Wednesday's Top 10 with NZ Mint: Analysing the Greens/BERL critique; Better Life Index; 'It's here and it's unclear'; Decline; Magic; bloopers; Dilbert

Here's my Top 10 links from around the Internet at 10:00 am today in association with NZ Mint.

Bernard is preparing for tomorrow's Budget announcement and will be in Wellington for that. He will be back with his version tomorrow.

We welcome your additions in the comments below or via email to

See all previous Top 10s here.

1. Unconvinced
The Greens had the friendly economists at BERL look at the partial privatisation projects of the National Government, and their conclusions are reported here. Eric Crampton at Offsetting Behaviour took a look too and thought the results were a tad superficial. He wasn't convinced, based on the BERL arguments:

So, how does BERL approach the problem? They assume that revenues from asset sales are used to build other assets that yield dividends equal to the returns on the sold assets but that time-to-build means a few years' delay in getting the flow of assets from the alternative stream. It's then not particularly surprising that they find that asset sales are a dumb idea. It would be hard to find anything other than "privatisation is a dumb idea" given that starting point. They also assume that borrowing costs are lower than dividend yields and conclude that it makes more sense to borrow than to sell off assets.

Further, when BERL makes the case for debt over asset sales based on the difference between the government's cost of borrowing and the dividend yield from state owned enterprises, they don't seem to adjust for that dividend yields tend to be higher because asset owners need a risk-based return. If it doesn't make sense to take out a mortgage on your house at 5% because you can buy stock in a company that usually pays 6% dividends, it probably doesn't make sense for the government to do it either.

I'll agree with BERL that some of the benefits of partial privatisation seem overwrought. I've been critical of partial privatization, and especially of starting with the energy companies. But if this is the best case against partial privatisation that the Greens can come up with, it sure isn't convincing.

2. How lucky we are
The OECD has updated its innovative Your Better Life index. This tool enables readers to compare well-being based on 11 topics - housing, income, jobs, community, education, environment, governance, health, life satisfaction, safety and work-life balance. You can select and compare well-being priorities to those of other users by country, age and gender. The great advantage of this tool is that you can weight each category using your own values. To a large extent it proves John Clarke right.

3. Counter revolution - who needs branches anymore?
We are lucky in  New Zealand - we have big, stable, boring banks who basically do the boring stuff well. And that is about all they do. Big international banks got very involved with the 'exciting' investment banking stuff and look where that landed them. But it seems, the utility side to banks is about to get exciting after all. The long-heralded transition to alternative payment technologies is starting to happen in a big way, and it will transform the banks as we know them. It may well create some heady excitement for a few - in a death-defying way. They will need to adapt very quickly. The internet and mobile phones are at long last turning boring old retail banking into an exciting industry, says Jonathan Rosenthal at The Economist:

These changes will give bank customers more clout, allowing people effortlessly to find the best deals, mainly at the expense of banks’ profits. Some of the biggest beneficiaries will be migrants, who have been failed by a banking system that charges them up to 20% of the sums they regularly send to support their families at home. People with bad credit scores will also surely no longer have to pay interest rates of 1,000% a year to payday lenders. But virtually all customers should gain.

This will undermine the old model of retail banking. Pricing will become more transparent. It will be harder to pretend that banking is free when in fact it relies on customers giving banks virtually interest-free loans in the form of deposits; harder to profit from the disorganisation or sloth of customers who slip into unauthorised overdrafts or roll over balances on high-interest credit cards while leaving cash in low-yielding savings accounts. Banks will probably have to accept lower margins on credit cards, personal loans and mortgages.

4. Palmy's time is coming
PN might be the butt of jokes in New Zealand, but don't laugh too hard - it might yet become the cool place to be. Young 'knowledge economy' workers are moving to Cleveland, Pittsburgh, Detroit in the USA. It’s not just the cheap housing. It’s a demand for decay, or so they say. Will Doig at Salon has uncovered an unexpected trend:

According to a recent analysis, the population of downtown Cleveland is surging, doubling in the past 20 years. What’s more, the majority of the growth occurred in the 22-to-34-year-old demo, those coveted “knowledge economy” workers for whom every city is competing.

Pittsburgh, too, has unexpectedly reversed its out-migration of young people. The number of 18-to-24-year-olds was declining there until 2000, but has since climbed by 16 percent. St. Louis attracted more young people than it lost in each of the past three years.

And as a mountain of “Viva Detroit!” news stories have made clear, Motor City is now the official cool-kids destination, adding thousands of young artists, entrepreneurs and urban farmers even as its general population evaporates.

5. 'Get used to it'
Europe's new normal; its here and it's unclear. Daniel Kelemen at Foreign Affairs magazine says Europe will stay mired in problems for years - and that is because current policies do not address Europe's central economic problem: the massive debt accumulated by the periphery countries during last decade's credit boom.

The eurozone's troubles no longer qualify as a crisis, an unstable situation that could either quickly improve or take a dramatic turn for the worse. They are, instead, a new normal - a painful situation, to be sure, but one that will last for years to come.

Citizens, investors, and policymakers should let go of the idea that there is some magic bullet that could quickly kill off Europe's ailments. By the same token, despite the real possibility of Greek exit, the eurozone is not on the brink of collapse. The European Union and its common currency will hold together, but the road to recovery will be long.

6. Rising or falling?
One of the world's easiest smears is to claim the US is in decline. But the problem is the facts. The main 'big picture' element is demogaphy, and it is the one big advantage the US has over nearly every other big nation - it will stay relatively young for the next century or so unlike Europe, Japan, even China or India. Then there is the problem of what you mean by 'decline'. Ezra Klien of the Washington Post has been wondering too.

The claim is maddeningly vague. What does it mean for the US to be in decline? Are we talking about our geopolitical influence relative to other world powers? Our standard of living relative to other nations? Our current standard of living compared with some assumption about its appropriate rate of improvement?

Let’s flip the question: What does it mean for the US to be on the rise? If it’s growing at a perfectly respectable 3.5 percent a year while China is growing at 8.5 percent a year, enabling China’s economy to surpass the US in a decade or so, does that mean the US is in decline?

My hunch is that’s how most Americans define decline. That’s a problem. Consider a different scenario: Let’s say the US is growing at 3 percent annually, and China’s growth slows to 4 percent. In that case, China won’t surpass the US for decades, forestalling American “decline.” Yet that’s a worse outcome for everybody. It means more impoverished Chinese and more impoverished Americans -- who will, incidentally, be competing with those low-wage Chinese workers who still can’t afford to buy American-made goods and services. It means fewer life-improving innovations will be developed in both countries. It may also mean less geopolitical stability as the Chinese people channel their frustrations against their political system, or their political system tries to distract them by channeling their frustrations against competitor nations.

7. 'Inflation expectations are falling; run for cover'
When inflation expectations correlate closely with the price of equities, that points to trouble brewing. Around the world, inflation expectations are falling and that may be signaling the stock-market will decline for some painful time. David Glasner notes the unusual correlation only when deflation exceeds the real rate of interest (as it does now when slightly positive expected inflation exceeds the negative real real rate of interest).

What accounts for the drop in the stock market since April 2? Well, as I have explained previously on this blog and in my paper “The Fisher Effect under Deflationary Expectations,” when expected yield on holding cash is greater or even close to the expected yield on real capital, there is insufficient incentive for business to invest in real capital and for households to purchase consumer durables.

Real interest rates have been consistently negative since early 2008, except in periods of acute financial distress (e.g., October 2008 to March 2009) when real interest rates, reflecting not the yield on capital, but a dearth of liquidity, were abnormally high.

Thus, unless expected inflation is high enough to discourage hoarding, holding money becomes more attractive than investing in real capital. That is why ever since 2008, movements in stock prices have been positively correlated with expected inflation, a correlation neither implied by conventional models of stock-market valuation nor evident in the data under normal conditions.

8. Tourist trap
Greece and Spain are in trouble. But maybe now is a good time to visit. There will be bargains for tourists, right? Wrong. Matthew Yglesias explains:

Prices haven't moved down there because the excahnge rate has hardly moved. Greece and Spain are only a relatively small part of the eurozone. The exchange rate dynamics reflect the overall conditions throughout the currency area, most of which is doing much better than Spain or Greece. Because of Germany’s strength, the euro doesn’t fall across the rest of the continent (just as a recession in Florida doesn’t pull down the dollar in the rest of the United States).

9. 'Let capitalism work its magic'
A columnist at the UK Guardian doubts any level of political tinkering will save Europe and the euro. The voters there have made some seriously flawed choices, and making more of them as part of any solution seems farcical. Larry Elliot says the realistic options for the euro are that it breaks up or staggers on in a zombie-like condition. What would you choose?

The euro, in short, is ripe for what Joseph Schumpeter called creative destruction. Capitalism, according to Schumpeter, was the story of constant, normally gut-wrenching change, in which innovation put established firms out of business and made whole sectors obsolete. Anybody working in the music industry, publishing or newspapers in the past decade understands what Schumpeter was talking about.

Does Schumpeterian theory apply to the eurozone? In a way, it does. The centre of gravity in the global economy has moved from Europe, which looks old-fashioned and lumbering in a world of rapid innovation and loose networks. Tweaking the flawed model in the way François Hollande is suggesting will not do the trick. The only real solution is to rip up the blueprint and start again with the small group of countries that could hack it together. Making the eurozone work is like finding a long-term business model for HMV or Thomas Cook. Like them, monetary union is the past, not the future, an analogue construct in a digital world.

10. The last laugh
Everyone does a bloopers video and we don't want to be left out - so here's our's.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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9. 'Let capitalism work its magic'
I wonder if the question of the euro is really just  a question of large too big to fail banks.
If the euro fails then the first thing people worry about are those large insolvent banks.
Maybe JPMorgan should be a candidate for the Creative Destruction process.
This article talks about JPMorans bad derivitive bet and he starts to question capitalism sacred cow type issues.
Why J.P. Morgan's Jamie Dimon Should Resign
The Fed has engineered a massive wealth transfer from everyday Americans to large banks. They do this by holding interest rates near zero. Savers get nothing for their hard earned savings. However, banks get free money because they pay almost no interest. Banks then invest the money in Treasury notes and earn the difference. The Fed permits this to rebuild the capital of the banks. The Fed doesn't mind hurting everyday Americans if they can prop up bank capital.


Even if you favor Fed policy, it is unconscionable that the bank earnings derived from small savers should be squandered on a leveraged bet that a rookie trader could see was flawed. If the bet had worked out, the whale would probably already be shopping for a Lamborghini to buy with his bonus.


Apart from the risk in the trade, a more fundamental question is why it was allowed in the first place? What purpose was served? No new loans were created. No new jobs were created. Absolutely nothing of value to society was derived from this trade. At best, it was a form of gambling for the whale and his colleagues. Next time they should go to Las Vegas and skip the drama.



And please spare me the Kudlowesque lectures about "free market capitalism." Banks don't operate in the free market because their liabilities are guaranteed by the taxpayers. Banks are public utilities designed to make commercial loans and should have no more freedom to make derivatives bets than the Post Office.


Banking change won't all be good news.
Lower margins, should they eventuate as he predicts will certainly move the industry toward lower service levels.
And whilst I'll agree some fee rorting will be removed his example of 1000% interest caused by a bad credit score isn't so convincing.  For a negative credit score to have no effect on the return a lender charges would imply the abandonment of risk analysis altogether.  And look where that got us last time.

Andrew - everyone should listen to that. I placed an article earlier - to introduce a NZ GOLD DOLLARS - please see below.
I find it unbelievable not one comment so far. Is this country crazy talking about housing/ heat-pumps/ property/ peak oil issues all the time ?
Another great idea for the government to consider.
Stability and choice - "THE NZ GOLD DOLLAR"
Recommended for Bernard and team and other experts: Listen to Dr. Bruno Bandulet – could be an interesting concept for New Zealand.
..and other reasons why:

A ....N.Z. gold coin Walter would still have to be partially tied to our commodities and trading partners despite it's gold face value...look to the historicals on the Krugerrand ...the value reflected in U.S. dollars was not in line with gold bullion prices over the last few ( since as far back as 02) years or so and in fact trades below  gold prices.
Relying on as much foreign investment as we do.....our lenders would want to be on the same page ...or we would soon see the violent fluctuations the rand has endured. 

Christov – it is a NZ Gold Dollars not a coin = money - no commodity. Listen to the concept (again).

Forget about the ever losing NZ dollar – introduce the NZ Gold dollar to pay your daily bills.
Christov - a NZGOLD DOLLAR would stabilise our currency against others and keep the value, this is especially important in an inflationary scenario, the world is currently experiencing. The nation dealing with a Gold$ would certainly calm the currency market and the NZpopulation would have the possibility buying the Gold$ in order to keep the value of the money. It is everyone’s choice.

#1 totally unconvinced - this bloke's article cherry picks the points to suit a political persuasion.
No mention of the massive earthquake risk the infrastructure in question is exposed to.
I guess, after such an event, the non-affected asset rump will remain in private ownership and the rest underwritten by the public - much as the bust part of AMI has drawn down it's first ~NZD 430 million tranche of Tbills to make obligatory payouts while IAG has run away with the on-going profitable premium collection/manage the float business. However, the float is never there when called upon. Frittered away in dividends and outsize salary disbursements. 
Risk! What risk of asset ownership?    
The private sector is also shy when it comes to servicing the energy needs of a tiny population spread over two islands the length of the US eastern seaboard.  

Do note that I am not a fan of the partial asset sales. You could have caught that by following the link and reading the series of posts I've written explaining why I think selling part shares in the power companies is not such a great idea. I just think the BERL report is pretty silly and about the worst way of making the case against partial asset sales. A bad argument in favour of a position to which I'm sympathetic is still a bad argument.
Please revise how you evaluate arguments as your current method doesn't seem to be working.
Dr. Eric Crampton
Economics, University of Canterbury

Dear Dr Crampton
Your criticism of how I evaluate my arguments is noted.
Yet I find very little to apologise about or correct.
I consider the sale of strategic government energy assets unethical and those that enter the fray and call into question the methods of those trying to secure them from the ravages of private enterprise will incur my biased scrutiny whether you approve of my methods or not.  
And I am certainly not about to read all your prior articles despite your kind offer to do so. Time does not permit such an endeavour. 

Mr Crampton,
With respect I think your argument is poor. You cite an example where to borrow at 5% to earn likely dividends of 6% would generally be considered not worth the risk, and I expect most would agree with you on those specific numbers. My understanding though is that BERL quoted numbers of borrowing at 4% to earn 8%, (and has justified why those numbers seem very plausible in the case of the power companies) and that clearly is a materially different equation. Assuming I'm right, surely you would have known the numbers in the report, so I don't understand why you have used different ones.
Based on the numbers in the report, I believe the Greens argument blows the reason for the sale out on first principles, let alone a myriad of other social and economic reasons. Their argument therefore strikes me as very sound. 

Given the GFC and the flattening of power demand for 3? years I think its a little unrealistic to take the dividend for just one year. Especially as it seems the returns are volitile...and the Govn messes with the energy production mix.
I would suggest that really you should be looking at say a 10 year time frame especially as we are looking at 10 year bonds at 3.6%...
Also seems to be at odds with this,
"In its Leading Energy report, PwC finds that across the board in the energy sector returns on equity have fallen from 6.3 per cent in 2009 to 5.2 per cent this financial year.
Genesis Energy's return on equity has fallen to 4 per cent, but listed TrustPower has maintained its return on equity at 8 per cent or more for the past three years."
(Tuesday Nov 8, 2011)
So as they say, lies, damn lies and statistics, but thankyou for putting forward a credible reply to BERL.
Sadly it seems the both sides can be a bit stretchy with the facts and data.

Return on equity isn't the same thing as dividends. Dividends are cash paid out to owners (govt) and available to the owner for other uses. What you're probably wanting to look at is total shareholder return, which is much higher than dividend payouts because it includes changes in share prices. That's higher than dividends for 2 of the 4 companies; Solid Energy posted a reasonable loss on that measure, Meridian posted a total shareholder return slightly below its dividend payout, Mighty River and Genesis both posted ones rather higher than dividends.
Total shareholder return is a reasonable basis for comparing different companies' returns where companies can choose between releasing dividends and reinvesting for share price appreciation or running share buybacks. But where the companies aren't traded, it's not entirely clear what the basis for the valuation really is. The same problem comes in with dividend rates too. 
Think about it this way. Suppose that we value Meridian or Mighty River based on the value of their capital assets and their customer goodwill. We'd wind up finding persistent really high shareholder returns. Why? Because that valuation ignores the big rents that anybody with a hydro dam earns by virtue of having a very low cost production technology with no potential alternative low-cost competition: not only would it be impossible for anybody other than the big guys to get planning permission to put in new dams, it's also impossible for the big guys to put in new dams the better to compete with each other: DoC says no, and nobody has the balls to stand up to DoC or Forest & Bird. So it's illegal to compete with Meridian on low cost power generation. They then have big rents accruing to an intangible asset: that DoC is effectively enforcing a cartel on hydroelectric generation and barring new entry. That cartel rent is real and would be valued by anybody buying up shares in the hydro companies. They'll bid up the price of Meridian until the total expected risk-adjusted shareholder return in Meridian is the same as elsewhere. So it's pretty much irrelevant what the actual current returns to the government are so long as we've a well-functioning IPO market. It all gets priced in.

Its hard to disagree with much of your reply, other than how you then reach the conclusion that selling these assets is a good idea. (Solid Energy as a possible exception, based on your analysis, there being no real world monopoly in coal). Or maybe you don't. Perhaps you are saying Berl should have focussed on profits/ shareholder return rather than dividends, and then their logic more than stacks up. If so, am very happy to agree with that.
I understand that economically there would be a price at which it makes sense to sell just about anything, but for the reasons you outline, that price should be extremely high indeed in the power companies' case, and from the numbers mooted for the sales, the expected prices seem to me very low. I note your caveat on whether we have a well functioning IPO market. 
Our history of selling Telecom, the BNZ, ASB, Petrocorp, the Railways, Air NZ et al, do not give confidence.
And that's without the factor that if the assets are sold offshore, that bids up the $NZ, which in turn puts exporters out of business until we've blown all the money.
And there's the minor issue of paying companies, mostly offshore, $100 million for the privilege of selling our companies back to ourselves. 

I can see a case for full privatization, or at least that case is defensible. But, I worry a lot that partial privatization doesn't do much to help operational efficiency and that, in political second best worlds, could lead to price caps during dry years as public pressure against the power companies would be stronger where the returns accrue privately rather than publicly. And then our power markets get all screwed up.
So I wouldn't push the button for partial privatization - we take on the risks of political second best outcomes without getting the efficiency rewards from full privatization. 
But I get tetchy about bad arguments being used in support of positions I like. And there's a lot of nuttiness in the BERL paper.

What were their profits, as opposed to dividends? As you no doubt know, most companies trade on multiples of their NPAT or EBITDA. Dividends are important, but if the companies are investing for the long term, then most investors would happily accept that. I believe Apple, the world's highest market cap company, recently announced its first dividend in years. BERL's 8% return seems modest for companies with high barriers to entry, and near monopoly elements to their business, selling essential services.

See reply to above. The total returns to shareholders are indeed higher. But the rents accruing to regulatory barriers would be factored into any selling price.

No mention of the massive earthquake risk the infrastructure in question is exposed to.
Correct, and will the investing public be told as they are required to be by law?
The Turitea wind farm is right on the Wellington and Northern Ohariu Faults
#4  Palmy has it's good points but it is built on a flood plain on soils which will liquify in a moderate earthquake 500+ buildings identified as a big risk. 
I have personal experience of strengthening a building in the city, and at great expense I might add. The result was good and we went well beyond what was required, steel beams, massive concrete foundations with pads underneath, but sadly now after Christchurch I'm doubtful that the building would survive a big shake. 
Wednesday, 9 May, 2012 - 12:06

The release today of a list of 109 earthquake-prone buildings by the Palmerston North City Council is required to uphold public safety, says Mayor Jono Naylor.
The list comprises mostly Unreinforced Masonry Buildings in the city centre assessed by a consulting structural engineer. All the buildings are below 33 per cent of what is required for new buildings. The Building Act 2004 defines buildings below 33% of code as earthquake-prone and having greater risk of collapse in a moderate earthquake.


In South Island news Buller Mayor Pat McManus was quoted on Stuff this morning lamenting the loss of the proposed Meridian Energy dam at Mokihinui;

  • $350 million of investment
  • more than 400 jobs
  • cheaper electricity for west coast coal & gold mining and dairy farmers

Instead coasters will continue to pay higher than the average for their electricity and continue to worry what happens when their old transmission lines reach the end of their life.
In unrelated news the Electricity Authority has started a probe into the politically sensitive issue of power pricing.

Yes it was interesting listening to the head of Meridian on morning report this morning on this.  He also talked about one transmission line in, power to the west coast having to be transmitted over 600 km, and lamented the West Coast forever now having to import electricity.
Which is why it is very interesting that Solid Energy announced this on 2 May:
Solid Energy has received resource consents for a hydro-electricity generation scheme using water from its Stockton Mine in Buller. The scheme would produce 195 Gigawatt hours of electricity a year, sufficient to power 24,000 homes and enable the West Coast region to become a net exporter of electricity.
For more visit
Has someone forgotten to tell Pat McManus and the Meridian boss?  Or are they telling us a tall story?

Demographics is really old news:  Mark Steyn jokes about being the 'demography bore in the room' and Spengler (David P Goldman) has a long history of pointing out the obvious:  that Demographics are Destiny.
Glenn Reynolds (Instapundit) sums it up neatly:"  the future belongs to those who show up for it.
And that won't be Russia, Germany, Italy, Greece, Spain or even Iran.....

Best doco Ive seen this year......fasinating..........