Top 10 at 10: Tax hikes caused depression; FDIC begs banks for cash; Gold to fall; Boris wants pizza; Dilbert

Posted in News September 23, 2009 - 12:00pm, Bernard Hickey

Here are my Top 10 links from around the Internet at 10am. I welcome your additions and suggestions in the comments below or please send suggestions to bernard.hickey@interest.co.nz Apologies for lateness again. Back on track tomorrow. We do a lot of technical writing. 1. 'A government cannot tax itself into prosperity' - Here's an interesting piece in the Wall St Journal's (still free) opinion section from economist Arthur Laffer (yes of the Laffer curve fame) arguing that the Smoot Hawley trade tariffs and higher taxes were actually the reason why the early 1930s recession turned into a decade-long depression. The implication of course is that the Fed's obsession with loose monetary policy may not work if taxes are hiked and Trade Wars develop. HT Nick White via email

While Fed policy was undoubtedly important, it was not the primary cause of the Great Depression or the economy's relapse in 1937. The Smoot-Hawley tariff of June 1930 was the catalyst that got the whole process going. It was the largest single increase in taxes on trade during peacetime and precipitated massive retaliation by foreign governments on U.S. products. Huge federal and state tax increases in 1932 followed the initial decline in the economy thus doubling down on the impact of Smoot-Hawley. There were additional large tax increases in 1936 and 1937 that were the proximate cause of the economy's relapse in 1937.

2. 'Bailout yourselves out' - The US Federal Deposit Insurance Corp (FDIC) has asked banks to replenish its depleted deposit insurance fund, rather than taxpayers. Maybe there is a future yet. HT David via IM

"It's a nice irony," said Karen Shaw Petrou, managing partner of Federal Financial Analytics, a consulting company. "Like so much of this crisis, this is an issue that involves the least worst options." Bankers and their lobbyists like the idea because it is more attractive than the alternatives: yet another across-the-board emergency assessment on them, or tapping an existing $100 billion credit line to the Treasury. The Federal Deposit Insurance Corporation, which oversees the fund, is said to be reluctant to use its authority to borrow from the Treasury.

3. Gold bugs beware. This piece in FTAlphaville highlighting a record level of net speculative long positions is ominous for the gold price, which could be in for a big fall. The chart is startling.

The weak physical demand for gold combined with the rapid rise in the speculative activity could give rise to a sharp correction, especially if the US dollar rallies.

4. Ken Fisher is nutsMish at Global Economic Analysis points to a great debate going on involving fund manager Ken Fisher, who reckons we need more debt. Read it and weep.

The U.S. has too little debt, not too much, Fisher says. The U.S.'s return on assets is high and interest rates are low, so our borrowing capacity is much higher than our current debt levels. Also, Fisher says, you have to look at the U.S. in the context of the world, because the U.S. is only 25% of world GDP. The world is way under-leveraged, so one country's particular debt-to-GDP ratio doesn't matter.

So what's Steve Keen saying?

So what's Steve Keen saying? That those of us with no debt have one last chance at borrowing from the banks as far above our eyballs as we can before a jubilee?

by steven | 23 Sep 09, 12:45pm

@Harriet: its our duty as

@Harriet: its our duty as those that have little debt to help out those who are crippled with debt for the good of all (puke).

As John Key said we should be spending our tax cut and not saving....well I'm mean it went onto my mortgage....I have to be able to do something to recover for my old age after my pensions saw a minimum of a 22% loss last year....brought about by incompetent managers in his ilk no less.

Just where this crazy gets this not enough debt idea from I dont know....its like he's determined to bugger up the entire world beyond hope and not just the US and the UK....maybe he's jealous that some ppl didnt go mad and now still have reserves to survive, so now its squander others savings as well....

regards

by Roger Thompson | 23 Sep 09, 12:51pm

Yup : Those of us

Yup : Those of us who were prudent , who weren't greedy , will watch the foolish ones being " jubileed " out of their debt holes . ........... . There will be blood in the streets !

by Simon | 23 Sep 09, 12:56pm

Gold may well fall for

Gold may well fall for a while. However nothing on the chart indicates that the bull market is over or even brewing a correction of any sort. Gold spent 20 years 82 - 2002 not going anywhere during a period of well ...greenspanism ... faith in monitary policy was never higher. We have recently had that faith sorely shaken and daily are presented with dire predictions for its future. To me the growth in holdings at the six largest ETF's merely confirms the extent to which faith in fiat money has been shaken. It look like a trend that could easily continue for some considerable time.

by marky mark | 23 Sep 09, 12:59pm

#3 The FT would have

The FT would have more credibility on gold matters if it once, just once, at some time it published an article saying that gold was way undervalued compared to fiat currencies and that it was a clear buy. The FT is always the inverse of a "gold bug".

by Les Rudd | 23 Sep 09, 1:02pm

Harriet - I think I

Harriet - I think I heard,

"What do you mean by drastic action" says interviewer.

Steve Keen says, "We need to abolish the debt, the private debt should never have been extended to sub-primes and many other people in the first place, we should write the debt off, bankrupt the banks, nationalise the financial system, start it all over again. We need a 21st century jubilee." Then, or otherwise we get;

"Yep, a never ending depression, if we don't get rid of debt, that should never have been extended in the first place, and if we keep the parasitic banking sector alive the enconomy will die. We have to kill the parasites and get the real enconomy to thrive once more, and stop these financial bastards doing what they did this time round ever again."

I think that's what he said.

by simon7 | 23 Sep 09, 1:04pm

Q7. ABOVE is where a

Q7. ABOVE is where a lot of the Questions and Answers will lay.

OR maybe to put another way "IT's WHERE THE FAT LADY SING's" ha ha.

or a Train without brakes not even emergecy one's THISTIME.

by W. Kunz | 23 Sep 09, 1:06pm

Yes Roger - looking at

Yes Roger - looking at Steve Keen's background (empty shelves) it seems he's already leaving his office (home) probably living safely in caves somewhere in Tasmania or even better on the West- Coast of NZ.

by Roger Thompson | 23 Sep 09, 1:19pm

They say " never trust

They say " never trust a skinny cook " , in Steve Keen's case I'll extend that to economists with empty shelves , thankyou , Walter . I'd rather join the Ken Fisher camp and extol the US to take on more debt . The guy ain't skinny . And it's a happier time for one and all if the band continues to play , whilst the USS-Debt-tanic sinks . Party on folks !

by simon7 | 23 Sep 09, 1:25pm

Roger T , I think

Roger T ,
I think the expression you were gunning four was

"never trust a FAT BAKER"

"WHY"

"Because there the one's that LET everyone else do all the WORK"

(SPI's @ AGENT'S come to mind here TOO.!!)

by Kate | 23 Sep 09, 1:42pm

Actually Harriet, I think that's

Actually Harriet, I think that's the way much of the population are viewing it these days - the institution you are borrowing from will be bailed out or guaranteed or taken over by a government .... and so party on!

What was interesting about Keen's analysis was the comparison between government money creation vs private sector money-as-debt creation. Massive, massive, massive deleveraging still to come - I don't see any other way. I suspect interest rates will increase at a rough correlation to the pace and magnitude of the deleveraging.

by stevek | 23 Sep 09, 2:00pm

Steve Keen's right on everything

Steve Keen's right on everything except a debt jubilee; you're right Roger there would be blood on the streets and it would be the biggest moral hazard of all time. But if he is right and in the US 1 trillion of stimulous is leaning against 45 trillion of debt, either a large chunk of the debt has to be repudiated or the debt will have to be inflated away. Either way prudent savers are screwed (hyper inflation or banking collapse and loss of bank deposits)

I've been holding out for a big correction for 4 years now but the game's rigged and I can't be bothered fighting the tide anymore. Time to buy another house. Maybe the property bulls are right - At least your house can't vanish into thin air.

by Kate | 23 Sep 09, 2:08pm

stevek - well, you are

stevek - well, you are right the second or third or whatever house can't vanish into thin air - but the government welfare programs which support so much of the private sector tenancies can!

I would hate to be a landlord with a multiple property portfolio at a time when the government removes it's subsidies for private rents. Just think of all the Mum's on the DPB returning en masse to Mum and Dad; all the students unable to get an interest-free loan or a student allowance; all the ACC beneficiaries taken down to the level of unemployment benefit.

It's coming our way - sometime next year, I suspect.

by steven | 23 Sep 09, 2:32pm

Interesting to listen to keen

Interesting to listen to keen on part 1, all economists should commit hari-kari due to the damage they have done.....I couldn't agree more....

@Kate: "I suspect interest rates will increase at a rough correlation to the pace and magnitude of the deleveraging."

I think you are wrong, more like deflationary...."proof" (such as it is), right now we have had a massive de-leveraging, something like 12trillion "lost", so where is the inflation? the money pumped in by Govn's is staying in the banks, so that's not inflationary....

regards

by Ludwig | 23 Sep 09, 3:19pm

When the bullion banks and

When the bullion banks and their devious partners at the central banks pull down gold and silver with their outrageous short positions, then sure, these metals will (possibly) fall quite a bit. That is the time that the smart ones will increase their positions (China among others). The fiat system masters are desperate to maintain the status quo (i.e. corrupt system) which favours the financial elite at the expense of the more productive citizens in society. However, this game cannot go on forever - unless these masters have deluded themselves into believing that they can/will defy the lessons and laws of history.
If ever-inflating debt levels and money printing were the answer then Zimbabwe would be rich by now.
When the whole edifice starts crumbling (as if it hasn't already), then I would sure rather have gold and silver than paper/plastic + ink...the only real lesson that remains is that you cannot trust governments to uphold monetary integrity. They will throw that out of the window when they are backed into a corner.

by steven | 23 Sep 09, 3:26pm

@Ludwig: Agree. Govn's are quite

@Ludwig: Agree. Govn's are quite happy for the populace to suffer as long as they dont....but once they start to suffer (lose elections, income, status etc) all pretense of competence and care goes out the window IMHO....

by Kate | 23 Sep 09, 3:36pm

steven - I think you

steven - I think you got my meaning wrong. I agree with S. Keen, assets are definitely in a deflationary spiral - but what he didn't talk about was where interest rates would go during that period of deleveraging. I think they will rise in close correlation to the pace/magnitude of the deleveraging. Think of an X - assets down; interest rates up - in close correlation.

As for inflation of goods and services - some goods, yes (as I think there will be significant scarcity in certain production sectors as the deleveraging occurs - we can already see it's not worth keeping much of our present farm production going). In services not much inflation at all, as there will be very low (if any) wage inflation during the period of asset deleveraging - or as Bill English calls it - the period of re-balancing.

But, hey - I'm just guessing (like everyone else)!

by Chris_J | 23 Sep 09, 4:40pm

Bernard In this morning's Christchurch

Bernard

In this morning's Christchurch Press, there is an article entitled "Tax net closes in" by Tina Law, which discusses the long anticipated changes to association rules for developers/traders/builders which were passed by Government last week.

I see you haven't commented on this law change which has been referred to CGT by stealth.

These new rules will taint a huge number of rental investors since so many investors (or their partners) have business associations with other tainted individuals.

Consequences of these changes could be:
Less people developing properties: IMPLIES less supply and higher house prices.
Less people buying rentals: IMPLIES less rentals and higher rents.
Less people people selling rentals (to avoid tax): IMPLIES less supply of second hand central city/city fringe property therefore higher prices over time.

Initially it may sound like bad news for rental investors but when you consider the consequences it may turn out to be good news for those that keep property long term.

Unfortunately there's no link on "The Press" website that I could find so I'll email you a copy of the article Bernard.

by Harriet | 23 Sep 09, 4:45pm

So if less investors are

So if less investors are going to buy the "rentals", chrisj, who is going to buy them? They don't just magically go away. They become owner/ occupiers not rentals? And if they just get 'held' doesn't that imply they will still be on the market as rentals? And is this just the start of 'rebalancing' or do you think there's more to come?

by W. Kunz | 23 Sep 09, 5:09pm

Gold and US$ moving -

Gold and US$ moving -
http://www.reuters.com/article/marketsNews/idAFN2235934920090922?rpc=44
http://www.oanda.com/channels/forex-trader/index.shtml

by Chris_J | 23 Sep 09, 5:17pm

Harriet Point is the way

Harriet

Point is the way these association rules work it makes it hard to be a developer and investor unless your are an investing for the very long term. People who engage in both or those who are associated with people who engage in building/developing/trading will be forced to opt for one or the other. My view is that this will mean a lot of people will opt out of developing, giving less supply. Some will opt out of investing which will mean that the proportion of rentals may shrink - that may mean slightly more homes for owner occupiers but decreasing overall supply from developers will make prices rise.

CGT is a bit like Labour's income related rents - everyone thought it would lower rents. All it did was take virtually every State House off the market permanently so that private landlords had 60,000 few rentals to compete with. I'd say it helped rents rise!

These changes probably won't create much extra revenue in the end since people will just structure their affairs to avoid the tax (ie they wont develop) - which means less development, higher house prices and more work for accountants (dispensing advice on how to avoid this tax), not really a good news story for first home buyers or those of you expecting house prices to fall.

by Harriet | 23 Sep 09, 5:25pm

I'm missing something, chrisj! Won't

I'm missing something, chrisj! Won't this just make the playing field a bit clearer for the likes of Stonewood, Horncastle etc to get on with what they do, developing, and get rid of some of the, well shall we say, less professional developers? Investors will then retreat to what they do, and buy finished product off the "professional" devlopers.

by ruru | 23 Sep 09, 5:28pm

Kate @2.08pm: Next year is

Kate @2.08pm: Next year is the year before election year. Key's Nats want in for the long term, so they are willing to trade off a couple of years delay for long-term structural reform gain. The large-scale reviews under way now will provide the template for the big, socially contentious changes that will roll in from 2012. That's assuming the media are still so dull that they don't ask any difficult questions, like what are you planning, in the lead-up to the 2011 election. The MMP referendum will be a godsend distraction too: should be a lightning rod for the likes of grumpy greens and the aggravated elderly (sorry, but that sounds alliterative.) and draw attention away from the big agenda.

by Steve Netwriter | 23 Sep 09, 5:59pm

<blockquote>3. Gold bugs beware. This

3. Gold bugs beware. This piece in FTAlphaville highlighting a record level of net speculative long positions is ominous for the gold price, which could be in for a big fall. The chart is startling.

The weak physical demand for gold combined with the rapid rise in the speculative activity could give rise to a sharp correction, especially if the US dollar rallies.

I'm beginning to think Bernard posts these to wind me up or in this case nearly cause me to cover my computer in coffee :)

Yes, it is true that open interest usually winds up and then the Cartel smash the price and grab the money from the longs. The cycle has been going on for years.
However, like all repeating cycles, some time, they stop.

This cycle is dependant upon several factors:
1. The Cartel needs gold to lease into the market to knock the price.
2. It only works while the opposition is small tine buyers.

The problem is the Cartel is running out of gold and there are now a few big buyers in the market, not to mention the reluctance of many central banks to sell any more of the real stuff.

When the cycle does stop, if it is at times like this, the upward price movement will be astonishing.
Anyway, if the cycle does repeat, which it may, China will be buying on the dip big time, and that will set a very firm floor on the price.

All that ignores the potential of complete financial collapse of course.

The "weak physical demand" was the bit that nearly made me cover my computer in coffee !!!

by Steve Netwriter | 23 Sep 09, 6:14pm

Bernard, <blockquote>You can also help

Bernard,

You can also help GATA by bringing this dispatch to the attention of financial news organizations and urging them to investigate the Fed's involvement in gold swaps particularly and the gold (and silver) price suppression schemes generally.

Fed admits hiding gold swap arrangements
http://www.gata.org/node/7819

Quite a development.

by ruru | 23 Sep 09, 6:16pm

Bernard: An update from Bill

Bernard: An update from Bill English on the 6pm TV news (Guyon Espiner, channel ?): The effects of the recession will last 30 years. Later to public servants: no increases in spending at all in the next 3 to 5 years. Can you grill him about that last bit please? What exactly does he mean? What does it mean for the populace?

I was wrong earlier: the Nats have started already. However, these "reforms" will certainly crank up in 2012. And an emergency/war/global financial crisis is always perfect cover to do what you'd really like to do in govt. It doesn't, of course, mean that the real structural issues discussed on this website will be addressed....or even understood.

by Steve | 23 Sep 09, 7:02pm

If gold drops like the

If gold drops like the anti-gold bugs want it to, fantastic I say for those who are not leveraged or have not yet bought their own physical gold. Buy the dip, cause its gonna go up again just as quickly. As long as the fed keeps churning out them bills and bailouts and buying up their own debt and lousy bonds, metals will beat fiat hands down.
Either way, Mugabe economics is showing its ugly head the West, and the US is in serious danger of entering a hyperinflation.
http://news.goldseek.com/GoldSeek/1253081100.php

by Steve Netwriter | 23 Sep 09, 7:06pm

Thanks Steve I'm going to

Thanks Steve I'm going to watch those.

by Iain Parker | 23 Sep 09, 7:16pm

Les - you say http://www.interest.co.nz/ratesblog/index.php/2009

Les - you say http://www.interest.co.nz/ratesblog/index.php/2009/09/23/top-10-at-10-ta...

In 1969 the court system in America set a precident that would have caused the long overdue reform of the credit system, but once again the privately owned international central banking network managed to shut it down. Here we are today, another US court precident, I wonder how this one will go?

"A landmark ruling in a recent Kansas Supreme Court case may have given millions of distressed homeowners the legal wedge they need to avoid foreclosure. In Landmark National Bank v. Kesler, 2009 Kan. LEXIS 834, the Kansas Supreme Court held that a nominee company called MERS has no right or standing to bring an action for foreclosure. MERS is an acronym for Mortgage Electronic Registration Systems, a private company that registers mortgages electronically and tracks changes in ownership. The significance of the holding is that if MERS has no standing to foreclose, then nobody has standing to foreclose "“ on 60 million mortgages. That is the number of American mortgages currently reported to be held by MERS. Over half of all new U.S. residential mortgage loans are registered with MERS and recorded in its name. Holdings of the Kansas Supreme Court are not binding on the rest of the country, but they are dicta of which other courts take note; and the reasoning behind the decision is sound."
http://www.webofdebt.com/articles/mers.php

and from 1969:
"Don't believe banks create the money they lend? Neither did the jury in a landmark Minnesota case, until they heard the evidence. First National Bank of Montgomery vs. Daly (1969) was a courtroom drama worthy of a movie script.3 Defendant Jerome Daly opposed the bank's foreclosure on his $14,000 home mortgage loan on the ground that there was no consideration for the loan. "Consideration" ("the thing exchanged") is an essential element of a contract. Daly, an attorney representing himself, argued that the bank had put up no real money for his loan. The courtroom proceedings were recorded by Associate Justice Bill Drexler, whose chief role, he said, was to keep order in a highly charged courtroom where the attorneys were threatening a fist fight. Drexler hadn't given much credence to the theory of the defense, until Mr. Morgan, the bank's president, took the stand. To everyone's surprise, Morgan admitted that the bank routinely created money "out of thin air" for its loans, and that this was standard banking practice. "It sounds like fraud to me," intoned Presiding Justice Martin Mahoney amid nods from the jurors. In his court memorandum, Justice Mahoney stated:"
http://www.webofdebt.com/articles/dollar-deception.php

by Les Rudd | 23 Sep 09, 7:58pm

Iain - hi, nope, Steve

Iain - hi, nope, Steve Keen said most of that. Rascal eh. I wonder what he'd say about debt free money supply?

by finger pointer | 23 Sep 09, 8:22pm

Hey you negative negative people!,

Hey you negative negative people!, the recession is over, don't forget to smile, come on it doesn't hurt. bye bye

by Kate | 23 Sep 09, 9:46pm

ruru - serious structural reforms

ruru - serious structural reforms are cranking up already. It is no accident that English's hard talk to the public sector today coincided with JK's NY visit - he's pleading with our creditors for more time. The IMF prescription is a Cat 5 hurricane heading our way.

by ruru | 23 Sep 09, 11:02pm

Kate: I was hoping you

Kate: I was hoping you wouldn't send me to bed with that lovely thought. I agree.

by steven | 24 Sep 09, 8:38am

@Chris_J: In specific circumstances maybe,

@Chris_J:

In specific circumstances maybe, overall I think your assumptions are not correct IMHO.

"Consequences of these changes could be:
Less people developing properties: IMPLIES less supply and higher house prices.

yes, "could" I dont see why...ie there should be no or little less development...instead of selling to a Landlord, its sold to a home owner.

Less people buying rentals: IMPLIES less rentals and higher rents.

Only if there are the same amount of renters.....People often rent because Landlords take up a considerable number of properties forcing up prices beyond what a residential payer can pay, hence they cant afford the mortgage so rent. So less rentals means a bigger housing supply for ppl to buy and most ppl like to buy if they can. Less ppl wanting rentals might depress rental amounts, or if rents increase there is a move to buying as its cheaper....swings and balances.

Less people people selling rentals (to avoid tax): IMPLIES less supply of second hand central city/city fringe property therefore higher prices over time.

uh? this looks really faulty logic......More landlords will sell their rentals as the tax dodging no longer pays, thus putting more housing on the market so depress over-valued supply right now, will prices rise? very questionable, with no tax advantages there is no reason for "casual" landlords to step into the market .ie Landlords no longer get as much capital gain and cant see a tax "loss" offset elsewhere, a home owner is less interested in that, short term anyway...

regards

by steven | 24 Sep 09, 8:41am

@kate, JK's itenery is well

@kate, JK's itenery is well documented...and the NZD is very strong, therefore I dont agree with your logic....I would see it as a relative thing, yes NZ isnt in the best shape, but compared to the basket cases out there, NZD is safer....

regards

by steven | 24 Sep 09, 8:52am

@kate The G20 wont do

@kate The G20 wont do a thing.....structural reform is pain for them today, they will make some vague promises of doing something tomorrow...gambling it either wont happen or it will be some other pollies problem. The Pollies are just like the financial industry, there is least individual risk when you are in the herd.....anyone who stands out risks getting eaten....so collectively doing something stupid / average means they can claim the circumstances were "exceptional" and "look, everyone got caught by surprise on this". Eventually the big issues of; peak oil/energy, population v food imbalance, financial stupidity/greed, baby boomer retirement, huge debt will hit....

I see it as a house of cards, just one of these will cause the rest to go as well....and peak oil cant be avoided, its a geological fact, we cant get oil out of the ground any faster....(at some point). I have several good articles saying whenever oil gets to 4~6% of US GDP they will fall into recession again....its happened every time in the past 6? occasions....4% of US GDP is $80 per barrel of oil and we are at $72....even if its 6% $100 oil is a dead cert within 2 years...

regards

by Kate | 24 Sep 09, 9:49am

steven - I agree the

steven - I agree the G20 won't do a thing structurally with the international monetary system - as Steve Keen said they are of no consequence ... meaning as long as they continue to accept their instructions from the IMF/Feds/wider private sector financial industry nothing will change - except individuals and taxpayers get more and more in debt to the private sector monetary system.

Accumulation by dispossession (David Harvey) - that is the way I see the IMF/Feds/Wall Street banking conglomerates are driving this thing. NZ being a small target (easy picking) will be dispossessed sooner than others. Our government is preparing us for the IMF prescription - dispossession accompanied by debt slavery for the masses - greater accumulation of wealth by the elite.

English's "re-balancing" won't happen (neither do I think he believes/intends it to happen) - the "talk" about the need for it as an objective is aimed at providing the justification for having to do it for us (by dispossession) in the future. Higher taxes, higher interest rates, higher unemployment, leading to increased defaults and dispossession. If I am reading David Harvey wrong - my apologies to the author!

by steven | 24 Sep 09, 12:31pm

@kate: "to accept their instructions"

@kate: "to accept their instructions" I dont see it as a master / slave but peer to peer, its mutually advantageous to them all to do nothing IMHO. I dont think individuals will get into private debt more and more, that's the issue, it looks like many are de-leveraging that debt, 45trillion(?) worth. Consumers are now paying down debt....what's left is

1) The Govn's increasing debt to compensate and they cant do it on the same scale...which begs the Q at what point do voters vote out the people who are taking on debt on their behalf and then default on it. If the Govn cant get more finance for debt, that leads to 2)

2) But before that (maybe) and this is even worse, they are now saying we should be taking off our future public pensions and health care provisions and use that money to keep the shell game going....so there is a real risk that we will be impoverished for the next 20 to 30 years individually ie the rest of our lives, even our childrens, which leads me back to "at what point do voters vote out the people who are taking on debt on their behalf and then default on it."

In extremis, what happens to NZ if we default? by this I mean at some point if its a downward spiral of interest on the debt is worse than the cost of us defaulting and having to pay a premium for future loans ie the cure is worse than the disease....what exactly can external financiers do about it? refuse to lend?

IMF, I see that as a non-event as long as we dont need their money, but yes there is a risk that other countries could see NZ and OZ as a threat as we are sound(ish) financially and not really crippled by Govn debt....I guess you could say under "under way out there conspiracy theory" that other drag us down so they dont look bad...this sort of happened in the great depression.....

"English's "re-balancing" won't happen (neither do I think he believes/intends it to happen)" - agree, its not in his or his parties members self-interest to do so....Ive said this before, taxes will have to rise, there is no choice....as in the UK the only ppl that can afford to pay more are the "rich" but especially the "super-rich" so I expect that taxes for them will rise considerably....hence "we" the votes will vote the Pollies out, that's a bigger danger for National than Labour....

Now some ppl say the 'super-rich" will just leave, however there are moves afloat that places like Switzerland, Caymen islands etc will no longer be tax-free havens....so yes they can leave NZ but is there anywhere for them to go? I dont think so....they could go for "stateless" spend their lives on a super-luxury cruise ship....but that effectively is a prison....

regards

by steven | 24 Sep 09, 12:38pm

I will add I dont

I will add I dont see this as what I want, but as what I think the most likely outcome is.

regards

by Wally | 24 Sep 09, 12:48pm

steven, the super rich avoid

steven, the super rich avoid taxes. You are right to expect that nothing will change. Rocking the boat even when it is sinking, is not the done thing. Lots of spin and BS however, it's a growth industry in Noddyland.

by stevek | 24 Sep 09, 1:35pm

"In extremis, what happens to

"In extremis, what happens to NZ if we default? by this I mean at some point if its a downward spiral of interest on the debt is worse than the cost of us defaulting and having to pay a premium for future loans ie the cure is worse than the disease"¦.what exactly can external financiers do about it? refuse to lend? "

Unfortunately Steven what would happen is small ex colonies like NZ would be treated like a private bankrupt, unable to conduct business/trade with others for a considerable period of time. We'd essentially have to become a closed economy until someone needed something from us desperately enough. Our trade isn't essential to anybody and we don't have huge standing armed forces to stand over others. Different rules for the big guys with big sticks.

What usually happens is like Argentina. IMF loans money to govt to pay off banks and govt is forced to raise taxes and cut spending to pay the IMF back.

by steven | 24 Sep 09, 2:07pm

@StevenK: I am not so

@StevenK: I am not so sure its that bad, this must be documented somewhere?

regards

by steven | 24 Sep 09, 2:11pm

@Wally: they avoid taxes now

@Wally: they avoid taxes now because no one seriously ties them down, some country decides that its worth their while not to tax the "super rich" eg cayman islands....so the "super rich" move there....What Im seeing is suggestions that this wont continue or wont be so easy in the future. Lets examine these super tax dodgers, what benefit are they really to NZ? their money is in Cayman islands anyway, and its in hedge funds or other high yield endevours not linked to the real economy so they simply live in NZ and dodge tax, so if they leave I dont see it as a disadvantage for NZ.....

regards

by steven | 24 Sep 09, 2:35pm

This is an interesting piece

This is an interesting piece and is quite relevent,

Ecuadorian President Rafael Correa explained rather that he was unwilling to continue to pay debts that are "obviously immoral and illegitimate."

http://www.fpif.org/fpiftxt/5744

Some further discussion,

"In a pioneering work on sovereign debt, Eaton and Gersovitz (1981) argue that a country's incentive to make repayments is to preserve its future access to international credit markets."

So the assumption is that getting credit is a good thing, good enough to have to ensure it is so....yet access to credit in fact gives a Govn with a short term objective (staying in power) an incentive or a way to dodge the bullet and leave the problem to someone else....that is the definition of debt, bringing forward tomorrow's spending to today....

http://www.econ.nyu.edu/user/yue/Yue_2006.pdf

yes this is a model....

So avoid a small pain now but have a bigger pain later....what if the people say we dont want that to happen again? by defaulting they make it impossible for a Govn to borrow, the Govn has to live within its means....it has to be competent....it has to save in the good times rather than borrow in the bad and re-pay in the good....now to me this makes sense....to National? no....give tax cuts in the good times and borrow in the bad....I think its potty.

Also here we talk about Govn debt default as opposed to private debt.., so goods could still be imported by private companies if the sellers considered they were good for it.

regards

by stevek | 24 Sep 09, 2:57pm

Problem for NZ is most

Problem for NZ is most of the debt is private and held by the Australian banks in the form of mortgages. Its the private sector and consumer who needs to deleverage the most. Government debt isn't that bad by historical or global standards. Imagine the pressure NZ would come under from Australia if there were enough loans defaulted on here. The Australian govt would be demanding that the NZ govt bail out the Aussie banks here. Rudd would be under huge pressure from the big 4.

by Wally | 24 Sep 09, 3:20pm

Steven, applying higher taxes on

Steven, applying higher taxes on the rich is a no win game. Better to flatten the tax structure and thereby cut out the tax havens as viable players. We would be better off with another one hundred millionaires living here than encouraging the rich to bugger off. Cut the top rate to 30c and promise to cut again for those who are residents at the time of the first cut. Introduce an incentive to invest in NZ. The longer you stay the less you pay!!!!

by NevilleWC | 24 Sep 09, 3:43pm

The Govt debt is in

The Govt debt is in NZD so there isn't problem of a default if the exchange rate drops.

The RBNZ holds a 'float' of about $20b in FX offset by the same amount of borrowing (on a longer term) or swaps so the net for each currency is net zero.

http://www.rbnz.govt.nz/statistics/rbnz/f5/data.html

by NevilleWC | 24 Sep 09, 3:46pm

The more millionaires the better.

The more millionaires the better.
We get 12.5 GST off them every time they buy something.

by Iain Parker | 25 Sep 09, 6:47am

NevilleWC - WRONG, the financial

NevilleWC - WRONG, the financial sector was excluded from paying GST from the get go. In return they claimed, to encourage direct foreign investment we must make it attractive, they wouldn't claim gst back for input rebates, i.e would not claim back gst on pencils, pens, computers etc as long as gst was not charged on their services and profits. This gained them a small fortune in non-reinvestment to the social infrastructure of the nation they have gutted and hollowed:

http://www.dsanz.co.nz/taxation/WFDSA_Congress_Presentation.pdf

by Mark Hubbard | 25 Sep 09, 8:14am

Good to see the compilier

Good to see the compilier of the top 10 is starting to understand that the Great Depression, just like the current one, was caused by Government intrusions in a non-free market.

(Just back from a two day business trip, now going on holiday until October 12, so I'll have to pass the torch to Malcolm - haven't seen him for a while - to keep the Big State mob in check.)

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