How to avoid a recession in New Zealand

In my opinion New Zealand is heading for recession. We need the government to realign peoples mindsets so that they can position themselves to cope with it. This is a general theory at the moment and will likely be revised.

It’s too late to play with the house price boom. I found out the other day that in 1974 after the last major house price crash, that the then Labour government introduced the rental property tax that they want to introduce now. The horse has bolted.

In light of this legislative retardation and cliche usage I have another. It’s time to bite the bullet.

Simply put:
Increase GST to either 17.5% or 20% but introduce exemptions to petrol, diesel and most foods.
Remove income tax on savings accounts at banks.
Give tax cuts, preferably to a flat tax rate.

The whole idea is to decrease consumer spending. 20% GST is effectively forced price rises across board whilst keeping food affordable or even cheaper (helps poorer families). Cheaper petrol helps people get to work.
Tax cuts allow people to spend money on their mortgages and paying off their credit card debt.

Ideally we’d be able to encourage people to pay off debt first (like credit cards) and paying off their mortgage. I’m not sure what mechanisms would be available for this but I’ll continue to investigate this.

Unfortunately the above will never happen as it would likely be election suicide for Labour (poor people hate tax cuts for rich people and increasing GST is government stealing) so we’ll have to wait for the recession and National to have a majority to crash through some reforms just like Labours Roger Douglas did in the early 80′s. Too little too late though to round off the cliche usage.

 

Don’t punish failure

I was reading this article on making Habbo Hotel a success and when I got to the following section, something struck a chord.

1. Create something to play with. “Lego are a good example of what you should be building.”
2. Intuitive interaction. “You need to kill the UI. If the users notice there’s a UI it’s probably too complicated.”
3. Set up a mood for play. “This is maybe the hardest part to explain. In the real world, as I mentioned earlier, it’s increasingly hard to play. Just celebrate the fact that people do stuff and don’t punish for failures.”
4. Support user-created goals. “Players know the best.”
5. Shared social setting. “Even when people create the content, let people walk into the room and [use] the stuff. If you want to play, you need to figure out how to play.”
The bonus sixth point, according to Haro, is safety. “The users need to feel as comfortable as possible.” Habbo bans players for passing personal info. “If you construct the game so that people can screw up what other people do, people won’t bother… it’s too difficult to maintain.”

Gaming in general is what people do for fun, if I needed to state that. As such a lot of effort has gone into researching how and why people have fun with relationship to computer gaming where a lot of money can be made. But what really struck me about the list above is how close to the financial markets this seems to be and almost life in general in a prosperous western nation. If I was to make a list for NZ it would be

1. Play with houses
2. Live in your house
3. House goes up in value, get rich
4. Tell your friends to buy a house and get rich
5. Your friends tell you house prices go up
6. (bonus) The media tells you house prices go up

I especially like the bit about don’t punish people for failures. All around we see the lack of punishment for failures. From the NCEA allowing txt language to be used in exams, parents no longer being legally allowed to physically punish their children, chronic fine defaulters having fines removed to prisoners having sentences reduced it’s all getting pretty ridiculous. Now we have the Federal Reserve Bank of the USA dropping interest rates once again to bail out the country and the British Government making tax payers bail themselves out buy lending money they’ve borrowed from themselves to themselves. Never punish for failures.

I expect something along the same lines will happen in NZ when the mess arrives. I haven’t worked out entirely what it will be yet. The rental tax package being bandied about doesn’t seem to not punish for failures enough. It scares me to suggest it but I can imagine Helen Clark diving into Michael Cullens war chest to shore up the poorest people’s house prices first (poor house owners will be the first to default in a recession). It’ll be a reverse tax most likely along the same lines as working for families.

Meanwhile the US is trying to work out if they can drop the reserve rate below that of inflation without screwing the economy. Oddly this is what most economists are predicting. It didn’t work for Japan so I’m not entirely sure how it’s going to work for the US of A. I feel the game is up, it’s paradigm shift time and as much as we don’t want to hurt anyones feelings, someone is going to get punished for getting it wrong.

 

Guessing on how the NZ economy will fall

New Zealand is in a very tricky place economically. We’re used to prosperity and free money. House price valuation increases has made a lot of people forget how hard the world can really be. Not many people would think about scrimping and saving to make ends meet, as a country, we generally think we’re past that.

However it’s turning out that alot of this wealth that was “created” wasn’t real at all and that this little utopia we’ve deluded ourselves into might be all about to fall. Run chicken little. Alreading other major economies are “correcting” the asset bubble with massive write downs my big companies in the billions of dollars. I believe it is almost at $100 billion in asset write downs already with more to come in the US 4th quarter reports due soon.

The time for NZ to do the same is very near. Fortunately Michael Cullen has been smart and put lots of money away for this rainy day, kudos to him, it’s one of the smartest things done by the Labour Government and I bet it didn’t have anything to do with Helen Clark. I’m not debating when the fall is going to happen as I’m strongly of the mind that it is going to happen regardless. I haven’t taken much time to work out how hard as that is beyond my abilities, I’m suggesting house prices by 15%-20%. My main focus has been on what will trigger the fall.

My latest idea is that that stabilising inflation figures due to curtailing consumer spending will enable the Reserve Bank to cut interest rates. They may have to do this to even prop up the economy if the global slow down turns up before we stop spending our imaginary money. When this happens, the billions of Uradashi bonds and other huge carry trades stacked against the NZ dollar will cause the NZ dollar to crash spectacularly. It did this and bounced back up last year around september or october. As the dollar crashes, the ability of banks in NZ to pay off the money they’ve borrowed to lend out to NZ home owners will drop and the repayments could effectively double. This will drive up the cost mortgages and thus increase the interest rates being charged to home owners by commercial banks. For the first time in a long time we will have a diverging curve of central bank interest rates versus commercial bank interest rates. The problem will be that the further the central bank tries to cut interest rates to stimulate growth, the worse the repayment situation will become for commercial banks and the higher interest rates will become.

The irony here is that this is the opposite of what putting the interest rates did. Putting the rates up was supposed to slow the economy down but instead drove the growth by encouraging the dollar higher. Now when the reserve bank wants to speed the economy up, it will further cause it to slow down. The exact opposite of the intended effect of the Reserve Bank Act.

Of course this is all just speculation but I’d be very interested in opinions to the contrary or in favour of this outcome. It could all get very messy.

 

The price now

I was reading this article describing the massive fall of house prices in the US and the investers cashing in and there is a fabulous quote near that bottom

I could say I bought for 50 cents on the dollar of last year’s price, because I did, but I think that’s a little bit of hyperbole because last year’s price was last year

People always talk about the value of things like it’s money in the bank and this is the fundemental failure in the ridiculous “house price investing” that I’ve noticed in NZ and England. People buy a house for X dollars. That is a real value, that’s how much you paid. In a year, if someone tells you that your house is worth 2X, that’s nice to know but meaningless. It only has any use if you sell your house for 2X. People always talk about cents in the dollar in terms of investment costs comparatively. You can only compare the price if you sell something though.

Unfortunately banks don’t work like that and will lend you more money against your mortgage if the increase in valuation of your house has increased your equity. So that 2X means something to the bank and as a result people feel richer because they pull money out and spend it, usually on consumer goods which devalues quickly. This is okay, as house prices usually go up. However in big bubbles like we’ve witnessed around the world happening, if the bank lends you on 2X and suddenly your house goes back down to 1.5X, you’re in big trouble. If you had to sell, you’d be selling at a gain of 50 cents to the dollar but at a loss to the imaginary (valuation) price. That’ll be 75 cents in the dollar of what the bank lent to you on. Ouch.

So the rule is simple, when you sell you are always selling at one dollar to the dollar. Valuations are indicative only and there has never been a stock or asset that hasn’t dropped in price at some point, that is a economic impossibility. Make hay while the sun shines and if you have any cash lying around or can generate some cash at the moment do so, you will pick up some bargains in the next year to two years.

 

Theory on the end game of unregulated capitalism

Was reading a blog the other day about alternate forms of government and of course communism came up. One commentor mentioned that Cuba, whilst being a communist state, is more a “private group owning everything”. I found this statement interesting and it got me thinking, if you were to take unregulated capitalism, would you end up with pure communism?

Profit is made by selling a good for more money than it cost to make. Lack of competition would allow you to set the sale price and if you owned all of the land then you could control the cost price. If you could dictate to the people what they bought then you’ve got end game and it sounds alot like a communist government to me. The only problem comes when you have two communist countries who want to trade with each other. Basically the whole world would need to be communist for communism to work and I think if that happened a few people would object and we’d be back to square one.

As I’ve said before in this blog, greed it not restricted to those who have or crave money. Greed is a facet of human nature and applies to communists as well as liberterians as well as socialists as well as capitalists.

 

Theory on the definition of art

I’ve had many drunken and sober debates on what constitutes art. Well I’ve just had what I’ll label an epiphany and what others may label a mental defect of sorts.

Art is whatever a minority of people are willing to pay you enough to live on or more.

Or in other words:

The level of artiness of something is the inverse of the liklihood that a lot of poor people will pay you a small amount of money to possess.

So far I’m liking this theory. It is beating my old theory of art is what ever you set out to be art. Which implied that only things created to be art where in fact art. I still like this theory. Perhaps I’ll work on joining them at some point

My new theory means that mass produced goods are highly unlikely to become pieces of art but the original design or mould or drawings for the mass-produced item might become art. Like the orginal blueprints for the Volkswagen Kombi van might be art but a Kombi van by itself is not. This possibly ties uniqueness in with what an item of art is which in turn means it is quite directly correlated with economics in that it’s proportional to scarcity.

 

The end of magiconomics

I told you so, I’m going to come out and say it right here and right now. It’s not that I don’t want to say it, in fact it’s the opposite. I told you houses were over-priced and that the rapid increase in prices made no sense but you didn’t want to listen to me. It’s a shame I didn’t start blogging in 2003 because that’s when I started saying it. I didn’t buy a house then because of it, I now wish I had and had sold it in 2006 but that’s the beauty of hindsight.

I can only give you anecdotal evidence of who I told and when I told them but what reminded me of it so much was a discussion I had last night about a new flat I was moving in to. Someone voiced concern about always flatting, I informed them that they just needed to wait a year and a half and then buy a house because that’s when house prices will be lowest. I was quickly scoffed by an engineer present. “House prices will not fall” he said. I disagreed and gave the credit bubble collapsing as my evidence, I was quickly admonished by my peers. I re-iterated that my position was that house prices will fall atleast 10% and that I was willing to put money on it. I wish I could put money on it, lots of it but business circumstances dictate otherwise. Such is life.

What I’d really like to do is have every one read this article on the end of magiconomics. Sure it’s about England but it applies equally here as it does there. We’ve got the double whammy of our easily tradeable currency with a the highest interest rate in the western world. If this goes sour it could either offset our credit bubble or it could double it up and really screw over NZ. If our lending situation goes bad and mortgages start getting defaulted on I can bet you the Japanese will want there bonds back as much as they want to slaughter whales.

It’s going to be hard to tell when everything will go pear shaped and unfortunately it’s all about timing. The Reserve Bank made alot of money earlier this year by getting the timing right and I imagine alot of smart people will make alot of money with the impending property price collapse. Then the socialists will blame rich people for being greedy when unfortunately it has been the exact opposite, it has been every man, woman and dog who could find 0% down and bought a house with faulty economics (that of the ever escalating house price) that has been greedy.

Greed is not confined to rich people, it’s just that the rich people got it right through either luck or intelligence.

 

Universities are supposed to be elite

The NZ Herald reports that universities are moving to cut undergraduate students. Within the article there are a number of views put across including Efeso Collins who is reported as saying

Students from poorer backgrounds would be excluded under the new regime… …and the university would favour students from rich, white schools.

Whilst sociology lecturer Dr David Bedggood is reported as saying

The move would create inequality and make it harder for people to get into university

I like to be able to see where people are coming from when the present their views but I’m really struggling with both of these. One of them is a doctor and yet still seems to struggle with the purpose of a university. This dictionary says that a university is

an institution of learning of the highest level

I like the term highest level, it infers achievement, like performance athletes.

Elite athletes are called elite for a reason. They are operating at the highest level achievable. If you want to ride a bicycle to get fit that’s wonderful. It will contribute to a longer and healthier life. If you want to compete in the Tour de France you’ll need a little bit more than your Raleigh ten speed and a notion of how to spin the wheels. You’ll need dedication in terms of years if not decades and you’ll need some real talent. It would be nice to think that some of the requirements for being an elite in sport would apply to being an elite intellectual. It used to be this way, going to university used to be an admirable thing and worthy of sacrifice and striving. Now a university degree seems to be a pre-requisite to get any sort of job at all.

How have we got to this situation where it is expected that everybody should leave school and get a nice piece of paper for the wall? Is it New Zealand’s well documented Tall Poppy Syndrome? Are we trying to knock down the intellectuals by moving closer to them in the paper race? I have to discount this theory because giving out degrees left right and centre seems to be a global phenomonen. We have somehow created a form of educational inflation. Like monetary inflation, no one can really pin down how it happens but the demand for higher and higher levels of educational achievement have degraded all existing achievements whilst adding no value to the system. Any movements against this system should be encouraged.

Universities are supposed to be elite. They are a place of the highest learning, they are not a creche for the disillussioned or the incapable, they are not a mechanism to achieve racial equality. Achieving equitable tertiary education percentages across racial groups seems to be all the rage for any sort of minority groups at the moment. I don’t necessarily agree that this goal is noble or not but the means of achieving it certainly isn’t to lower the entry levels of Universities. Efeso Collins says that this change in enrollment strategy by Universities is going to favour white students. Perhaps he should investigate the cause of this rather than try and change the game. Maybe he should seek more funding for lower decile kindergartens.

The road to intellectual achievement starts at the earliest age much like the highest level of performance in sport. Trying to get Universities to accept every one regardless of ability is equivalent to demanding that the Olympics accept anyone who wants to have a go. I for one wouldn’t want to see an obese man of any race stumble his way to the end of the 100m track for the purpose of “equality”.

The world needs elite institutions of all descriptions to encourage all people, regardless of background, to achieve to the highest level. Entry to such institutions should be based on ability and I think they are. Any that aren’t could quite easily be challenged on legal grounds to become so. The real problem here is that we don’t encourage intellectual achievement from a young age across all social groups and this is what needs to change. We’re happy for our kids to try and become the next Tiger Woods, Michael Schumacher or Tana Umaga but not many are encouraged to become the next Lord Ernest Rutherford, Sir Isaac Newton or Marie Curie.

 

When were we bought?

The Electoral Finance Bill is all the rage to argue at the moment. The NZ Herald touts it as an assault on democracy, Helen Clark touts it as common sense. Why the disparity?

The left wingers are arguing that this will bring transparency to where money comes from in an election. I think alot of people would agree transparency is a good thing. The right wingers and lovers of democracy are crying that this is an assault on democracy. I’ve lumped right wingers and lovers of democracy together not because they are one and the same but because they are argueing the same thing. This is a difference that most EFB supporters cannot fathom.

Helen Clark has been trickey, like she often is. I used to call her trickiness clever, I don’t anymore because my respect for her is rapidly eroding. Crashing through a bill altering how an election will be run 11 months before the next election, right at christmas, the busiest time for families and businesses, she’s hoping we’ll all forget about this like the Terrorism Suppression Act and the Anti-smacking bill. I hope we don’t and every one votes with their feet and heads to whoever promises to drop this bill after the next election. Maybe we can have our referendum on MMP then too.

What is particularly bugging me about the debate going on the Herald site is the argument for the EFB. This argument seems to completely rely on the argument that big money can buy your vote. When has this ever happened? When has New Zealand ever had a government voted in that we can unilaterally say was bought? Last I heard we were ranked pretty well for political transparency. I’m also quite sure that we’re reasonably well educated and not hugely susceptible to propaganda. Two points bought up in favour of the EFB are the Exclusive-brethrens involvement with the last election and Telecoms involvement with the MMP referendum. How illogical can two points be? Firstly National lost the last election with the Exclusive Brethrns assistance. Secondly we have MMP! Usually when trying to make an argument you choose points in your favour, not points against it. The argument put forward in support of the EFB implies that all New Zealanders are idiots easily swayed by posters and big words whereas all evidence is contrary to this.

The counter argument, that against the Electoral Finance Bill is based on the definition of freedom of expression and even that of the Bill of Rights. It is not based on the support of hidden money into political parties. This is where Helen is clever. She has created another bill that ensures that the argument against it leaves those people branded easily with a tag they wouldn’t like.
Against the anti-terrorism bill? You’re a red neck anarchist.
Against the Anti-Smacking bill? You’re a child abuser.
Against the EFB? You’re an Iraq war loving, secret money old boy.
For the anti-terrorism bill? You’re a patriot.
For the Anti-smacking bill? You’re a forward thinking gentile.
For the EFB? You’re anti-corruption and bribery.

Like I said, it’s clever or tricky, depending on how you feel for Helen at the time.

In fact, the more I think about it, the more power it seems that the reigning political party has. They have the public coffers to spend supporting their ideas like the Working For Families ads, the ACC ads, etc. I don’t see where the leveling of the playing field comes in.

Let me make my point perfectly clear. The Electoral Finance Bill is a cynical ploy by a bullying leader of an ageing party to buy an election. Whilst I don’t think National is offering any ground breaking policies, I truly fear for the direction of New Zealand if the Labour Party gets into parliament for another term.

If Labour really believed in what they are pushing with the EFB they would have done it straight after the last election, not at the most convenient time before the next one.

 

When’s a mandate a mandate?

I was interested to see the following quote taken from Helen Clark regarding climate change
From this NZ Herald story we have Helen quoted as saying

Eighty five per cent of New Zealanders surveyed said they want the Government to act on climate change. That’s an overwhelming mandate

It’s funny how Helen Clark can use an over 80% majority as a mandate for change when it suits her and completely ignore it when it’s inconvenient to her minority governments political allies.

Labour needs the Greens to govern and so Helen pretty much has to do whatever things the 5% vote getting Greens have agreed for her to do. This means ignoring an “overwhelming mandate” to not introduce the Anti-Smacking bill. How have we got to a stage where an 80% opinion poll is an overwhelming mandate to introduce things that a party with no mandate to act wants? Three letters MMP.

MMP was touted as a fantastic idea when it was introduced. However it was only voted in with a referendum on the basis that there would be another referendum to see if New Zealand liked it and wanted to keep it. This never happened. So now a party with 38% of the public’s support is pushing through policies provided by a party with 5% of the public’s support, which 80% of the country didn’t want, whilst using this same statistic to recommend other policy changes aligned with it’s political “ally”.

Some how it would seem more comforting if the party in power had over 50% of the real vote, now that would be a mandate to act. Perhaps it’s time for that referendum after all.