestic firms in a move analysts say is aimed to curb hot money flows, the official Shanghai Securities News reported. Citing sources, it said the People's Bank of China told banks in mid-July that it will stop accepting applications for direct offshore yuan borrowing by mainland companies. Borrowing rates overseas are currently lower than those in mainland China, and analysts say the move is targeted at curbing hot money inflows, the business daily said.
http://www.businessspectator.com.au/bs.nsf/Article/China-cbank-halts-firms-offshore-yuan-borrowing--r-KC29V?OpenDocument&src=hp7
Yes and I would "sterilize" " the foreign-currency inflow by either the Reserve Bank or other government agency and put them into reserves, with only a domestic-currency reaching the recipient in the deal.". Just think of all those overseas funds coming in for the Christchurch earthquake. It could be used for paying off some of the Government debt instead of of selling off our assets. It could also mean the exchange rate would not increase because of that inflow
11. Variable land tax.
If Don Brash thought varying fuel excise duty would be useful, then maybe varying a land tax and focusing on specific sectors (maybe dairy?) could be just as useful. See slide 13:
http://www.nzmea.org.nz/documents/734-presentation_by_dr_don_brash_t.pdf
More goodies like this here:
http://www.nzmea.org.nz/media/presentations.aspx
Straying from the topic slightly ......but Troy's observation of so much money tied up in property creating a vacuum in investment in companies that actually produce products and create wealth....can be directly attributed to the very poor performance and capability of domestic banks in properly assessing and managing any risk other than residential property mortgages! Any degree of sector expertise for the purposes of any form of corporate debt financing that all companies at some stage of their life cycle require, is sadly missing in NZ.
Its also a factor in GoNZ's contempt for investing in NZ shares...If you have professional bankers partnering with NZ companies, the quality of management, governance, etc, should be strengthened and the barr lifted as part of the process of complying with bank facilities. A lot more needs to be contributed from the banks instead of focussing on gauging the retail customers......
Bernard, I appreciate that you've got copy to write, and produce comment, but you've really given a series of totally impractical solutions here. Without going through them all, number 9 just can't go past without comment
How does a nation that can't fund its own comsumption, fund its own bank lending. One way maybe, the banks push deposit rates up to 7 - 10%, whatevers required, to suck every last dollar into bank deposits to such an extent that the banks can fully fund themselves from onshore sources - add a bank margin to those rates, and everyone will want a mortgage at double digit rates, right ?
Bernard, try and show some resemblance of attempting to find practical solutions.
Grant A
I'm not saying it has to be done overnight.
Yes it would mean banks have to offer higher term deposit rates. Yes it would mean people choose to save rather than consume (and repay debt).
We're in this mess because we've been able to borrow so much offshore for so long.
Why not try to wean ourselves off the enabler?
cheers
Bernard
Bernard, Bernard, Bernard....... Sometimes I just want to wrap you up in a warm woollen scarf, give you a hot lemon drink and pat you on the head and let you know that its all going to be ok...
You carry on like this world debt issue is so critical that the rest of us 'naive constituents' better sit up and listen or the world as we know it is going to hell in a hand basket.
The truth is, the world doesnt change that much each day we wake up. Its still people dealing with people at basic interaction level trying to make sh*t happen. You think it all has way more gravity than that, but really thats all bullsh*t.
Sepherial is an interesting poster, he/she thinks that we are all so stupid that we live in a con/matrix-like world where we are all oblivious to the outcomes, and we are all pawns in an agenda that was conceived before we were born.... Duh - if if it takes people most of their whole friggen lives to figure out that sh*t - why would they care when they finally get it?
Bernard, you are almost as bad as Sepherial. Dont you see...? Most of us dont care about the exponentially increasing debt ceiling. Just keep raising it - why does it have to stop? I dont care if a billion became a trillion, or a trillion becomes a quadrillion. I dont know the next number, but thats a problem for generations beyond me. they will sort it out, just like we just sorted out this round of issues. How hard is it to create a new number?
Debt creates energy - its an indelible part of a system created thousands of years before we were born. Yes - it requires confidence in asset values, and in currencies, that only skilled orators and politicians can create, but that has always been the way, and we should continue to encourage belief in their optimism.
People like you drag down confidence levels and feed on people's fears. As much as you decry America's economic models, you like to prey on insecurities the way the American public love to be preyed upon.
Move on Bernard - yes you are living in a world that resembles a game - people who figure it out, will win at it, and those that dont, will struggle - that is the riddle of life. You will not answer it for everyone, the goal is to answer it for oneself. I ask you this... have you mastered life to the extent that you can truly preach at a government level to the rest of us? I dont think so.
You may think the debt system is unsustainable and you may flippantly suggest we depart from it, but that just lumps you in with all the fashionable, tryhard newsworthy, pithy observationalist journalistic nonsense that represents everything that is wrong with this era.
The debt system pre dates us by a very respectable margin and has faciltated notable world growth. Show it some respect before you trash it, and propose some genuine alternatives before you consign it to the scrapheap. Otherwise you are just annoying noise, and I might as well watch FOX news.
Asterix,
Many thanks for those thoughts...I think...
I've got a feeling you would actually like to strangle me with that warm scarf...
Glad to see you don't care about the ever-rising debt...
And maybe you're right that it doesn't matter in the end, particularly if interest rates are repressed at near zero ad infinitum and inflation slowly (or not so slowly) makes them go away...
Or if there is a default the bankers will pay...
Or some other younger generation will pay...
But what if the bankers repossess the assets or enforce austerity (Ireland, Portugal, much of America)? Ever had anything repossessed or most of your income tithed to a bank?
Hasn't happened to me but I sure don't like the sound of it.
You suggest I should just take a chill pill and relax...
You also suggest I should just STFU and let the peasants get on with the business of eating, sleeping and working their way to servitude...
Fair enough.
But what sort of world do I want to pass on to my kids? Will it be in New Zealand? Will it be so indebted they won't be able to afford a house or have a job?
These things get me up in the morning...
cheers
or Maybe it's Obelix
How about, like with the debt ceiling, a compromise .... you can keep your (very valid) concerns about debt and continue to articulate them - just don't beat us over the head with them every single day. Maybe broaden the scope of the site to some wider econ/finance/business topics ... in fairness, I think this has already started happening.
Here's a crazy idea ... maybe initiate more coverage of the NZX ... wait! hear me out ... you complain (and I agree) that there is too much capital tied up in unproductive residential real estate, yet this is the sector you cover most. Let's talk more about shares, NZ fixed income and Kiwisaver. Let's have more personal finance, and more success stories! (they are out there)
Thanks for your reply to my rant Bernard - I appreciate that you provide an excellent mechanism to vent our opinions even if they are contradictory to yours.
I think the world we will pass on to our kids is indefinable and unimaginable because we are an emergent society grappling every day with the problems we create for ourselves. I think, given the complexity of the problem, we do it pretty well.
I'll tell my kids to buckle up and enjoy the ride, because if you approach it the right way, life is a great experience. But I fear my kid will read this site and say:
"but what about all these worrying trends I hear about - I am anxious and scared that world is going to destroy itself under this burden of debt that will saddle future generations like mine with unimaginable hardship....Will we descend into anarchy soon and end up fighting each other for food?
No wonder we have depressed young people running around wondering what the point of life is and resorting to drugs/booze/suicide and crime, because the way you put it, they're screwed. The young people of NZ need a vision supported by some optimism to give them a purpose, not a regularly painted picture of the gloomy grey world they are inheriting.
These are all big topics, and we could go round in circles forever. Thanks again for providing the platform to air these views and being prepared to put your views out there and handling the feedback in such a composed manner. While I may have bordered on rude in my first post, I think you do a great job creating an environment for the debate.
Les - they must mean that when you're in the crap, you do a whole lot of things faster than you did when the going was good.
Actually, it's got to be the quote of the day - I'll take it along to my next physics lecture (Friday) - should get a laugh. I'll report back....
Um - Debt creates energy. Its my opinion, and perhaps a reasonably abstract concept, but seems fairly logical to me.
If we accept that all money is lent into existence, then all money is debt. Money is lent into action, we need it and borrow it build and create things, sometimes it isn't used wisely, but where it goes things happen.
Attaching Interest to money is what gets it moving, one way or another. Interest motivates the borrower to use the money well or he/she ends up in servitude to the debt (as someone eloquently put it earlier), if the money is used well it creates a productive thing and the debt goes away, and you start to build up money, and then you become a lender of money (at interest), and someone else is borrowing your money to try to do something with it.
The money just moves around (as debt) from one to another, sometimes fast and sometimes slow. Where it goes, things happen, some good, some bad.
So yeah - I think debt creates energy - or makes things happen, however you want to put it.
Eistein said it didn't he? "Compound Interest is the single greatest invention in human history"
"Debt creates energy" poor wording IMHO.....maybe "Debt releases energy"
In either event move away from thinking debt and money as the last arbitrator, its energy and specifically fossil fuel energy.
At best debt, money, gold, bonds etc are future calls on energy. So when you do that and consider how much energy is left v how much debt/money you have today you have to conclude somewhere, somehow there is a lot of worthless money about.....it can never be redeemed for energy that doesnt exist.
regards
FYI have added this article on Geoff Bertram's views
http://www.interest.co.nz/opinion/54672/victoria-university-economist-g…-
cheers
Bernard
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