A decision that will cost our kids NZ$40 bln

Bernard Hickey says the National Govt's decision to suspend contributions to the NZ Super Fund will have cost about NZ$40 bln in lost investment returns by 2040

26th May 13, 9:09am by Bernard Hickey

Would you be happier with higher Govt debt levels to keep funding the NZ Super Fund during the GFC ?

By Bernard Hickey

I often wonder what my 11 year-old daughter and her friends will think of Prime Minister John Key when they look back on his decisions in 30 years time.

I know they currently see him as the famous guy on the telly who seems friendly and popular. A school visit would be a big success.

They may not be thinking the same happy thoughts come 2040 when they are in their 40s and having to pay the taxes and interest bills that fund the pension and healthcare costs of a 79 year-old Mr Key and his fellow retirees.

The current long term fiscal forecasts are that without changes to the retirement age or pension level my daughter's generation will have to stump up about 16.3% of GDP every year through the tax system and borrowing to pay the health care and pension costs of Mr Key's generation.

That's up from the 11.3% of GDP that current taxpayers shell out for pensions and health.

Without changes, net government debt would blow out to over 100% of GDP by 2040 and my daughter's generation would face some ugly choices about cutting spending and increases taxes.

They would also face much higher interest rates on their mortgages because of that government debt blowout.

This is an entirely avoidable situation and one a previous generation of leaders thought they had dealt with by setting up the New Zealand Superannuation Fund.

It was a selfless measure to consume less now and to save and invest for the future while government debt was low. This effectively transferred wealth on to future generations so they could easily cope with the bulge of public costs likely once the Baby Boomers retired.

The Fund has been a big success by many measures.

It reported this week it earned 19.85% over the last year and grew to NZ$22.6 billion by the end of April, thanks to average returns of 8.7% since its creation in 2003.

Taxpayers contributed a net NZ$12 billion in the years from 2003 to 2009 and the other NZ$10.6 billion was earned from investments, and through the power of compounding interest, which as Einstein said, is the most powerful force in the universe.

However, that's where the good news ends.

Mr Key decided in the depths of the financial crisis to suspend contributions to the Fund, arguing it made no sense for the government to borrow to invest in volatile overseas stock markets.

This seemed a no-brainer, particularly to a generation of older voters who don't trust the stock markets and are heavily exposed to higher interest rates through their own massive mortgages.

Initially the plan was to resume contributions once the government returned to surplus.

But the massive news for my daughter's generation from this month's budget was Mr Key's decision to extend the contributions 'holiday' by two years to 2020/21, arguing the government needed to drag government debt below 20% of GDP before restarting contributions.

That decision not to contribute to the fund for 12 years will cost my daughter's generation dearly. Figures released by the Fund under the Official Information Act show the fund would now be worth NZ$32.7 billion if the government had continued putting money into the fund. That includes NZ$6.9 billion of contributions net of tax and an extra NZ$3.2 billion of investment returns and compounding interest.

The irony is that choosing to borrow to invest would have meant the government's net debt would actually now be lower than it is with the extra borrowing to fund the contributions.

That's because the investment returns of 8.7% are higher than government bond interest rates of 3.3%.

But the story doesn't end there. Estimating the full opportunity cost of the contributions holiday to my daughter's generation by 2040/41 is a tricky thing, but Treasury's own budget forecasts show the fund would be worth NZ$182.3 billion by 2040/41 if contributions resumed next year, rather than the NZ$153.4 billion it would be with the current extra eight years of contributions holiday. This figure doesn't include the effect of the four years of contributions already missed.

This means Mr Key's decision in 2009 to not borrow NZ$23.3 billion over 12 years will have cost my daughter's generation at least NZ$40 billion in lost investment returns by 2040.

He might argue this is dependent on many long term variables, but it does demonstrate Mr Einstein was right about the awesome power of compounding interest and that short term decisions have long term implications.

Mr Key might not be so popular if he returned to my daughter's school in 2040 to say hello to my grandchildren. He may by then be comfortably receiving his pension and free healthcare, but will those kids be receiving free schooling, free healthcare and will their parents be living in their own home?

I suspect those kids and their parents will think of Mr Key in the same way Mr Key's generation now think of Robert Muldoon, who decided selfishly and cynically in December 1975 to dismantle a compulsory superannuation fund created just 9 months earlier.

It's the same short term thinking that will create the same legacy.

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This is an extended version of an article published in the Herald on Sunday.

(Updated with link to Treasury forecasts)

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75 Comments

by Alex13 | 26th May 13, 9:39am 1369517983

Here's a comment in this morning's Herald. Hard to express it better:

" Let me get my head around this.

Because Key didn't borrow heavily to invest in shares on the gamble that the returns would beat the long term interest rate during this extremely volatile period in the world markets, you are going to blame him for what happens in 20 years time.

Who's to say there wouldn't be another colapse in 10 years time which wipes the investment and leaves the borrowed debt. He would be a hero now in your eyes, but what would you write about hime after the colapse in ten years time, would he still have made the right choice?

Would you have had the integrity, guts, and values to look back and tell the country and world that Key made the right choice to borrow heavily and invest, if world financial markets had suffered a second collapse? Returns would have been negative from shares and interest rates on debt significantly higher. My guess is that you would be the coward and criticise him to anyone who would listen.

You cannot with any integrity criticise him for the decisions he has made, unless you are prepared to accept responsibility for all the first home buyers who sat waiting for your predicted collapse in house prices who now cannot afford a home! "

by south paw | 26th May 13, 10:07am 1369519620

"unless you are prepared to accept responsibility for all the first home buyers who sat waiting for your predicted collapse in house prices who now cannot afford a home!"

A prediction is only a prediction. If people make financial decisions based on commentary in the media that is their call.

Who was to know what kamakzi actions the global leaders eventually would perform in order to reinflate the financial system, to "extend and pretend"?

by Johnson-9 | 26th May 13, 12:41pm 1369528889

Of all the garbage that Hickey produces, this takes the cake. Agree entirely with the first comment.

by south paw | 27th May 13, 9:36am 1369604219

Another Smile n Wave fan.

by Bernard Hickey | 27th May 13, 11:39am 1369611581

Alex 13

You say: "Who's to say there wouldn't be another colapse in 10 years time"

This is an argument I hear a lot from Baby Boomers traumatised by the 1987 stock market crash and those who will only ever invest in property because "You can't lose with property maaate"

That ignores all the investment strategy theory which the NZ Super Fund has used successfully over the last decade. That says that over the long run shares/equity in companies and infrastructure return more than bonds and property. If you are young it makes sense to invest in these investments, knowing you have the time to ride out the volatile swings and roundabouts of these market.

It also makes more sense to invest in bonds when you're nearing retirement because they are less volatile and you're less likely to lose a chunk just as you retire.

The problem is the government is now governing as if it is an ageing baby boomer sitting on property debt and doesn't ever trust the stock market. But the government has the balance sheet and the time (and should be) governing for multiple generations. That was the whole point of the NZ Super Fund. It was designed to take advantage of a strong balance sheet and long time horizons.

Instead this government has chosen to put the interests of indebted property owners (mostly in their 40s, 50s and 60s) over the interests of the kids/teens/millenials who aren't in property.

cheers

Bernard

by Alex13 | 27th May 13, 3:57pm 1369627057

Well, you are wrong again. While it is true that stock investments work better long-term (and this is what the Super Fund invests in at present), the point that you miss is that borrowing money to invest in shares is much more risky and not something that the Govt should be doing.

If you truly believe in what you preach, why have you not borrowed to invest in shares yourself? Have you?

by Happy123 | 27th May 13, 12:33pm 1369614817

"accept responsibility for all the first home buyers who sat waiting for your predicted collapse in house prices who now cannot afford a home!"

Great quote. I (thank God) brought my first home at the start of the GFC (2009) amid endless commentary and predictions that there was an impending collapse. If I hadn't made that decision I'd be severely disadvantaged. Fear is the most powerful motivator, and all those people who discourage investment on this site should consider that some people may be scared off investing due to the ill-considered information that they post.

by powerdownkiwi | 26th May 13, 10:26am 1369520811

"This means Mr Key's decision in 2009 to not borrow NZ$23.3 billion over 12 years will have cost my daughter's generation at least NZ$40 billion in lost investment returns by 2040".

Bollocks, Mr Hickey. The fiscal system - growth-based - that you both play your projections on, is no going to be around in 2040. You have been told - clearly and over a long period - why.

She isn't going to want money - she;s going to want what it represents: food, water, temperate climate, access to resources (heck, resources full stop) shelted, a nurturing society (it's the only one which works on the down-slope) and about 5 bilion less fellow0inhabitants on the planet.

And you're worried about how many electronically-represented digits she may or may not hold? Why the disconnect? You're not alone - Laidlaw dropped the same ball twice so far this morning, the second Rhodes Scholar to not see it coming (Elder being the other).

Stop living in fantasy land, Mr Hickey. This is the real world. :)

by Bernard Hickey | 27th May 13, 11:46am 1369611977

PDK

Many thanks. I haven't given up on growth. Humans are a remarkably resourcesful bunch.

The Malthusians of the world have been proved wrong time and again for the last couple of centuries.

I agree we have some fossil fuel shortages, but things are happening to use energy more efficiently.

cheers

Bernard

by powerdownkiwi | 27th May 13, 1:01pm 1369616500

Bernard Hickey - I'll lift that reply, and treasure it.

After all that has been posted here, it's the reply of a fool. Nothing personal, but there's been more than enough info, for you to simply know better.

You been told what has happened over the last two centuries - exponential everything. Yet you treat that as linear, and project it forward. No reference for your assertion that efficiencies can outpace - or even pace - energy decline? Or any other decline, say in resources? Which one has gained in URR?

If you want to be thought of as a serious scribe, you need to do better. You need to cite the efficiency reference, point to the underwrite, point to the underwrite in 2040 (complete with expected % growth), or acknowledge that you are merely expressing a wish. By my reconing, 3% growth would require twice the economic activity currently engaged in. Twice the production, twice the consumption.......are you seriously suggesting that?

I gave the media as a whole,an F. Ever wonder what the fellow reporting a clothed Emperor thought of himself afterwards?

by Don m | 26th May 13, 11:17am 1369523820

Wow Mr Hickey for a "so called financial guru" you have me confused....

have the basics changed recently..???like

...past performance(share market) is no gaurantee of future performance.

borrowing to play the shremarket is a risky game ..not one for the govt to be playing at with other peoples money

..pay down debt first(its usually the safest and best returning investment)

Your leftyideals are showing by the fact that you want your daughter to blame JK for her lack of retirement income..in 2040...instead the best advice you could give her would be to

..get a high tertiary qualification in something useful(no BA or similar bullshit degrees)

..work hard save plenty and live within your means

you have made your assumptions with 20/20 hindsight..not that clever really

by powerdownkiwi | 26th May 13, 11:44am 1369525492

Donm -

"work hard save plenty and live within your means"

That's an oxymoron, one which I learned about in a sciences discipline, and with no need to denigrate others.

That comes later, when you get frustated with their continued inability/unwillingness to learn.

by Ralph | 27th May 13, 11:24am 1369610694

You need a dictionary pdk.

Working hard does not contradict (or exclude) saving.

And living within your means is a choice that neither contradicts (or precludes) saving nor hard work.

by Bernard Hickey | 27th May 13, 11:48am 1369612129

Don M

"borrowing to play the shremarket is a risky game ..not one for the govt to be playing at with other peoples money"

You're wrong there. Our government borrows money all the time to invest in infrastructure, which is just as risky (but just as high returning) as the share market.

There's decades of successful theory around stock market investing that the NZ Super Fund is based on. It has proved its success.

You also say people are better off paying off debt first. That's true if you've already bought your house and are nearing retirement. Not everyone is in that position.

cheers

Bernard

by Stephen L | 26th May 13, 11:40am 1369525251

The National government has been consistent in being short term populists, and having scant regard for building the country's wealth.

I would rank the following higher in priority than the NZ Super fund decision.

A treasury model of funding a government deficit through massive offshore borrowing. This in turn has kept the exchange rate high, and guaranteed a high current account deficit.

Similarly, Reserve Bank settings that have encouraged huge capital inflows, again keeping the exchange rate too high, and guaranteeing a very high current account deficit.

The current account deficit correlates almost exacly with loss of wealth, the wealth that will be required to fund the inevtiable rising costs of an ageing population.

Selling power companies, which will lose the government funds; and to the extent those assets end up offshore, also guarantee current account deficit, high exchange rate, and dissaving as per the measures above.

Tax cuts to the high income earners only. Tax cuts were probably a good idea, but should have started at the bottom (and so enjoyed by everyone, including high income) rather than the top. High income earners tend to spend offshore, low income people spend locally. Other benefits of not needing tax credits and the like would have been additional.

The above would rank worse to me than the NZ Super decision, but are consistent with it.

The Key government will I believe be given a fail for the loss of wealth to the country, both government and NZ Inc, that their policies guaranteed.

by powerdownkiwi | 26th May 13, 11:50am 1369525817

SL -

"The National government has been consistent in being short term populists, and having scant regard for building the country's wealth"

I make the same comment as I did to Bernard. Why is it that so many - having been told what has to be ahead and why; immediately pull their heads in and continue with the cafe latte's, even though they are losing their footing?

From the outside, it's like watching some sort of mass cognitive dissonance. Did you not read my question re his daughter? Ring any bells? Defining 'wealthy' from her perstective in 2040, might be a good start.

by Stephen L | 26th May 13, 1:16pm 1369530984

PDK,

I had read your note; and largely dismissed it at the following point.

Of course she will want what the money represents; but any suggestion that we will not have a money based system, or will have 5 billion less people, in 20-40 years is delusional nonsense. My point is that owning a reasonable share of the capital items that produce those things would be a sensible investment policy. The National party's policys are aimed at owning considerably fewer than we did before they took office.

You increasingly base your arguments on the fact that you have made them many times; as though doing so makes them true.

Afraid not; as sympathetic as I am to the non polluting elements to your environmental push.

by steven | 26th May 13, 3:32pm 1369539160

Interesting as when scientists and academics look at the future lack of energy and environment "will have 5 billion less people, in 20-40 years" isnt "delusional nonsense." its their conclusion.

Yet you with no obvious equal background think its delusional, pt up some evidence/data/analysis to justify your delusioned outlook please..

Thus societies collapse through wanton delusion and vested interest.

regards

by powerdownkiwi | 26th May 13, 3:31pm 1369539097

SL - this graph - and I've put it up many times here - was run with 'double resources'. That's TWO PLANETS. I can't make it any clearer.

http://www.peakoil.org.au/limits.htm

We will never get to 9 billion by 2050, and we won't have 7 billion by then. Yes, we may have more than 2 billon, but that just means her share of the planet is so much smaller - and her chances of 'owning ' it, so much less.

Yes, owning the hydro resources would be good for her - better than money in the bank, and yes, that is being stolen from one section of the community, by another.

But do the math. If you grew our economic activity at 3% (which is what seems to be deemed necessary to continue fiscally) and brought up the rest of the current global population to our standard, you'd beed 60 - that's right, 60 - times the resource-consumption we indulge in now. We can't even maintain this! Yet those existing others are pushing to get where she is, consumption-wise.

Who is delusional, those who aim for that scenario, or?

Yes, we will trade/barter. But by 2040, we're beyong underwriting growth - what will the token be? Not saved digital investment, I suggest.

by iconoclast | 26th May 13, 3:37pm 1369539423

David Attenborough: on the lunacy of endless growth

http://www.smh.com.au/environment/attenborough-endless-growth-lunacy-20130525-2n3pg.html

Is he scheduled to come to new zealand on this tour?

by powerdownkiwi | 26th May 13, 5:08pm 1369544881

Icono - you have a just-as-goodie closer to home:

www.arts.unsw.edu.au/tsw/‎

by Stephen L | 26th May 13, 5:56pm 1369547818

PDK,

Am not sure if you test your hypotheses with any real world checks.

I note the paper you link to supposes the world population to peak at about 2041 (even though it conveniently actually drops any scale off the charts); and that seems very plausible. I would even allow somewhat earlier, and although I would more likely credit modern contraception and urbanisation for slowing and then reducing population, if you want to credit peak energy, that is okay with me. The peak then, though, is mathematically inconsistent with your dire threats of massive depopulation by 2050.

According to this site: https://www.cia.gov/library/publications/the-world-factbook/geos/xx.html

we are currently growing at 11 people per thousand every year. To get to say 4 billion by 2050, we need that to reverse to 14 extra deaths than births per thousand people, starting now. Every extra year of not having such a number increases the deficit required. Isn't going to happen.

By the by, I don't believe we need to grow energy based activity by 3% a year (or even at all) to sustain a fiscal based system. When any particular form of energy becomes scarce, it will be priced accordingly, and societies will find alternative forms, or less energy intensive priorities in valuing things. We seem to be in agreement that owning one of the more certain forms of energy production- hydro energy- will be useful no matter what.

As to the tokens, they will still be money, as there is by far no better alternative.

by powerdownkiwi | 26th May 13, 7:56pm 1369554974

SL - "with any real world checks".

You mean that extrapolation of 11/1000, pa projected?

How can anyone do that, and keep a straight face? Every one of those folk, every on of the current 7 billion, has to eat, if not every day, every few. They also have to have water and - depending on habitat - shelter, but let's just do food.

They do that by using fossil fuels, even as they deplete their soils, monoculturise everything, drain their aquifers, pollute their ponds. Take fossil fuels away, and half the planet is dead within the month;yett someone, without reference to the underwrite, can extrapolate a number that far out on no basis whatever, and call it real?

by Stephen L | 26th May 13, 10:41pm 1369564918

PDK,

The figure, if you read my note, is the CIA's best guess for world population growth this year. It is not an extrapolation beyond that. My point was that to achieve a materially lower population by 2040, a lot of people will need to start dying off very quickly; and or fertility rates will need to drop to below say 1 acoss the planet from now. I suppose there may be some famine or war type crisis to wipe 3 billion people off the planet, but it's not looking likely. If you added up every war and catastrophe that has ever happened on earth, you wouldn't get to a tenth of that number, so it would have to be a doozy.

The UN's low projection for 2050 is 7.4 billion; with a peak roughly around 2040, the same as your paper.

http://www.un.org/esa/population/publications/longrange2/WorldPop2300final.pdf

They may be high, though I doubt it; but for argument's sake, say 6.4 billion. It's a lot more than your 2 billion mentioned in your first posting. PDK, your underlying story of peak fossil fuels and pollution is a good and interesting one, but if you actually want people to take you seriously, you have to show how your hypotheses fit with the facts. If the facts don't fit, then you have to question the hypothesis to some extent at least.

And a few plausible solutions also would be helpful.

The suggestion that money will disappear and we will all go back to bartering is clearly nonsense; but if you don't agree, explain in a little more detail who is going to barter for what in the future, and how they are going to measure this trade. When you get to any first principles, you will see that money is around for a while yet.

by steven | 26th May 13, 10:02pm 1369562571

Do you not understand that you cannot have infinite growth on a finite planet? Do you not understand that in effect we eat fossil fuels? Can you not understand that oil is a finite resource and its output has peaked? How then can our population also not peak?

regards

by Stephen L | 26th May 13, 10:46pm 1369565178

steven,

See my reply to PDK,

The world population will almost certainly peak. I don't anticipate the fall off to be as dramatic as PDK suggested in his posting. The world economy will still function, although I accept there will be some real stress points. Am not sure they are all to do with fossil fuel shortages right now, but that is an aside.

by steven | 27th May 13, 7:33am 1369596797

Do the research.

regards

by scarfie | 26th May 13, 10:50pm 1369565413

Stephen I am disappointed in your comments, you are usually better than that.

Your stats on the growth rate are meaningless, it is the trend that counts. As I have pointed out many times here, while growth is still positive the rate of growth has been negative for more than 50 years. First time ever in human history, pretty significant I would say and with the Seneca Effect the rapid drop off is not only plausible but can be seen in nature.

It clearly wasn't peak energy that was the problem at the inflection point in 1961, but peak EROI fits very well.

by Julz | 27th May 13, 5:16pm 1369631769

PDK,

As oil starts to run out prices go up, more investment goes into efficiency, alternatives get much needed investment, people make different choices to use less and the world goes on.

The loss of productivity from expensive oil generates vast numbers of new jobs and new industries. No longer can labor simply be replaced by pumping oil out of the ground, developing countries will experience an economic boom as the value of manual labor is recognized once more. Developed countries enjoy the benefits of all the skilled labor saving jobs and technologies that will now be needed to replace combustion engines. The environment gets a huge boost, what’s to fear and what’s not to love about this less oil dependent future we are heading towards?

by powerdownkiwi | 27th May 13, 5:35pm 1369632950

Agree/disagree.

Yes, more investment (let's call it 'effort?) will go into efficiency. That's my thing, but as I wrote in the 'Trouble with Electricity' piece here a while back, efficiencies are a cherry-pick, and never mitigate the real depletion, eventually losing completely. Using less will happen - not by choice - and the world will go slower.

New jobs, yes. As labour put's it's shoulder back to the FF wheel, there will be 'jobs' for everyone. New industries? I guess, different would be my take. CC-wise, it would be a better outcome, ecxept we can't wait until the second half is burnt.

The problem is that we can't support our 7 billion, ex-FF, and North Korea shows us what happens ex-FF (no, it's not because it's 'communist', it's a curtain-raiser demonstration of what happens to farming, mining, heating, health, in a powerdown situation).

To get there from here, you have to do a Cuba (again, forget the 'communism', it's a case of the USSR support crashing, and a powerdown situation. Neither will look pretty to the middle-class-business-as-usual brigade.

by Julz | 28th May 13, 2:22pm 1369707731

Good points but of course neither North Korea or Cuba had the financial resources, the technology or the time to respond in the same way we will. The developed nations transition away from oil will be vastly less painfull.

I would also argue the ever growing number of unemployed and new technologies will be sufficient to fill the farming productivity hole left when oil based farming is no longer enconomic. Supporting 7 billion people will still be possible, it will just look different, yes there will be fewer oil based machines but more labour and new technologies will replace them.

by Stephen Hulme | 26th May 13, 12:55pm 1369529734

The Fund has been a big success by many measures.

It reported this week it earned 19.85% over the last year and grew to NZ$22.6 billion by the end of April, thanks to average returns of 8.7% since its creation in 2003.

I do not know who to blame the most, the reporter or the subject.

The NZ Superannuation Fund has recently decided to declare performance by reporting returns on a time weighted basis.

Each time money is deposited (contributions) or withdrawn that money is factored out of future returns.

IRR takes cash in to account which drags on performance, where time weighted ignores the cash and only pays attention to the 'real' performance of the investments.

IRR shows you what your getting out of your investment dollars whereas time-weighted returns show you how your investments are performing.

A significant government cash contribution to the fund will show a less impressive IRR at the end of the year, but Time Weighted returns still show how well the invested portions performed.

I could care less how the chosen investment managers' performance compares with their cohort - just show me the money - the actual return, not a derivative.

by Vera Fayed | 26th May 13, 4:07pm 1369541220

Yet another absurdity in a long line of Hickey Howlers. Still, nothing could beat his Herald piece about 4 years ago. He took non-sequiturs to dazzling new heights when his headline screamed "Why Copper Has Been a Better Investment Than Property."

Sort of like saying "Why Pork Is A More Nutritious Fruit Than The Sydney Harbour Bridge!"

Our resident expert financial commentator. Yeah, right!

by Grant A | 26th May 13, 5:13pm 1369545227

What's is it with left wingers and borrowing, haven't they learn anything from what's been happening in the US and Europe - they have only just started to pay the consequences of that, and will do so for decades - pity the young people there well before you pity them here. Yes let's borrow ourselves to get riches, great policy.

The truth is that the Govt will not always be able to borrow at 3%, and Adrian Orr will be the first to admit that the super fund won't always earn above it. To suggest that borrowing to invest in a super fund is ludicrous, especially coming from a financial commentator who is meant to be better informed. I guess Bernard, you're not one of those, you're just a mere journalist that will write anything for readership, superficial as it is.

by steven | 26th May 13, 9:36pm 1369560985

austrian til your last breadth eh. Of course whats happening around the world is the result of 30 years of right wing policy. The so called "free market" and the mess it has created is absolutely nothing to do with the left, yet it will be the poor who will pay, yet havent enjoyed any of that 30 years of gains. Interms of spending it has been inadequate, austrian in thrust and body and its failed and obviously badly.....so what we see in the EU is recession and that will probably slide into a depression and that has all the marings of a 20 year maybe even 30 year event. maybe you missed my post on the rioting in sweden from idle and jobless youth? I think thats going to become a lot more frequent.

Yes right now the Govn can borrow at 3.2% (or so) for 10 years that doesnt mean we should be going crazy and doing substantial spending....which funnily enough I dont see being suggested by any party. What this govn seems to intend to do is commit us to the failed PPP model when simply 10 year bonds at 3.2% would be half or even less the cost, that frankly is retarded.

regards

by Bernard Hickey | 27th May 13, 11:53am 1369612394

Grant A

Simple question.

Have you ever borrowed money to invest in an asset that will return more than the cost of the borrowing?

If you answer yes to that question then you have to say why it is wrong for the government to do it on behalf of the young?

The government is very keen to encourage the young to borrow to buy houses. What's wrong with the government borrowing cheaply (as it can now) to invest in infrastructure and other assets that return more than the cost of the borrowing.

That is the entire strategy being used by the world's central banks right now.

cheers

Bernard

by Grant A | 27th May 13, 2:35pm 1369622142

Well Bernard as a matter of fact I'm doing so next month, but its a case of both sides being locked in and able to repay if from other investments at any point - thaqty said, the asset has an almost guaranteed income stream greater than my interest costs that I have locked in for the full term - yes, why dont I do more, because thats as much as I can get of it.

But I do think super funds, with no guarantee and a very short track record, are entirely another beast. There will be periods where we're going to be funding it negatively because of either higher bond yields, poor markets (and both can will come together as a double whammy when the bond bubble eventually burst - maybe that a huge subject for a future article from you I'd welcome), or a poor performance by the super fund. Give me complusory super and an extension to the retirement age any day in comparison.

by robby217 | 26th May 13, 10:32pm 1369564358

Only pdk and steven can hijack a discussion on superannuation and turn it into a discussion of peak energy

by Stephen L | 26th May 13, 10:47pm 1369565275

robby,

Am inclined to agree, and apologies for indulging the tangent. It was a slow Sunday.

by powerdownkiwi | 27th May 13, 4:48pm 1369630126

StevenL- just what I meant - you go so far, then recoil to the famimiar latte discusion. Just like recoiling into the stateroom, because the sea looks cold.

If there isn't the energy-supply to support the future scrip, then the future scrip is not worth anything.

Which means any discussion only looking at the scrip, 30 years out, is pointless. Indeed, if the underwrite is known but the discussion ignores it, then it is worse than pointless, it is lying.

Whether lying to self, or purposely to others, comes to the same thing, discussion-wise.

by Vera Fayed | 28th May 13, 7:17am 1369682237

7 billion raindrops

Form from the cloud

The PDK one feels special

(and proud)

I am the one

I can see

that.....

splash.

by steven | 27th May 13, 7:24am 1369596276

When you get right down to the basics energy underwrites the pensions. If there isnt the energy there wont be the pensions. What will remain is the debt, so my present "pension" is pay down my debt ie mortgage. Because after the the pensions are wiped out the debt will still remain. So while I agree on the theory of the fund to carry the BB bulge through their retirement and that the BBs should be paying now for it, I dont agree that we should be borrowing to put money in. Though if someone can show its a Net benefit even in this situation I'd change my position.

One other thing, I took a pension out at 17, so I started planning such as it was 30 years ago, that pensions lost 22% in 2008, it will never recover, given this GFC is a long way from over I fully expect it to lose a lot more, even the capital I put in. I have some company pensions as well, I dont know that they will survive either.......so its money Ive probably lost. If I'd known then what I know now, I'd have done things differently....ie for the last 15 years I just bought my own shares....I sold them years ago I had control, I liked that....

regards

by Roelof | 27th May 13, 5:50pm 1369633835

When you get right down to the basics energy underwrites the pensions.

Why not take it to the nth degree.... the sun underwrites pensions... If the sun don't shine..there will be no pensions.. :)

by moa man | 27th May 13, 8:18am 1369599498

I agree with you as well robby217. There is a time and place go on and on about all this peak stuff, and every thread these days seems to degrade to energy or peak something, i think PDK and steven should give it rest.

by steven | 27th May 13, 9:20am 1369603201

If ppl stop make pronouncments and offering opinions based on la la land beliefs, yeah sure....Otherwise all you are doing is building on quicksand.

regards

by moa man | 27th May 13, 3:26pm 1369625183

I don't do building steven, I mow lawns. Take a hint.

by steven | 27th May 13, 3:42pm 1369626128

So if you dont like what PDK and I say its simple, dont read it.

regards

by Happy123 | 27th May 13, 12:36pm 1369614967

Thanks Robby, we were all thinking it.

If I had a dollar for every time I saw the "Limits to Growth" link.

by steven | 28th May 13, 8:55am 1369688140

Math not too good eh? and no not all, so just speak for yourself, thanks.

If indeed there is no more growth and thats a certainty at some point, then surely that has major implications for your investments? I would say so.

regards

by powerdownkiwi | 28th May 13, 11:17am 1369696637

Happy123 - if I had a dollar for every reasoned, referenced rebuttal presented here............................. I'd be dead broke. :)

Bernards piece was about the relative merits of two deckchairs, on the crossing after the crossing after next. Given the sinking, this crossing, it was about as relevant as .......

Well, it was just another media failure, in my book, and had to be shown up as that. Sure, folk don't/won't want to know, and sure, those folk will be in the majority to start with. Logic says it can't be any other way.

Doesn't make 'em right, and doesn't make the piece any more than projected nonsense.

by Millie Pickle | 27th May 13, 8:22am 1369599759

"What is it with the left and borrowing?" It is a popular myth that only the left borrows. Are you calling Key's National government leftist? Truth is, in a time of credit expansion which we are at the tail end of now, everyone is borrowing and politics has nothing to do with it.

by steven | 27th May 13, 9:13am 1369602834

If you look at US Presidents since Reagan you see that the Republican Presidents actually borrowed significantly more and were far more profligate with their spending and ran up far bigger deficits than Democrats. Oh and lets not forget Muldoon (though his think big legacy on hydro may yet prove good for NZ).

http://www.marketwatch.com/story/obama-spending-binge-never-happened-20…

regards

by Vera Fayed | 27th May 13, 8:40am 1369600856

Bernard has a uncanny ability to predict the past. He demonstrates however, some difficulty with understanding the present and probably thinks forecasting pertains only to weather.

Nothing like 20/20 hindsight.

by OMG_WTF | 27th May 13, 9:06am 1369602392

Back to the original topic:

The grandchildren will not connect the dots between their financial condition and PM Key et al any more than present NZers make the same connection to the popular smiling assassin.

by Uninterested | 27th May 13, 9:17am 1369603072

Like a lot of commentators to the media, I think Mr Hickey has been captured by the funds management industry.
Thankfully, Mr Key is steadfastly ignoring them.

by Bernard Hickey | 27th May 13, 11:54am 1369612486

Sigh

NZ Super Fund is not run by the Funds Management Industry. It's 'profits' are recycled to the public.

Mr Key has been very keen to hand over public wealth to the funds management industry through the SOE floats.

cheers

Bernard

by kiwimm | 27th May 13, 10:06am 1369605998

$40b is chump change compared to the extra costs added by letting house prices inflate. This is costing NZ now and will do so for upto 30 years after the situation is resolved ( or more likely resolves itself horribly)

by waymad | 27th May 13, 10:32am 1369607572

Ah, Growth.

The simplistic use of the word by all and sundry is itself the issue. There are at least three kinds of growth: all totally different, and some only loosely connected to 'energy' or 'peak <insert your Fear-du-Jour here>'.

1 - the conversion of a formerly subsistence or black economy, into the white economy. The current working example is China, where arguably much of their spectacular 'growth' has been nothing more than the monetisation of what they'd been doing, uncounted, for millenia.

2 - conventional 'economic growth' where a fully monetised, largely white economy grows. This sort of growth is what the Peakers of all stripes tend to fixate upon. Note however that even here, there are substantial black-economy aspects (try Northland or East Cape) where much activity but little counting occurs.

3 - growth via technical and efficiency changes - the InterWebs being the example we are still living through. It's a substitution of intelligence for effort, with the aim of minimising the latter, and the course is very far from being run, as the Maker crew, 3D printing and disintermediation are showing.

So unless common taters tease apart these fundamentally different Growths, state their assumptions and argue in a much more nuanced fashion, their discourse is gonna be a bit like the tattered thread to my immediate North.....

by Roelof | 27th May 13, 11:38am 1369611499

Waymad ... I'll add my 2 cents worth..

True productivity growth has 0nly averaged about 2 % per annum over the last 100 yrs..

The irony is that productivity gains .... that really do improve everyones standard of living...are actually a deflationary force.. ie. they lead to cheaper prices.

What we normally percieve as growth ..ie GDP growth ... is actually a bit of an illusion..

What makes it an illusion is the fact most of what we call growth is actually a function of increasing money supply growth...

If you double the money supply.... just the fact that the $ is the unit of measure in determining GDP... gives us growth in GDP.... ( increase the money supply by 10% and GDP will surely growth by 3-4%..... just like magic ) .. ( gdp deflators that they use to determine "real growth" are always much lower than the growth in money supply )

Just look at the money supply growth in China.... Since they became an export Nation ...their money supply has expanded massively.

Excessive Credit growth/money supply growth leads to malinvestment and overproduction/ consumption....

It really is ironic that NZ is going thru a "growth phase " again.... but it is simply more of the same old "claytons " growth.. ie.. based largely on credit growth which expands the money supply and allows us to consume more.

This kind of growth has absolutley nothing to do with ... improving standard of living.... quality of life... or sustainable living... it is the antithesis of all that .

by Bernard Hickey | 27th May 13, 11:24am 1369610689

FYI from a reader via email:

One of the things that many people forget is that there Is a difference between funding and cost. Funding changes the source of the quantum but not the quantum required. If the government wants to make NZ Super and healthcare for the elderly more affordable they need to reduce the cost, by cutting the benefits or growing the economy. Putting more money into the Cullen fund, that you argued for, doesn't make it more affordable unless the investments lead to increased productivity or economic growth. Even then economic growth only benefits if the entitlements are not linked to the growth and both super and healthcare is highly correlated to wages.

What you children should be complaining about is that Key will not have a discussion on the age of entitlement of NZ Super or the standard of healthcare that should be community funded. It is this lack of openness and the lack of challenging in the media that is the problem, assuming that in 40 years the workers of the day are not prepared to have 16% of GDP allocated to the retirees.

Borrowing money to put into the Cullen fund now does very little for the country other than benefit the financial services sector. If you could solve problems by debt the US, UK, Europe and Japan would be well on the way to prosperity and would have no poverty.

by Bernard Hickey | 27th May 13, 11:25am 1369610736

Most of that Cullen fund is invested in higher returning assets overseas. Won't those returns built over time help NZ fund the increased costs? I agree though, as well, that we need to reduce the costs.

I agree Key needs to be challenged on the retirement age, but he has been and regularly. He just ignores it and is enabled to by the generation that control the votes and the media.

I don't agree that investing in the Cullen fund benefits the financial sector. The Cullen fund is publicly owned and doesn't generate profits for the banks or others. Saying borrowing never made anyone richer is strange. Households in New Zealand have borrowed heavily over the last 20 years and it has made them vastly richer. You could argue about the sustainabiity about that, but I'm more aware than most about predicting falls in house prices... ;)

by Ralph | 27th May 13, 11:45am 1369611939

There are many such arguments from economists to spend our way out of various problems. Because governments did not "save" during the good times (the first part of of the keynesian solution that is usually over looked) there is no money to "spend" our way out of the bad times.

Therefore all these "spend" solutions imply the borrow hook which, of course, is not risk free.

Maybe the investment returns will hold up, maybe the quality of assets will stay high and not erode the balance sheet. But I for one am not surprised neither our government nor the Bundesbank chose that route in the currently volatile environment.

by Bernard Hickey | 27th May 13, 11:55am 1369612557

Ralph

Ah yes. The Austrian strategy.

How's that working out for Europe?

cheers

Bernard

by Ralph | 27th May 13, 12:50pm 1369615837

Hm. The implication perhaps that austerity is a policy choice and not a consequence.

by steven | 28th May 13, 8:51am 1369687900

It is a policy choice, actively undertaken from a politcal viewpoint based on wonkie "economics" and here we see it as an abject failure.

regards

by powerdownkiwi | 28th May 13, 11:09am 1369696173

Bernard Hickey@11.55 - it's working out like this:

http://2.bp.blogspot.com/-nXAjAU7PIM0/UZuaL5gVySI/AAAAAAAAE8k/U7PXA_SRmqY/s1600/Screen+Shot+2013-05-21+at+12.00.33+PM.png

And even with that reduction in REAL activity, their politicians are complaining of oil-prices. Have you the faintest idea what would happen to energy-demand if they attempted to reverse that graph?

Sigh.

by steven | 27th May 13, 12:03pm 1369612993

Im not aware the keynes or the keynesian school specifically said we need to save in the good times for the bad, however I do think that would be the best way. The model I see is how to specifically get out of the zero bound trap, where the money comes from isnt material. Of course the last 30 years have not been a keynesian model, not in the slighest.

There is money to spend our way out, its known as borrowing, now even Paul Krugman says that after that fact ie once out of the zero bound trap we need to repay it. The problem is the pollies eg Clinton pretty much paid all the debt off and handed over the reigns to a right wing president who promptly cut taxes and stole out of the super fund...and produced an at best mediocre economy as a result...

So just who has the broken economic model?

regards

by Waripori | 27th May 13, 12:03pm 1369612982

Bernard is half right which is better than usual. I reckon Michael Cullen set up his fund so he could put some of his surpluses out of reach of his loony mates in cabinet. He knew they were unsustainable and were the result of a housing boom that left us with record high interest rates and currency. I am sure he would not have advocated adding to an already ballooning deficit by borrowing to invest in his fund and he would not have suggested slashing govt expenditure in the face of a recession to save for the future. That would be a definition of Austerity. So.... wrong about this.

But he is right about Key refusing to consider the age of entitlement to super. This little country cant have a generous scheme available earlier than anywhere else in the world. We will have every one in Australia over 65 shifting here. However, if you look at the polls and consider Winstons constituency you can guarantee nothing will be done about this for the next 18 months.

by Happy123 | 27th May 13, 12:14pm 1369613657

I agree with Bernard on this one; if the return from the investments is greater than the interest portion of the extra borrowing (and other costs) then it is a net gain for the fund and the country. It does of course assume that the person managing the fund can smooth out the ups and downs.

It seems more a political decision so the govn can keep it's promise to return to surplus.

by Julz | 27th May 13, 4:06pm 1369627602

What many here are missing is that you don't need "growth" for equity, forestry, farmland and the other assets held in the NZ Super Fund to provide returns greater than the governments very low cost of borrowing.

If you believe we are heading into a period of depleted and scarce natural resources the Fund will clearly outperform the cost of borrowing
If you believe we are heading into a period of inflation then locking in borrowing at 3% and earning a return on real assets is a no brainer
If you believe there will be more QE and financial repression then investing in real assets also makes huge sense

So for all the skeptics out there what is the scenario that leads them to think borrowing at 3% and investing in real assets with a high expected return is a bad idea?

A move to Global austerity after observing Europe?? Deflation that is left unchecked now that even Japan has embarked on massive QE?? A market crash where the central banks sit back and do nothing??

by Roelof | 27th May 13, 10:54pm 1369652085

Julz....

I'm a bit of a skeptic....

Yeah... it sounds wonderful to borrow at 3% and invest with high expected returns.... You make it sound like a walk in the park.

But the real world of investment is unforgiving... Everyone seems to assume that the growth of the fund is plain sailing.... Are our Managers better than the competition..??

The fund has surfed the wave of global rising asset prices.... and doesn't hindsight make us all experts... but I have learnt that extrapolation is not a great way to forecast the future.

Most of my friends use surplus income when they invest in the financial mkts.. If they were running deficits..the last thing they would do is borrow to invest...... AND.. I would suggest that whoever is running the super fund would be as clueless about the future as you and I.

I don't understand the logic of having a soveriegn wealth fund with investments scattered all over the world... when we are a country with a chronic current acct deficit.. ie. we are a debtor Nation.

I think Bernards headline is in the realm of fantasy...

by Julz | 28th May 13, 10:17am 1369693047

A couple of points to add though...

There us one very big difference between your friends and the NZ government, what rate do you think your friends could take a 10yr unsecured loan out at? It probably wouldn't be possible and even if it was I would suggest it would be multiples higher than the 3.4% the government is able to lock it in for. What mightn't make sense when you only have access to relatively expensive short term funding can look very different when you have access to long term funding at very low rates.

Regarding "surfing the wave of rising asset prices" the fund has not had any contributions since the Global Financial Crisis. Most asset prices are only now marginally higher than they were pre crisis, you can't write off the solid performance by pointing to rally while ignoring the huge crash that immediately preceded it.

The fund also has some significant advantages over the competition and other managers. Being a sovereign wealth fund they have the size, the funding stability, the open doors, the name, the credit rating and a low cost of borrowing that is simply not available to others.

by steven | 28th May 13, 9:06am 1369688783

Im not so sure on the first point as the natural resources are only worth what ppl can pay. As an example oil in July 2008 was $147USD a barrel, 6months? later it was $35, demand collapsed from ppl being unable to pay.

Within that $147USD Saudi was apparantly selling Pakistan oil discounted at $107 and even then Pakistan was almsot bankrupt and likely to be unable to buy fuel and food within a very short time frame. Or that mills in africa run by diesel couldnt run as the ppl couldnt afford to cost of the grinding charge due to the fuel cost....they went back to doing it by hand.

So the asset and its return are only what ppl can afford to pay for. That maybe inadequate for the cost of buying and providing that commodity. For me I look at the price of such commodities and I strongly suspect they are greatly over-valued, hence there will be some severe losses for those left holding them.....

Yes we are heading for deflation, that means in turn ppls ability to pay the asking price is greatly impared. Owning any assets in such a scenario is asking for huge losses IMHO.

regards

by Julz | 28th May 13, 10:55am 1369695337

I think central banks have made there intentions very clear though and that is that deflation will not be tollerated. I believe money will continue to be printed and handed out in ever more creative ways untill deflation is beaten. Japan is the impossible to ignore example of what deflation can do and there is near universal agreement on the current aggressive course of central bank action to resolve it.

by steven | 28th May 13, 11:18am 1369696733

Julz, the captain of the Titanic wouldnt tolerate it sinking, he went down with it. Many first class ppl refused to get off and many in stowage were not allowed to....

There has not really been any agressive stimulus and spending, and thats just it, the money handed out has been debt, meanwhile the Govns practice austerity, matching private austerity.

When 70% of your economy is consumerism and when you knee cap those spenders after loading them up with debt throwing "huge sums" into their banks makes no difference. The EU is in recession and I dont myself see depression and deflation now being avoided....looks like we both get to watch over the next year or so....maybe 5....

PS and Japan got out of it? no it didnt...

regards