About $5 billion of Uridashi and Eurokiwi bonds are maturing this month with no sign of a sell-off. Despite having one of the deepest external earnings deficits in the developed world, foreign savers seem content to retain our dollar.

Unless something is done to discourage a resumption of property price inflation we are all too likely to climb back on the merry-go-round of borrowing to invest in second or third homes. Confident of untaxed capital gains we will again feel wealthy enough to splurge on imports and travel made cheaper by the dollar's export-punishing exchange rates.

The Government knows it ought to break this cycle before a recovery gathers pace. But its strategy, outlined by Mr English and again by Prime Minister John Key yesterday, is fuzzy. Rather than simply attacking the problem with its most effective weapon, taxation, it talks about six solutions.

These are: regulatory reform, infrastructure investment, public sector savings, better education and skill training, assistance for business innovation and taxes. All of these could be helpful to export industries but only the last is capable of quickly tackling the fundamental misalignment of national investment.

Is it possible that our (Australian) banks playing cat and mouse with RBNZ ? Rhetoric ?

They want to earn money - how - by lending more on one side and having more deposits on the other.
Thus they have to engage people in borrowing more and investors in giving more.
The simplest way to achieve both of these is to minimise the criteria for lending and increase interest on deposits.
By starting with the first option - casus Westpack - they create the environment for increasing OCR and get the higher dollar - so the more money into deposits - foreign money....
And a bubble starts all over again....

RBNZ can't do anything until there is a change of attitude towards regulation of the banks and markets.

Seems that NZ is getting poorer day by day and we may have not enough money for BB or even X or Y generation to live here.

Cheers, STP

STP, with my limited knowledge of the Fractional Reserve Banking model we have the banks don't really require that much capital to flow from overseas to make a fortune from local lending. With required reserves of around 10% banks can write into existence loans worth 9 times that figure. So if they have a million in cash they can lend 9 million in mortgages with interest on the lot. So paying 4% for one million and earning 5.6% on nine million is a good deal all day every day.

So yes they pay 3, 4 or even 5% for the 10% used as a reserve but on the 90% they pay nothing. No wonder they are so profitable!

The argument goes that this is okay as debt always equals cash in society and the money supply expands (and contracts?) to meet demand. Cash in circulation always matches debt to someone somewhere. The interest component (created from interest in expanded lending) never leaves the economy as the loans are repaid so that's causing and underlying inflation component. That's true but in our case the profits are repatriated to Australia. So we are the milk cow of Australian banks. Do the numbers it's a great model for everyone in the banking sector.

Now I don't know much about this subject yet so happy to hear from those that know more and please correct me if I have this wrong.

And Selwyn, the banks fund the political party machines which means the Beehive is in the hands of the fat banker. No escape Selwyn. Show me a country that survives without money. Some of the Pacific islands were once free of money but a quick intervention by colonial powers soon fixed that. The name of the game is to use the Law making powers of the state to provide the mortgage security system and then extend the credit to suck the nation into so much debt, the fat bankers are guaranteed a steady flow of money and wealth. In effect they come to own the nation.

The 'elephant in the room' with fractional reserve banking is the underlying liquidity. When customers default, it can have a run on effect, as the bank struggles to find real cash to cover the losses. The Americans and Brits found this out the hard way .

And eventually the elephants going to come home to roost in NZ, unless we drastically reduce the drain debt servicing is producing in the country, is debt servicing become untenable to the cash strapped consumers, to whole system will collapse like house of cards.

I don't support reserve banking, it may work in a closed system, but it's easily exploited in a global context. I think it has long term detrimental effect on the ecomomy by atrtifiaclly allow unsustanable debt levels, funded by external investors - teh returns funneled out of our ecomomy. But we don't have enough real cash in the system to pull the plug, but we do need to drascticlly reduce the mulitples, and soon. We need to pop this debt bubble before it becomes to late.

How about putting strict limitations on the mulitples allowed on capital sourced off shore?

Why call for extra taxes have you taken leave of your senses ? Do you honestly think that Mum and Dad getting a rental property as an investment should be taxed on the capital gain it makes and hey presto the NZ economy will charge ahead. Bearing in mind that the big boys get taxed already on any capital gain they make.
While you are about it why not stamp duty, inheritance tax etc etc.
Let me make a suggestion Mr Walley why cant your organisation help to develop a manufacturing company to get to a size where it can be listed on the sharemarket and be a world beater ? Instead of bleating Anderton like for more taxes like a cloth capped pommie trade unionist take up the challenge and produce something constructive.
Its like Muldoonism blaming the government for not having enough taxes instead of getting on with business.

Thanks for the reasoned reply Selwyn. I guess the point I was trying to make was that John's article didn't seem to me to get to the root of the problem. Instead he took a cheap shot at an easy target.

I also wanted to point out that if anything we should be proud of our banks ( I can't believe I'm saying this).

You rightly point out Singapore as an example of relevance.

On the subject of CGT one of its fundamental weaknesses is it ceases to provide revenue for the welfare state when it is most needed. See California, and they don't even have a fuctional welfare system.

I think the RBNZ initiative to require a percentage of bank funding to be raised locally has great merit and will probably solves one of their main problems.

My point to John would be if interest is too expensive perhaps he should raise equity (or have done so previously).

David - "Let me make a suggestion Mr Walley why cant your organisation help to develop a manufacturing company to get to a size where it can be listed on the sharemarket and be a world beater." I'd be happy to answer that, but ditto my response to Roger Witherspoon above.

Cheers, Les.

David you say: Why call for extra taxes have you taken leave of your senses? Do you honestly think that Mum and Dad getting a rental property as an investment should be taxed on the capital gain it makes and hey presto the NZ economy will charge ahead. Bearing in mind that the big boys get taxed already on any capital gain they make.

David perhaps you can tell me why anyone in the right mind would put money into a business (higher risk than property) when in addition to the lower risk profile they can reduce their personal tax. Perhaps that's why business has to pay a higher price for money and perhaps that's why we have the productive economy in recession for the last 5 years. Just a thought!

Now on the flip side can you tell me why a minimum wage worker has to pay more tax than his middle management buddies to make up for the tax his middle management buddies are not paying as they can claim losses against their property investments. Is this fair! An why would you run year after year a business at a loss unless"¦"¦"¦..there was capital gain at the end. So having not paid the tax on the way through is not right and proper to now pay the tax if they sell.

Perhaps you can tell me why as someone who is trying to drive an NZInc agenda (an economy that benefits all) I would want to encourage increased foreign debt year after year to end up with the same asset we started with when we are desperate to drive productivity investments.

Finally you may like to consider why as a parent I would support policies that force our kids off shore as we have one of the worst housing affordability ratios in the world as a result of these policies.

NZMEA is totally right to be addressing these issues as they are destroying the productive economy that keeps us afloat

My apologies if my comments have been too vicious. The subject is important and it does stir me up.

I guess I'm feeling a bit frustrated as I'm not quite sure we are looking at the real problem, but can't exactly say what that problem is.

I agree there is a wealth transfer going from NZ to international finance and that we are being milked in some way.

I don't think fighting amongst ourselves will get us anywhere (hence my apology) and to me CGT, attacks on banks, and denigration of housing as non productive are just us fighting amongst ourselves.

Don't forget housing is a manufacture, it is one of the most useful things we can make for ourselves. Second only to food and water. Yes it is ridiculously overpriced.

Similarly commercial property is a valuable manufacture, we need it for retailers and for producers.

My problem is this, we go round and round shooting at ourselves but where is the enemy?

The cause of the problem to me is the non taxation of interest.

Interest is not an expense, yet the banking industry (I think historically when lending to governments for war) has this wonderful trick of getting it treated as an expense.

If I have a business which has no debts I pay no interest and all my profit is taxed.

If I have a business which is half financed by debt I pay interest and hey presto I can claim it as an expense.

But it is not an operating expense it is a capital cost and so should not really be eligible to be treated as one.

Since this is the cause why not remedy it. Remove tax deductibility for interest and while you are at it charge GST on interest (what makes it so special, more special than food).

Attack the cause of the problem not the result.

Not just the fat bankers profits, Wally, my own too. I used to be a manufacturer employing 90 people, now I own commercial real estate.

I learned not to try to swim upriver.

Roger I dont think your idea could work.

If a bank pays 4% via TDs and receives 6% via income then it is fair to pay tax on the 2% profit. If they dont take account of the 4% cost, then they will likely pay more in tax than the profit.

... then again, if it forces foreign banks to bugger off and we end up with a state owned bank that controls and allocates lending to benefit the economy and NZers then I am quite happy with that.

The banks are not the problem Jimmy, we are.

At the moment the system encourages me as a good businessman (or even as an indifferent one in my own case) to borrow money.

To me the problem is one of weaning the nation (including myself) off the teat of international finance.

Why do the manufacturers feel the need to borrow money in the first place? I thought business was about making money.

The Finance Industry has got us by the balls, just as the unionists had a few years back. We must end the favouritism the industry enjoys. But I don't know how we do this. There would be unintended consequences.

I don't disagree with you that there is a serious problem here John, just the root of it. Housing and property are just not the problem.

Why are the manufacturers not more profitable?

High interest rates and a high exchange rate just don't cut it for me. The high exchange rate means that petrol and imported machinery are cheaper for instance. High interest rates just adjusts the trade off between equity and loans.

What is wrong with manufacturing?

Iain, but your system still relies, does it not, on a central planning organisation, which will actually have more power than our current central planning agencies? Your system will still build the State, not diminish it?

I'm going to have to ask Mr Hayek and Mr von Mises that over lunch John :)

JW - you own experience carries a clue. Yes stuff is cheaper to buy offshore with a strong currency, but what of farmers with next to nothing of inputs in other than NZ$, most manufacturers (even at the high tech end) might have only 40% of inputs in other than NZ$ but most exporters have 100% of sales in other than NZ$. Yes you win on the swings but on the roundabouts lose 2.5 times more.

When competitors offshore can get cheaper money we put in new paint plant at the servicing cost of a new offshore factory "“ WACC matters, returns matter to investment.

Too much demand by the tax havens of property pull up rates for things that don't have the same tax break and tradeables have the double whammy of falling returns as the exchange rate appreciates.

Look at the past year, the cross on the US$ has gone from 80c to 49c and back to 65c "“ just calculate what that does to returns back in NZ. F&P decisions at 80c don't look so good at 50c "“ the real economy behaves like a super tanker, finance has the response times of a sports car. Ultimately we will all suffer from the missmatch.

What's wrong with the productive sector not that much the ones that have survived thus far are pretty good "“ we just don't give them an even break.

John asked me how does your prescription deal with the pressure of uncontrolled capital flows and its associated damage to our trade exposed economy ...

My initial reaction is that such issues, correct, - if that is the right word - themselves in laissez faire markets: that is the nature of such markets, and why would they not? Either way, in a laissez faire market there is no attempt to deliberately control this by a central agency, obviously. So I don't concern myself with it.

If you say to me but an uncontrolled capital inflow pushing up our exchange rate makes our export prices uncompetitive, then I say to you, if you take away tax (almost totally) and bureaucracy, red tape and regulation, and whittle in the low, low cost of a minarchy, those export industries are so much more profitable and able to weather this.

Though, economic arguments aside, my point, and answer to your question, is - you may not believe this upon reading it - better given by my letter to the editor of the Press, penned over lunchtime today (Mr Hayek and Mises were, alas, out). I leave you to draw the connections, though I have embolded my point :)

'I see a succession of letters recently from dietitians and medical specialists justifying the addition of folic acid to "˜my' bread. What all of these professionals are missing is that this is not a medical argument. It is philosophic and turns on the question: should a government have the right to force bakers to add "˜anything' to bread. Those of us who understand that the most important condition for an individual's health and happiness is to live in a state of freedom from the tyranny of State, are able to answer this without thinking: NO. No government has that right.'

The Bank Manager Says:
"Unless something is done to discourage a resumption of property price inflation we are all too likely to climb back on the merry-go-round of borrowing to invest in second or third homes. Confident of untaxed capital gains we will again feel wealthy enough to splurge on imports and travel made cheaper by the dollar's export-punishing exchange rates.

The Government knows it ought to break this cycle before a recovery gathers pace. But its strategy, outlined by Mr English and again by Prime Minister John Key yesterday, is fuzzy. Rather than simply attacking the problem with its most effective weapon, taxation, it talks about six solutions."

Dont you just hate it when you have to agree 100% with those generally totally disagree with?
When this sort of thing happens, 'enemies' align, against a common wrong, that wrong is very wrong...and will have dire straights for everyone.

Mark Said: "If you say to me but an uncontrolled capital inflow pushing up our exchange rate makes our export prices uncompetitive, then I say to you, if you take away tax (almost totally) and bureaucracy, red tape and regulation, and whittle in the low, low cost of a minarchy, those export industries are so much more profitable and able to weather this"

I say bollocks Mark: Sit down with a spread sheet and plug the numbers. The exposure to FX from .50 to a .80 to the US would kill any well run export business operating at say 35% margin, with say 15% pretax at .50 to the USD but it would be dead at .80.

Tax is not an issue when there is no profit so when the numbers turn on you (through no fault of yours by the way) tax and government spend makes zero difference to the outcome one way of the other.

I have lived in this export world for decades now and the reason we have such low productivity is no one wants to invest (long term) because the returns are so fickle and risky.

If you're doing a business internal to New Zealand you really don't get the exposure to the realities of the exchange rate. If your an importer and the exchange rate goes the wrong way you pass it on and are not at a competitive disadvantage. When you're and exporter you can't pass on the price rise as the local competitor hasn't changed his price at all.

I encourage you to do the spread sheet example and make some reasonable assumptions, take a well run local business and expose their income to the same volatility and tell me how they would survive. It's this basic lack of understanding that is killing the productive economy, as everyone assumes it's just a small issue that you just have to tolerate. Bollacks you give up and exports decline and that's what's happening.

Selwyn and John

I gave that example quickly, so I don't need the spreadsheet to prove your point Selwyn, it is obvious.

But, and I need more time to think it through, I don't know whether such exchange rate issues are problematic once you move away from a Central Banking system to a Free Banking system. It is our OCR being higher than other markets which was bringing in the inflows and so raising the exchange rate. In a laissez faire economy you do not have an OCR and all the market distortions consequent on it.

On those points, I need to read more.

Mark Hubbard

What type of money is created by the banks in your "free banking system"?

Currently trading banks have the right to create electronic money that can be exchanged for sovereign currency which serves as legal tender i.e. when offered in payment for a debt it cannot BY LAW be refused. Thus the state and therefore we taxpayers guarantee without charging the integrity of money created out of thin air by foreign-owned banks which have absolutely no constraint to act in our national interest; this is a rort and in my opinion amounts to nothing other than a direct subsidy. If your free banks create their own currency and when accepting payment sellers can decide for themselves whether or not it has integrity then I might agree with you; that would also give us minnows the chance to show certain banks the finger that they so richly deserve.

Robert: The issue is the distortion that comes from biased tax codes, the bias shifts behaviour and make poor use of resources. We are a asset fixated wealth aggregating trickle up economy. Trickle down wealth comes from activity, activity requires people, skills and builds employment.

Those chasing a gain as you say we need more of but we them in activities not assets.

Balanced broad based tax means lower taxes on everything and an absence of distortion "“ take a look at the Treasury web site there are some really good papers there.

Who would not support a 23% tax rate? What do you think such a tax code would do for the real economy, the exchange rate and over time interest rates?

I have enjoyed reading the article and comments. Using a tax haven analogy really helps my understanding. We don't seem well served by our politicians or the Reserve Bank on dealing with this issue. The way John broke the issue down shows it is not that difficult, it just requires vision, courage and resolve by those in power. One thing for sure, if NZ keeps going through cycles of property booms, interest rate/exchange rate peaks and strangling our exporters we are on a slippery slope. Maybe the rating agency downgrades will force the government's hand.

Here is something to ponder:

Interests rates are not merely related to tax (though I comprehend the suggested link).

Related risk is the fundamental that determines interest rates.

There are far more cost effective ways to deal with the demand for credit. Yes, we need to balance the tax system - nevertheless, we don't want to swing the pendulum the other way.

Requiring larger deposits not only reduces the demand for credit but also encourages savings. No new punitive tax burden required.

When it comes to high interest rates for business, a lack of demand for credit won't change the banks perception of risk (as you say, the banks see increased risks associated with firms in the real economy in recessionary conditions).

This risk, coupled with the need to recoup losses (larger reserve ratios needed to deal with their own toxic loans) and the international cost of credit, are what's largely determining current interest rates.

Other than redirecting credit demand (at a cost) would a new tax really make any difference? Diverting new investment to the productive sector will also increase the demand for credit.

Therefore, reducing demand in one sector to increase it in another will not achieve the desired objective (lower interest rates).

If they continue to support the housing bubble, increasing state backing of Kiwibank won't correct the current imbalance. Apart from subsidised lending, competitive and prioritised lending is about all they can do. Though, don't get me wrong, it would help.

Credit can easily be restricted through prioritised lending or higher deposit requirements, both being variable to suit economic conditions. These volume control measures will produce similar if not the same benefits but without the cost (new taxes).

John - Yes, I fully understand that "excessive demand" increases the cost of credit. Nevertheless, the point I'm trying to get you to consider, is there is far more cost effective ways to control that demand (prioritised lending or higher deposit requirements) hence achieving the same desired results with no new punitive tax burden required.

I fully agree productive activity is a better investment, however if more debt goes toward production it does little but divert credit demand "“ not reduce it.

Moreover, there is far more driving investment into property (rather than production) than merely tax incentives.

Have you seen my discussions with Les? New Zealand's makeup (mum and dad property investors, weak market perception, the risk related to production, lack of exporting know how etc...) are also behind the current imbalance (housing/production).

You say the whole point about removing tax havens is to lower the tax on things that favour the economy.

Yes, as I previously explained, I comprehend the need to balance the tax system, I was merely pointing out there are far more cost effective ways to control credit demand without having to resort to introducing new taxes.

Furthermore, that diverting credit demand won't solve our interest rate problems and the way banks currently perceive production lending as high risk.

I agree that an effective capital gains tax, which targets property speculation, would help to correct the tax imbalance.

However, tax is a volatile tool, often failing to achieve the desired result. With costs becoming inflationary and being passed on and gains ending up offshore.

Once again, New Zealand's makeup needs to be taken into account (an over representation of foreign ownership with significant capital flight coupled with substantial overseas liabilities and a high concentration of our wealth directly tied to property).

Indeed, we need to remove existing distortions but we need to ensure we get it right.

Ponder what redirection the power of government can accomplish, if only it had the will.

By the way, Iain Parker has the most cost effective way to reduce the cost of credit.

I believe there is a big ideological rift occuring within the RBNZ at present. Between those fighting for the financial economic independence of the nation and the lackies of the international bankers seeking to put us further into servitude. The RBNZ was officially dropped as agent to the NZDMO which is now overseen by American financial institution - Northern Trust - ninth largest central bank in the US. This pretty much nuted the RBNZ of any influence upon our fiscal policy. The RBNZ does not only need new tools it needs to be reinstated to the overseer of the conditions of credit in the national interest.
For the serious student of banking who wants to come to terms with how our money/created credit supply is rented from foreign private central bankers and enters our nation through the NZDMO portal -

NOW, TO CREDIT CREATION AT THE INTERNATIONAL LEVEL

We must first understand the role of Primary Bond Dealers or also known as Underwriters:

This from thismatters.com Educational Articles about Consumer Finance and Investments:

"An investment bank is not a bank in the usual sense. It doesn't have checking or savings accounts, nor does it make auto or home loans. It is a bank in the general sense, in that it helps businesses, governments, and agencies to get financing from investors in a similar way that regular banks help these organizations get financing by lending money that the banks' customers have deposited in the banks' savings, checking, and money market accounts, and CDs. In other words, connecting the need for money with the source of money."

This from Centre For Financial Studies 1999

http://www.ifk-cfs.de/content/veroeffentlichungen/data/19990111TheRel.htm

"Primary dealers are institutions which have the exclusive right to submit (competitive9) bids in auctions for government bonds. Moreover, a primary dealer has the obligation to participate in a "substantial" way in these auctions, to quote two-way prices for government bonds on secondary markets with paying attention to maximum spread and/or minimum turnover requirements. Furthermore, primary dealers may have access to some other privileges such as special financing facilities which can be transformed into monetary equivalents...........

On the one hand there are the noncompetitive bidders from the auction. They will be called type 1-individuals and they may act as buyers or as sellers of government bonds on the securities market. On the other hand there are other subjects who are not endowed with government bonds. We call this last group of agents type 2-individuals. They only can act as buyers of public bonds............."
http://socialcreditorbust.blog.co.nz/international%20and%20internal%20cr...