LVR home sick

The Reserve bank is finally going to do something about the super-heated housing market. Unfortunately their preferred method they have chosen will make life even more difficult for the average income first home buyer. Why they think that penalising new entrants (low deposit buyers) - rather than hitting the property speculators - is going to do anything to contain house prices is not at all obvious. The rich white men making these decisions aren't affected by it so I guess that's why it occured to them...

NZ Herald:
--
The curbs on low-deposit home lending announced by the Reserve Bank yesterday are likely to prove more restrictive than it thinks, the Bankers Association warns.

Governor Graeme Wheeler said under the new regime, to come into effect on October 1, only 10 per cent of the value of banks' new lending could be on loan-to-value ratios (LVRs) of more than 80 per cent.
[...]
But the Bankers Association's regulatory director, Karen Scott-Howman, said the Reserve Bank was making compliance with the LVR restrictions a condition of registration as a bank.

In other words: only those on above average incomes can now afford to get a mortgage. And this will, somehow, contain the over-inflated property market.
--
RBNZ information: 'Limits for high-LVR mortgage lending
':
--

“The LVR restrictions are designed to help slow the rate of housing-related credit growth and house price inflation, thereby reducing the risk of a substantial downward correction in house prices that would damage the financial sector and the broader economy.

“The conventional mechanism to help restrain housing demand, while working on the supply response, would be to raise the Official Cash Rate (OCR), which would feed through directly into higher mortgage rates.
[...]
“In the current situation, where escalating house prices are presenting a threat to financial stability but not yet to general inflation, macro-prudential policy offers the most appropriate response,” Mr Wheeler said.

“The Reserve Bank considers that LVR speed limits will be more effective than other macro-prudential tools in constraining private sector credit growth in the housing sector, and dampening housing demand.
--

The Governor's statement - like the housing boom itself - is purely speculative. The one thing it will definitely do is lock poorer people out. And they will have to continue to rent... off the wealthy who can get past the LVR rules. Sigh.

Local customs

Primary Industries Minister Nathan Guy was doing his best John Key "I'm-relaxed-about-that" routine this morning on RNZ. NZ meat has been held up at the Chinese border and Guy reckons one issue is the change of name of the NZ authority and something else, but he hopes by the end of the week it will be OK. He says it happens everywhere apparently.  Does anyone really believe this?

Would the NZ customs have held up an important class of Chinese imported product on the basis of a name change to the Chinese ministry and... something else? No way - that would not happen. The NZ authorities would not do this and nor would the Chinese authorities just accept what has happened the way the NZ politicians and officials have.

RNZ reporting:
--
Chinese officials have been refusing to clear the meat being held at the border because of confusion over a name change on accompanying documentation.
Export certificates for companies to send meat to China were changed in March to recognise that the former Ministry of Agriculture and Forestry (MAF) is now known as the Ministry for Primary Industries (MPI).
Mr Guy told Radio New Zealand's Nine to Noon programme some chilled meat is already being taken off the wharf, and frozen product is likely to be moved in the next two days.
--

Guy is clueless. Something is seriously wrong with this relationship. The Chinese customs service lists visits between officials, but this does not seem substantial.

In November last year I posted on this when the product in question being impaired was infant formula:

--
Chinese front companies using NZ, the melamine scandal... it comes down to dodgy Chinese pratices - not dodgy NZ practices.

I wouldn't have posted on this formula milk issue if it weren't for reports I've received that our fish products are getting a hard time going through the Hong Kong border into China and that as a result of this it has to be re-routed through Shanghai at great expense. The reasons given why our exports aren't getting through in Hong Kong (but are getting through via Shanghai) are typically vague.

The Chinese are not proving to be particularly reliable partners are they? What a surprise that would be - to no-one.
[...]
NZ customs have not acted in the aggressive and hostile way our Chinese counterparts have - and our state-controlled media hasn't organised a campaign to discredit Chinese products the way they seem to have done in this instance either.

Are these incidents and impairments in China part of Chinese policy or not? Is the FTA going to turn into a one-way street, with our direction blocked with Chinese red tape?
--

 ... seriously wrong.

NZ Herald reporting today:
--
The New Zealand Defence Force and Ports of Auckland confirmed yesterday that the Yuan Wang 6 arrived on Sunday and was a space-tracking vessel controlled by the Chinese navy.This detail was later denied by its shipping agency Cosco and omitted in statements by both the Chinese Consulate General and the Ministry of Foreign Affairs and Trade.
Lieutenant Commander Vicki Rendall of the Royal New Zealand Navy confirmed yesterday morning that "yes, it is a Chinese navy ship".
Ports of Auckland senior communications advisor Dee Radhakrishnan echoed this shortly after.
"The Chinese ship at Queens Wharf West is the Yuan Wang 6 - Chinese space-tracking ship, operated by the Chinese navy."
[...]

The Chinese Consulate General was guarded when asked about the ship."We have contacted the official on the ship in charge of media affairs and we were told that they will not accept any media interviews during their stay."
But when pushed further the Vice-Consul, Zhang Fangfang, released the following statement.
"Thanks for your attention for the Chinese space-tracking ship Yuan Wang 6. Yuan Wang 6 arrived in Auckland on May 19 after successful completion of a space-tracking assignment, to replenish supplies and allow the crew a refreshing rest."
A spokesman for Mfat also overlooked the navy detail.
"The Yuan Wang 6, currently in NZ waters, is a Chinese vessel used for satellite tracking. The visit of the Yuan Wang 6 follows similar visits in the past by space-tracking vessels, most recently in 2011."
The ship carries 300 crew members and is due to stay for a week.
--

The NZ government is whoring the country off to the Americans by day (witness the high-level Hollywood love-in going on in the US now) and renting it out by night to the new pimps on the block, the Chinese - including to their military - all in aid of a so-called"free" trade agreement where they are playing games and refusing to allow our main food product categories (like seafood and meat) through their border. Where is the NZ top brass to deal with this issue?

How the relationship works out in the cold hard light of the real world is a lot different than how it looked on paper to the MFAT flunkies in Wellington and the dollar-eyed farmers.  The concern is not so much the actual affect that these stoppages and hassles have had in themselves - they are probably very small in relation to overall trade across the board - but what they signal for the how the relationship develops and just how much shit NZ is willing to put up with. The Chinese are pushing and NZ is not pushing back. This acquiescenceis not the foundation of an equal partnership.

Joyce: saboteur

With a few wobbly poll results over the weekend a defensive Steven Joyce is running scared over the solid and unifying Labour-Green 'NZ Power' policy launch. It's timing was entirely provoked by the pig-headed Mighty River Power privatisation, so Joyce has only his hand-crafted asset sale programme to thank for that. His hysteria at the thought of lowering costs to consumers and the cries of anguish at the post-announcement slumo of the share price on behalf of the over-valued cartel has not relented. The Nats are sensing danger if the first pou of a coalition house goes in the ground unchallenged. The Tory counter-attack however has been more Dad's Army than anything 21st century. After Bridges called it North Korean, Joyce said it was South Korean. If they can't get their Koreas right, perhaps they should be searching for a new Korea?

From the paraniod Joyce today - fresh from flushing out reds from under his limo after another viewing of 'Good luck and Goodbye' spent sympathising with that awesome Sen. McArthy - he tells us the prompt disclosure by the potential incoming government of their policy to reduce electricity bills... Is to accuse them of 'sabotage' no less.

Joyce:
--
It's simply economic sabotage .
[...]
[A...] cynical and selfish attempt by left wing parties to play politics with the value of NZ's economic assets.
--

Crying a mighty river on behalf of the foreign interests too. The only thing cynical and selfish is the privatisation of public assets into the hands of the few on a flimsy pretext. The sabotage is a government that would sell off state assets to fund the irrigation schemes to make famers rich instead of paying off the debt like they promised. Everyone knows these things at some level. Those in favour of a Rogernomics-era style fire sale and unrestricted foreign ownership is low. Joyce's bogeyman tactics don't ring true and smack of desperation. By pinning so much on a share float - a show of confidence - it ran the risk of back-firing.

If Joyce is the best the Nats can do they should just bite their lips and take the judgment the market will render rather than flap about condemning the opposition for essentially being responsible and up front.

NZ Herald infographic:

The only main thing missing is the debt. The orthodox move after a float will be for the private shareholders to demand higher dividends - windfall/super dividends of over 100% of profits - and they will raise debt to do it. Borrowing to pay themselves. Looting upon looting.  After they have racked up billions in debt onto the books (which the government as 51% owner is also responsible) and taken all the cream they will then attempt to use that as a reason the commerce commission and the regulators should let them charge above average increases. It is all so predictable.

Flatlining

The Stats NZ CPI quarterly statement:
--
The consumers price index (CPI) rose 0.4 percent in the March 2013 quarter, Statistics New Zealand said today. There were increases for cigarettes and tobacco, food, rents and newly built houses, petrol, and prescription medicines. These were countered by seasonally lower international travel prices, better value telecommunication services, and widespread discounting for furniture, appliances, and audio-visual equipment. [...] The falls for furniture and audio-visual equipment were influenced by widespread discounting.
[...]
Annually, the CPI increased 0.9 percent in the year to the March 2013 quarter, due to increased prices for [...]

What the press release doesn't mention is the relationship that inflation has with the RBNZ, ie. the target inflation figure - the basis for measuring the performance of the independent central bank - is between one and three percent. The RBNZ Governor is in breach of his performance standards if the CPI continues outside of the band for any continued period of time (the exact period is kept vague, but more than a year would be pushing it). The last four quarters of year-on-year inflation were: 1.0%, 0.8%, 0.9%, and now 0.9% again.

It's almost impossible that the new RBNZ Governor would be sacked for under-shooting - at least at this early point in his tenure - but the question is worth asking: what would it take?

New Policy Targets Agreement signed today
--

Date 20 September 2012

Finance Minister Bill English and incoming Reserve Bank Governor Graeme Wheeler today signed a new Policy Targets Agreement, which sets out specific targets for maintaining price stability.

The new Policy Targets Agreement takes effect on 26 September, when Mr Wheeler starts his five-year term as Governor.

The agreement continues to require the Reserve Bank to keep CPI inflation between 1 per cent and 3 per cent on average over the medium term.

Within this target, the new agreement now requires the Bank to focus on keeping future average inflation near 2 per cent.
[...]
Mr Wheeler says the new PTA remains focused on maintaining price stability, as well as avoiding unnecessary instability in economic output, interest rates and the exchange rate.

“The focus on the 2 per cent midpoint will help better anchor inflation expectations,” he says.


--

That's heading towards a big fail at present, though the spike when they upped the GST rate (4.5% for year ending 03/2011) will bring that long term average closer to 2%.

The information itself as broken down shows discounting is having an impact - this confirms that consumer austerity persists and that demand is still suppressed. The high NZ dollar is probably doing the most to lower inflation: keeping a lid on petrol and import prices. That is a double-edged economic sword as exporters are not slow in pointing out.

NZ is just coasting along, plateauing in the great global financial unwind, waiting for a pick up in our trade partners' growth, but the government does not seem to be doing anything substantial or proactive to stimulate internal demand or stimulate export production - it certainly isn't spending any more money (unless you include the crony deals with Chorus/Telecom with UFB, the trucking and roading interests, bailing out private schools etc.).

The underlying risk for NZ and other similarly indebted nations is that inflation is a sleeping giant and that stability of the currency value internally depends on stability in the foreign exchange and that if the latter weakens the former will awake.

Giving 110%

The Tory's state asset privatisation plans hinge on the outcome of the Maori Council's water challenge. It starts today:
-----
via Twitter:
Adam Bennett‏@AdDeville

Packed press bench for the Maori Council, Pouakani etc vs the Crown over the Mighty River sale in the High Court in Wgtn today.

Retweeted by Patrick Gower

-----

 

In anticipation of the privatisation goldrush, Mighty River Power's board has raised the looting perception comensurately:

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NZ Herald:

State-owned electricity company Mighty River Power is raising its dividend policy from 75 per cent of earnings to between 90 per cent and 110 per cent, saying it has fewer investment needs in the near future, and sweetening its attraction for investors in its partial privatisation.
The Government plans to offer up to 49 per cent of the Auckland-based firm, which owns the Mercury Energy brand and a string of hydro and geothermal power plants in the central North Island, for sale in the second quarter of next year.
That assumes court action by three Maori bodies, led by the New Zealand Maori Council, fails to block the sale in the courts and that market conditions are judged appropriate for the first of three SOE power company floats.

-----

 

In earlier posts I expressed an expectation that the company would end up taking on a load of new debt in order to boost dividends for the incoming shareholders. A 110% target cap seems to indicate this is the direction even if the borrowing stats aren't specific enough to confirm it.

 

Also from the MRP board is a position of uncertainty over the Maori Council's action.

-----

Statement of Corporate Intent 2013-2015:

Mighty River Power holds land and interests that may be impacted by certain claims that have been brought or are pending against the Crown under the Treaty of Waitangi Act 1975. In the event that

the Crown agrees to the return of some or all of the impacted land, resumption would be effected by the Crown under the Public Works Act 1981 and compensation would be payable to the Company. A claim relating to fresh water and geothermal resources is currently under consideration by the Waitangi Tribunal. The impact of this claim is unknown at this time.

-----

 

The more specifics that come into the public sphere and into public knowledge about just how profitable the Crown power companies are will both encourage share purchases and also encourage resistance to it.

2.5 billion reasons not to sell state assets

With the Nats pushing ahead with their state asset privatisation programme the Crown's own borrowing position continues to improve.  The imprudence of privatising essential services (that exist in a money-for-jam cartel situation) when the alternative of issuing debt at record low interest rates is so obviously viable is ample evidence the Tory's grand plan for economic salvation is pure, inflexible ideology. There is definitely an alternative to hocking off productive assets to cover the  two or three years of projected deficits.
-----
RNZ:
The Government says it's received strong investor demand for the first issue of its September 2025 inflation-indexed bonds.
The Debt Management Office has issued 2.5 billion of the 2% coupon bonds, which were heavily oversubscribed, with bids in excess of 4 billion.
It's the first issue of these types of bonds by the Government since 1999.
Finance Minister Bill English says it will help the Government to continue borrowing at competitive market rates, which will minimise its borrowing costs.
-----

With inflation skimming along the recessionary plateau at just under 1% - but with uncertainty still high - an inflation indexed bond is proving popular. From what I've read from the NZDMO each quarter the capital value of the bond is increased by whatever inflation (the Consumers Price Index) is, plus they bear 2%, so it is an ultra-safe investment attractive to conservative funds.

Two tax-related observations:

Firstly, I note that an "Approved Issuer Levy" is mentioned. From the Act:
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86J Approved issuer levy

• Approved issuer levy shall be computed in respect of any registered security at any time at the rate of 2 cents for every $1 of the leviable value of the registered security at that time.

-----
I've never heard of it before, but it appears to be on the interest - not the capital - and payable at the beginning (?). These are the sorts of things that a Financial Transaction Tax will tackle: having this levy idea extended to all classes of instrument, all markets and on every transaction (not just the initial issuance). 

Secondly, tax is payable on the portion of the inflation adjusted increase in the capital value. This may not be a capital gains tax per se, but it is an interesting that this value is being treated as such.

For those who argue that an FTT and a CGT are anti-competitive, a discouragement to investment, will impare markets, hamper the economy etc. it is just as well to keep in mind that some elements of these taxes already exist and don't seem to have crashed capitalism in a fireball of inherent counter-productivity, dead-weight loss, creative disincentive and wealth-destruction. It all depends on what the "mix" is with other taxation and what the levels are set at, but a modest levy on the perpetual friction of the money markets will be a relatively insignificant [I mean painless - because it may be that a significant sum could be raised] arbitrage compared to the other forms of taxation.

Eroding the minimum wage

The government follows through on another one of their promises to fray the edges of the minimum wage. The point of the 90 day fire-at-will rule and this new back door youth rate is not nearly so much the officially advertised doing of a favour to otherwise unemployable youth, but it is the doing of a favour to unscrupulous and particularly mean, tight-arsed employers.  This law is designed to assist bad employers - in other words - not the responsible ones: the good guys have no need to underpay in this way.
-----
Tory blogmaster, Farrar:
All it means is that they can be offered a job at a 20% lower rate than the adult minimum wage, for their first six months. The trade off is that it will mean more of them get jobs, but some of them will get paid less (for six months) than what it would have been.
-----
What trade off? The only employers where this new rule would tip the balance in employing an extra person who would otherwise have not been hired are going to be very, very few.  n=100 max is my guess - and most if not all will be big firms.   The likelihood though of the new youth rate-by-stealth rule providing perverse incentives and legalising rip offs and encouraging summary sackings is very, very high.
-----
Minister Wilkinson:
"The new starting-out wage will create demand for young people by giving employers a real incentive to take them on," Ms Wilkinson says.
-----

Creating a demand for one type of worker however also creates a lack of demand and disincentive for other types of workers - that's acceptable to the Minister because the ones who gain from this exercise in opportunistic discrimination are National's good chums in business. All the small firms who use this to lower their wages for new, young employees (and who don't hire anyone they wouldn't have before) are just gouging.  It's a law made by pricks for the benefit of pricks:
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NRT:
What it actually does is redistribute wealth, from the young and poor to the old and rich.
-----

And how much will it really mean to all the workers being underpaid so that a very few extra people can join the line if that creates vulnerability and undermines everyone's rights? What sort of a trade off is that?

What do you say to a Farrar's Bargain?

 No deal.

Haier price: F&P R&D

-----NZ Herald:Shares in takeover target Fisher & Paykel Appliances firmed slightly after the company's independent directors rejected a $1.20 a share takeover from China's Haier, which already owns 20 per cent of the stock.
By 10.20 am, F&P Appliances shares were trading at $1.22, up 2c from Wednesday's close.
Australian fund manager Allan Gray, F&P Appliances' biggest shareholder after Haier, has already accepted the offer by virtue of a lock-up agreement, giving the Chinese firm an effective 37.46 per cent stake.
[...]
"The independent directors consider that Haier's offer of $1.20 per FPA share does not adequately reflect their view of the value of F&P Appliance based on their confidence in the strategic direction of the company," Turner said in a statement.
The independent adviser's opinion was that the full underlying value of the company's shares was in a range of $1.28 to $1.57 per share, he said.
Forsyth Barr broker David Price said the price action in F&P Appliances suggested the market was playing "a wait and see" game.
-----

Is the NZ Super Fund going to take a blocking 10% stake in F&P? Or is this company in a few weeks just going to be another one of the assets of the People's Republic of China?

Haier can't get their hands on the IP side unless they have a complete takeover - from what I understand - and it is one of the main value propositions at F&P. Like all transactions with conduits of the Chinese government they will prove to have deep, cross-subsidised, currency-manipulated pockets and can out-bid any other player for any strategic assets they covet. The Chinese can and will pay a premium that cannot be matched - so to say they set the market price is not really true, they are above market price.

Euro point

The Eurozone economies lurch from one crisis to another: burdened by deficits and debt to maintain their standard of living in the face of a recession the austerity measures focusing on paying and repaying banks to keep the system going is faultering. The reality of a 'two-speed' Europe with one set of EU countries fully integrated in the Eurozone and one set not has been replaced by the emergence of a two-tier system of basket-case peripheral, spending Southern economies and an inner core of saving Northern economies that threatens the stability of the Euro and has led to open talk of how to devise a break-up that would see the peripheral cases exiting the Euro and re-establishing their own national currencies (in the case of a sovereign default).
I have been a Euro optimist and continue to be so despite this long patch of very inclement weather. The underlying fundamentals of the currency union are still strong even without the sort of fiscal alignment (or economic subjugation) mooted by the Germans. The Euro is still far more stable in terms of exchange rate than the US will ever be.

So with the NZ dollar at record highs against the Euro (about 65c to the NZD when it was as low as 51c last year and has a long-term average about the 50c mark) and the availability of high yields in Italy (which as a pillar of the Eurozone I cannot imagine will either default or exit) it would probably be a good time for those big players with NZD to put their money into Italian bonds. This assumes there is less risk than the market is indicating right now.

Bernard Hickey: today:

The New Zealand dollar [...] even fell against the euro to 65.0 euro cents from as high as 65.9 euro cents late on Friday.

via Bloomberg:

Germany’s bonds outperformed their euro-area peers, with two- and five-year yields reaching record lows, as Der Spiegel magazine reported the International Monetary Fund will stop paying rescue funds to Greece, citing unidentified European Union officials. Italy’s 10-year yield climbed to a six-month high and Greek bonds tumbled.
[...]
Spain’s 10-year yield rose 23 basis points, or 0.23 percentage point, to 7.50 percent as of 5 p.m. in London after climbing to 7.565 percent, the highest since November 1996.
[...]
Spanish two-year yield climbed 77 basis points to 6.53 percent after surging as much as 99 basis points, the biggest intraday gain in the euro era.
[...]
“Spain would need a bailout if yields stay where they are for another couple of months,” Georg Grodzki, head of credit research at Legal & General Investment Management Ltd. in London, which manages $596 billion of assets, [...] Italy would then be “an open target for the next wave of attacks,” he said.
[...]
Germany’s 10-year yield fell as low as 1.127 percent, matching the June 1 record, before being little changed at 1.18 percent. The two-year yield was at minus 0.06 percent, below zero for a 12th straight day, after declining to a record minus 0.080 percent.
Yields less than zero mean investors who hold the debt to maturity will receive less than they paid to buy them.
[...]
Italy’s bonds slumped. The 10-year yield climbed 17 basis points to 6.34 percent after reaching 6.43 percent, the highest since Jan. 19.

The German yields are crazy low. Sub zero, like the Japanese in their deflationary period. With the risk premiums on Spanish and Italian debt so far from the German situation you know things in Europe are highly imbalanced, but this doesn't necessarily mean a system collapse or an Italian or Spanish default. So, if you're willing to sink a few billion into Italian bonds based on the hypothesis of someone who'll be lucky if they can scrounge enough change together for a pie for lunch - go for it.

UPDATE 2pm:

Nek minnit

Italy's financial outlook darkened on Monday amid warnings that 10 cities are at risk of bankruptcy and schools may not be able to open in the autumn because of drastic spending cuts.
[...]
 Mr Monti hopes to reduce the country's €2 trillion (£1.6 trillion) national debt by dissolving 64 of Italy's 107 provinces, addressing long-standing concerns that they are an unnecessary and wasteful tier of government. The government plans to slash €500m from the provinces' budgets this year and a further €1bn in 2013.

The Monti government is pushing ahead with an ambitious spending review that envisages cuts to government services worth €26bn over the next three years.

Mr Monti reiterated that he will step down in Spring 2013, paving the way for elections.
Silvio Berlusconi has indicated that he will try to become prime minister for a fourth time, a declaration that has only increased market nervousness over Italy's economic future. 

A visit from the ad fairy

Just asking.

unfare

The base units of standard domestic goods and services spirals - pretty much as I predicted. After they got rid of the 5c piece the loaf of bread, the newspaper, the pint of milk and the bus fare was locked into massive relative increases. It was announced the price of standard postage would go up almost 20% this month. The jumps are now 10c instead of 5c and are already contributing to inflation pressure.

NZ Herald: Bus, train and ferry fares are set to increase by up to 90 cents in Auckland.

Auckland Transport today said its annual review of fares had found prices had not kept pace with cost increases throughout the city.

Public transport operations manager Mark Lambert said some bus, ferry and rail fares would increase between 10 cents and 90 cents from April 29.

Train users will be hit hardest, with prices for one to four stage tickets set to rise by 20c each.

A seven-stage ticket - the equivalent of a trip from Britomart to Waitakere - will go up 90c to $9.80, and six stage tickets will rise 70 cents to $7.90.

And as usual there is only a fortnight warning so people can't plan to change to other modes.

Euro crisis

Economist chart:

Despite the budget deficit blow-outs needed in order for European governments to retain their nations' standards of living in the wake of the credit pop three years ago I still consider the Euro more stable and with better long term prospects of stability than the US dollar. The graph shows the wide difference in fiscal constraint exercised by Germany and the outlying basket cases of Ireland and Greece who now face (a basically)imposed austerity to remain in the Euro-zone.

As our own Reserve Bank Governor described this week when he left the RBNZ's OCR at a record low 2.5%, the situation for the foreseeable future is a slow "grind". The external stimulus needed for economic expansion - and the repayment of that large debt overhang most Western countries face - depends on the emerging economies, themselves vulnerable to weak European and American consumption, steaming ahead. How long will this take - and is it possible to have the major Western economies in a slump and have the rest of the world maintaining high growth rates?

Major reconstruction of the Euro system - especially an agreement to link tax/revenue and spending into the equation (more stringently than at present with greater penalties that the big guys can't just wriggle out of as they have) seems necessary to many, but the issue of sovereignty may be insurmountable. An individual government's ability to operate internally an independent policy will be sacrificed, further sacrificed, to the centre (ie. to the politians in Berlin and the bankers of Frankfurt) and as the rejection of previous incremental Treaties has shown the European citizens of their respective states are loath to give up their self-determination.

$ :(

Sorry, I was out, what just happened?

S&P downgrade from AAA to AA+

Has all my doom-mongering come true? Has the reality that a depression is a series of systemic recessions setting in yet?

OK, so the boffins are not impressed with the debt ceiling and spending cut plan then. $14.7 Trillion and heading towards $14.7 Zimbillion. It makes it a bit of an obvious call and it's good the boffins haven't been influenced by the sort of wilful optimism of the markets or the bravado of American imperialism that helped create the credit expansion and resulted in the 2008 crash and this consequent depression.

The US dollar is holding though.Wasn't that Chinese Ambassador on 'The Nation' this morning saying they were buying Euro now.

So the Chinese are bailing on the US. Oh dear. Luckily for them the fear in the markets have driven people to US Treasuries and the dollar has risen in value... even though its S&P credit rating has been downgraded. Oh the irony. But enough of these games! China go now.

This temporary rise in the dollar's value will let them sell down at a better price. Will they evacuate the dollar and revalue the Yuan? Whenever it will screw the US the most they will do it, right when the Yanks need them. Go now.

Dow down 6% for week.

Gold $1662/oz - that's a better reflection of the value of the USD.

NY Times:

WASHINGTON — Standard & Poor’s removed the United States government from its list of risk-free borrowers for the first time on Friday night, a downgrade that is freighted with symbolic significance but carries few clear financial implications.

The company, one of three major agencies that offer advice to investors in debt securities, said it was cutting its rating of long-term federal debt to AA+, one notch below the top grade of AAA. It described the decision as a judgment about the nation’s leaders, writing that “the gulf between the political parties” had reduced its confidence in the government’s ability to manage its finances.

“The downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenge,” the company said in a statement.

The Obama administration reacted with indignation, noting that the company had made a significant mathematical mistake in a document that it provided to the Treasury Department on Friday afternoon, overstating the federal debt by about $2 trillion.

Quibling about a few trillion. The fact that even has the possibility of happening is why they are being downgraded. It's monopoly money heading towards confetti.

The downgrade could lead investors to demand higher interest rates from the federal government and other borrowers, raising costs for governments, businesses and home buyers. But many analysts say the impact could be modest, in part because the other ratings agencies, Moody’s and Fitch, have decided not to downgrade the government at this time.

The announcement came after markets closed for the weekend, but there was no evidence of any immediate disruption. A spokesman for the Federal Reserve said the decision would not affect the ability of banks to borrow money by pledging government debt as collateral, a statement that could set the tone for the reaction of the broader market.

S.& P. had prepared investors for the downgrade announcement with a series of warnings earlier this year that it would act if Congress did not agree to increase the government’s borrowing limit and adopt a long-term plan for reducing its debts by at least $4 trillion over the next decade.

Earlier this week, President Obama signed into law a Congressional compromise that raised the debt ceiling but reduced the debt by at least $2.1 trillion.

And a big Llyoys loss on the ticker - is that from Chch?

Price of milk policy

[***!WARNING: Pic at end of this post not work safe!***]
This morning the Commerce Commission explained why there's no need for them to launch an inquiry into milk price fixing. They don't reckon it's needed, neither did Peter Fraser on RNZ. The market is working they reckon. They are the few who do. Here's how ComCom brushed aside comparisons with Australia:

12. Why is milk cheaper overseas / in Australia?

[...] An analysis of overseas milk prices is not necessary in order to reach a decision whether regulation under Part 4 could apply, so we have not done so as part of this review.

However, it is apparent that New Zealand supermarkets have not priced milk as aggressively to date as in Australia. This may reflect that competition in the supply of groceries from supermarkets is less intense than in Australia. Alternatively, it may suggest that the competition dynamic is different, and competition focuses on other products or aspects of their offering.

So don't worry what the international pricing is like - or even the pricing in Australia - it's all a bit complicated and stuff so they're going to ignore it. Even when Fonterra itself says publicly that it uses international prices to set local prices? (see below). Yip, really. It may not be necessary in order to reach a decision, but it would be bloody helpful though wouldn't it - too helpful?

Some relief came in July when Fonterra announced it would drop some other dairy prices:

Fonterra Brands Managing Director Peter McClure said: “Butter and cheese prices in New Zealand increased in April, however, since then international prices have dipped and we will see these decreases flow through to consumers from next month.

“In February 2011, we announced a freeze on the wholesale price of fresh milk in New Zealand.

“At this stage there are no changes planned to fresh milk prices, but if international milk prices drop significantly we will of course flow these decreases onto consumers.”

Now please note Fonterra are quite clear that international prices are the relevant - the only relevant factor - in their pricing decision and that these prices "flow through" to NZ consumers. ComCom in their wisdom seem to dispute this.

As I said back in February:

The Fonterra announcement that it will freeze domestic milk prices for the rest of the year has been greeted with initial praise, but now meets some skepticism. Let me add mine. What they have done is announce they will keep prices at an all-time high. That is what a "freeze" means. It means they will not reduce prices. So, it's actually pretty shitty, but the PR from Fonterra has been lapped up by most of the media, like cats into saucers of NZ's finest. It worked so well for the 'terra monopoly that the supermarket duopoly followed suit... not that that is price fixing. Oh, no that would be illegal: "I don't want to go to jail" said the supermarket frontman on last night's Campbell Live show on TV3; but what else is it if not price fixing? The main supplier says it's x, the two main retailers say it's x, and they all say it within 24 hours of each other - if that's not the fixing of a price then I don't know what is.

And what happened since February? Exactly that scenario: they've kept gouging milk at their randomly chosen exorbitant price point even though other lines have fallen. FFS, if you are 90%+ of a market and fix a price that you won't alter - for the purposes of locking in a very super rate of return for yourself well after the real price has fallen - then that is a fixin' o' the price any way you cut it. And then... in NZ... the Commerce Commission just lets you off. Nothing to see here, move along.

Well there is something to see here. So, seriously now, how much did Fonterra pay them for this report again? It's a slap in the face of the consumer from the regulator and a bit more besides from the milk industry.

___
UPDATE 5:40pm: OK, took that image down. But if I had hacked into their website they would now be marketing Assmilk® to a confused and unconvinced world.

Inflation interest

And with the 1-3% medium term target band (the RBNZ has had since Sept. 2002) added:5.3% year-on-year is way over, but for the RBNZ keeping the rate down is more important for the government (in both a fiscal sense and for the political considerations of lowering mortgage rates) in a recession than sticking to the band. NZ has to borrow in the short term so might as well make it a convenient rate. It is also more important to our export industry if the NZ dollar didn't appreciate any more than it has to as it would by adding higher interest rates to the attractiveness of the NZD. That's why they are keeping interest rates low as they can rather than focusing on inflation. You chuck in the Nats reneging on their pledge when they hiked up GST and all the round of price increases that it caused and inflation has spiked 5%+. Last time it got to just over 5% - back in 2008 when Labour had overheated the economy and we were awash in easy credit - the Governor put the rate up over 8% to try to bring inflation into the realms of orthodox monetary credibility. Then the recession hit and inflation fears ebbed as the austerity measures bit and the economy contracted and the rate went to 2.5% Yet I kept up my inflation paranoia insisting that the underlying pressures had not abated.

The practical and psychological consequences of abolishing the 5c coin in 2006 would be to put the smaller, staple items on a steeper upward trajectory. The basic cash items like the paper, the milk, the bus, have to go up a minimum of 10c and puts 20c as the next increment. This magnifies the effect of the inflation and it will be felt primarily by the lower income earners.

The temptation to follow suit with other economies and inflate one's way around debt - and lower the value of the currency dramatically in the process - is lingering in the background, but our oil dependency locks a high dollar into the inflation equation too, if it falls then the imported inflation from pricey oil will push up the CPI across all sectors not just energy. We appear to be caught in something of a cleft stick on that count.

As the TV news shows picked up on in their analyses, the expected 1.9% annual average wage increase doesn't compare well with 5.3% inflation. There's little hope in National's austere anti-union, anti-worker environment, running high unemployment, for wage increases to match the inflation spike and so many people's standard of living will be going backwards.

As for the exchange rate I haven't been persuaded from my long term outlook for the robust stability of the Euro - versus the USD which is a long term zilch, they might as well default on the 2nd of August for real and send in the Chinese liquidators. With the NZD so strong off the backs of Australia and China (and off a falling USD) and anticipating a rate hike and with the Greeks causing a panic in the Eurozone the current rate of 60c Euro for the NZD is very high and I can't see it staying that way for long even if the RBNZ starts increasing the rate early.

Value

Glanced over to the NZ Herald stand at the petrol station yesterday. The first thing I noticed: it was proudly proclaiming to be NZ's best newspaper and had the accolade at the very top above the masthead. Eye-roll. Then I looked to the right of it - the price is now $2!

I speculated when the Tories reneged on their tax pledge and put GST up last year that the Herald - for some time at $1.90 would finally reach $2. It is a psychological barrier and it seems they have waited until they got a gong to crow about to sneak the raise in.

Problem is that it's two dollars regardless of whether there is any news or not - today there isn't any, for example, and you'll have to pay whatever the cost of the Weekend edition is now.

As a rule the Herald costs roughly as much as a single stage bus ticket - it's always been that way for as long as I can remember. The infuriatingly deliberately evasive and complicated Auckland Transport bureacracy continues to hide how much a bus fare costs, so I can't even tell you, but the trains at least are at $1.70. The bus is probably 20c dearer, so $1.90 - but I'm guessing because they don't want us to know and they've done a stirling job in making it impossible to find. Wankers.

Speaking of stirling... the NZD is at 50p now - back to the technical parity that existed in the depression when the RBNZ was formed (taking into effect the 1967 dollar conversion split). The first thing the RBNZ did in the 1930s was to devalue against Stirling by 20% to encourage exports, so we are back to the point even before that. With floating rates and massive liquidity behind forex deals it seems going back to setting rates is a financial impossiblity and an historical folly, and yet that was the norm. The UK has achieved (if that is the right word to use?) devaluation by running massive debts. The standard of living in the UK will have to trend down.

What will happen to NZ with a relatively high exchange rate? It has cushioned us against already high US$100/bbl oil but what happens on the down-tick? Externally-inflicted inflation. We have enough internal pressures already to cope with, esp. after the spike from the GST rise. We are seeing it at the low end of standard mass consumption necessities: the bus fares, the petrol, the electricity... the paper. These are the basic units and their relentless rise is what has real effects on living standards. How is Treasury's 4%, 5%, 6% growth forecasts going to have on pricing in the near future?

Official launch of QE2

The full text of the Fed's announcement. What they are going to do:

Taken together, the Desk anticipates conducting $850 billion to $900 billion of purchases of longer-term Treasury securities through the end of the second quarter. This would result in an average purchase pace of roughly $110 billion per month, representing about $75 billion per month associated with additional purchases and roughly $35 billion per month associated with reinvestment purchases.
[...]
the assets purchased will have an average duration of between 5 and 6 years.

They want to push the interest rates even lower to keep their borrowing affordable and encourage investment in businesses (the stock market) which will yield more of a return for savers than Uncle Sam's IOUs. The longer term debt profile helps stabilise the US sovereign debt and everything will hopefully turn out OK as the economy lifts and unemployment falls... is their theory. An optimistic theory.

The immediate consequence of pumping in so much money however is that they have unilaterally devalued their currency.

Brian Fallow at the NZ Herald:

Whatever the benefits then, there are doubts about how much good this will do now.

Is it the level of interest rates that is holding back the US economy, keeping unemployment high and output way below capacity?

Are banks not lending more because they lack the funds?

Not really.
[...]
Perhaps the major mechanism for quantitative easing to spur growth in US economy, however, is to reduce the international value of the US dollar, boosting the competitiveness of its exports and of locally produced goods that compete with imports.

The effectiveness of this, however, will be stymied at least partially by China's policy of allowing only a creeping revaluation of the yuan relative to the US dollar.

It crates the spectre of a world divided into two camps - a US dollar bloc including the US, China and the petro-economies - and the rest of us, with exchange rates driven higher as the US debases its currency.

Countries whose currencies are already buoyed by high commodity prices, including New Zealand and Australia, are particularly vulnerable.

A tsunami of yield-seeking hot money could be coming our way. The last one proved destructive. We have yet to recover.

A flurry of central bank meetings over the next few days, including the European Central Bank, the Bank of Japan and the Bank of England, may give some guidance on how the major players will react.

The NZD is at about 0.78c US today. The clueless NZ Treasury in their previous forecasts think we wouldn't go over 0.71 and will head down to a natural level of 50c in the next few years. That is what they have premised their projections on and is why they will get everything so totally wrong. All the signs of a long term decline of the USD have been evident for a few years now.

Jitters

It's 1:17am NZDT as I write this post. I'm nervous about the international financial markets today so I want to get this on the record ASAP before anything happens - if anything happens. October and Tuesdays are never happy ones historically - from what I recall - maybe it's nothing more than superstition, but the way the global depression has been unfolding these last few weeks and the unilateral currency devaluations via "QEII" (A second round of Quantitative Easing) liquidity pumping going on across the world in particular do not auger well when we shovel austerity budgets and weak demand into the pit on top of them. It's a monetary swamp of quicksand with the fiscal hard ground of state tax revenues and wages eroding away into the morass. The credit collapse of 2008 was the earthquake and the liquefaction that resulted across the economic landscape that toppled the weaker houses may still prove to be unstable as more tremors arrive.

I'm watching MSNBC's (US Tuesday morning) coverage and nothing seems amiss at this point, but it doesn't feel right. If the 2008 event was our generation's 1929 crash then 2010 is still only 1931 and we may have some way to go yet to unwind from the previous decade's bubble. In the early 30s the gold standard was abandoned and the NZ government created our own currency and immediately devalued it by 20% to stay competitive with the UK (our biggest trading partner) inside the Sterling zone. We basically followed suit with Australia and joined the dollar zone and effectively devalued again (by half) against Sterling in the late 60s which kept their Pound strong when they decimalised in 1971 - when the US finally abandoned the gold standard (on account of not having any) and we pegged ourselves to them and their inflation until floating in the mid 1980s where the currency traders and the RBNZ have decided to make it the 11th most traded currency in the world and the value in that market is somewhere between 39c (as it was under Clinton and a strong dollar policy) and where we are now - at 75c.

My concern is that the NZD-USD is at 0.75c and it was at 74c when the RBNZ started buying last time around in order to keep our dollar down. That was OK then because the RBNZ could sell it back when it receded into the 60s and they could make a profit on the trade; but that would be even more reckless now if they attempted to put a ceiling on it at that level. The NZ Treasury keep forecasting - wishing really - that our dollar is only worth 50c US. That's fantasyland - the greenback and their Federal 13 trillion in debt and fuck-only-knows-how-much trillions in total 'M3' US denominated instruments etc. are on a trajectory towards monopoly money and everyone knows it. Gold has gone from $35 to the oz in the early 70s to about $280 at the turn of the century to $1350 this week - that does speak to the real value of the USD. China has been making strong signals since Christmas that it will move to displace the USD as a reserve and has implemented Yuan settlement in some of its markets. That move by China fundamentally undermines the long-term value of USD. Even with our weak ballast we are at least backed by Australia in many ways and they remain relatively strong. My fear is that the RBNZ will try the same trick again and start selling NZD at 75c on the basis that it is the ceiling, but that it will act as the floor because the NZD is stronger than that - or should I say the USD is weaker than that. The UK has tried several times to defend its currency when it is under pressure and the Bank of England loses. We don't want our version of that - we are Icelandically small and couldn't afford to take a bad punt.

What would John Key, mercenary currency trader, do? What would John Key, steward of NZ's national interest and economic well-being, do?

UPDATE | 1:30PM: From RNZ re: RBNZ:But is the NZD "junk bond status" relative to the USD? That's the equation to keep in mind. Against the Euro - for example - the NZD is probably over-valued at the moment and undervalued against the Aussie (who are nearing USD parity) who have higher interest rates to attract currency speculators, a strong economy backed from mineral demand from China and of course all that gold.

But more to the point of this morning's post:

GST: Water torture

UPDATE | Thursday 5PM: A few local body candidates around the country are championing the cause of taking GST off rates:Quoting Waitakere Mayor, Bob Harvey:

"Rates are a tax for goods and services delivered by local government", he said. "That's fair enough. But for the Government to charge GST on top of that is just not on."

Harvey has called on councils to band together to defy the government and stop collecting GST on rates. If councils don't collect it, then the government can't have it.

If it's good enough for New Zealand's most distinguished mayor, then it's good enough for us. Hutt residents deserve councillors with the backbone to say, "a tax on a tax is robbery".
[...]
Groups representing people on fixed incomes, like Grey Power, and organisations advocating for social justice such as the National Council of Women have been unwavering in their demand that GST should not be charged on rates.

The Auckland bus fare increases from Sunday:
I note that many magazines for their latest issue have dual prices of pre and post GST rises. Metro goes from $9.50 to $9.75 (although the Whitcoulls at Lynn Mall was having a bob each way - as it were - and splitting the difference with their own price label of $9.60! The TV guide is going up from $2.10 to $2.20. The Listener is static - in so many ways - on $4.00 (but last time I saw it a few months ago it was $3.80). No news on whether the NZ Herald will go to $2. --UPDATE ENDS]

The GST rise - imposed in the middle of a depression - is coming at the worst time. The unavoidable costs for the low income earners (the public transport fares are going up in Auckland on Friday Sunday) will be heavier than predicted and there will be no nett gain for them after inflation spikes to 5% and erodes the miserly tax adjustments down at the bottom rung of the economic ladder. And no doubt the little luxuries like a cup of coffee, an iceblock and so on will also be hiked to a price point in advance of the extra 2.5% we will all be paying come Friday 1 October. The NZ Herald herself will probably go from the outrageous $1.90 to a preposterous $2. NZ Herald on National's response to Labour's fresh fruit and vege exemption policy. It's a flaky side-show that Labour is running and if you spot Mallard's double irony below when mocking the Maori Party's bill you get a sense that it is all bullshit. To use that wonderful line that the Tories kept taunting Labour with (supposedly from Steve Maharey) "It's just something you say when you're in opposition."

Apparently taking the GST off water - as modest as that may seem - has occurred to no-one. Taking the GST off council rates is not on anyone's radar either. I despair.

I know they are all too obsessed with political gimmicks to recognise the simple and achievable possibilities, I know they are all too thick and selfish to organise a bill to implement them, and I know that fundamentally, deep down, they all just don't give a fuck; so for those very few readers of this blog out there who do have a few minutes on hand and care about a practical GST exemption policy I'll humour you with some extracts from past posts on the subject:

Hide's budget ultimatum: no GST on Council rates from 1 November - 15/03/2010:

As for that headline - if it ever came about - the home owners and the landlords would like it, but I doubt any of it would flow through to the tenant. As a sweetener to the ratepayers it would make a little more palatable the rates alignments occurring across Auckland after the Councils are merged - especially since Aucklanders are picking up the tab for transition costs. It would be a good idea for Hide to pursue - or at least be seen to be pursuing - doing his bit to knock the edges off Bill English raising the sales tax by 20%. We expect nothing less from the leader of the association of consumers and taxpayers. If he says he is the minister for ratepayers then here is an opportunity to demonstrate it.

Wiping out the double-taxation - a central government tax on a local government tax - would give back some cred to the singed and scratched Act brand. Doing something like that might reassure the volk that an ACT minister is behaving like one and not like any old Tory, that maybe there is actually supposed to be a difference between the two and it is actually worthwhile for people in Epsom to keep voting him in on that basis. What's the point in being inside government - if you are a right-wing, quasi-libertarian party leader - and not take some initiative to reduce some taxes other than just income tax. Rodney is going to have to vote for GST to go up if English puts it in the budget because that's part of his deal to stay in government. If he's backing ACT principles and backing his portfolio - not the Councils, but the ratepayers - he's going to have to come out of the ignominy of having raised the sales tax with some form of victory. Anything he can. Getting the GST taken off the rates bill might be enough; it would be quite a substantial win.

Maori Party budget ultimatum: no GST on water from 1 November - 16/03/2010:

These positions go to the core values of each party: for the Maori Party it makes the basic necessity of survival a bit cheaper - and giving water the same tax-free status that gold enjoys indicates the unique status of this natural resource; for Act a deal to exempt rates would be the end to an unfair tax on a tax.

I do hope that the two support parties are using their leverage here and are putting up some firm options to ameliorate a 12.5% to 15% rise in GST. The Nats can't get their budget through without at least one of these parties backing them and they have every right to gain at least one concession each on something that is unlikely to be reversed (despite what Labour's "Axe the Tax" campaign might lead people to believe).

GST rise fait accompli - where are the gains? - 23/04/2010:

Mallard rebukes the Maori Party's healthy food exemptions and their support of the budget (because of their coalition agreement).
Well what about water? It doesn't get more necessary or healthy than water. Water should be exempted from GST. That is something that can be done for reticulated water and other supplies of water. It will make it less of a commodity at a time when it is becoming more so every day - witness the Canterbury Regional Council junta the government installed yesterday specifically in order to allocate water to the financial benefit of the farmers.

Once they start putting sales tax up then some alleviation is in order where possible. Charging tax on the water itself is going too far and unlike other products that Trevor Mallard can mock water is something that can be defined clearly.

GST off water - 29/04/2010:

As we can see by the exhaustive Australian list of exemptions - from milk, tea and coffee to penile clamps and everything in between in this part of the list - the system gets very complicated and confusing. The one item that stands out as being very clear however is water:
And I note another code for it here: It appears that bottled water is also exempt:But this must be under another code because there is a tax ruling on water at the ATO which gives more detail, but I suspect this is for reticulated supply issues (it also includes sewerage) and mentions a 100 litre limit:I dare say it can work in this country too - but for reticulated or bulk supplies only to keep it simple and to align it with similar human necessities that are not taxed in NZ, viz: rent.

The next similar class of charge to have removed from the ambit of GST are the Council rates - but that's an Act job.

[UPDATE: A commenter has said that it was United Future - whose sole MP is (always) the Revenue Minister - that had a policy of removing GST from rates in a previous election: "No tax on a tax". I have found nothing on their site to confirm that this is still their policy however, they seem to be silent on it. But it definitely seems to have been a policy. A private members bill from his own caucus member was put up on this exact issue. And this question from another UF MP in 2004:Where's the love now? What's the point of being the Revenue Minister if you can't even implement your own party's commonsense policies that specifically relate to Revenue? What is the point of Peter Dunne? --]

The Crown's budget is delivered on the 20th of May. If GST does go up to 15% there must be some trade-offs for the support parties that are bound to vote for it.

Pre-budget vibe - 19/05/2010:

Both the Act and the Maori Parties have their own legislation already before the House that can work in a water exemption and a rates exemption into the GST Act so that, basically, your local authority rates bill will have no GST. The United Future MP who is Revenue Minister had a party policy and a bill to do exactly that. This is the time to do it.

It can be done and should be done as a permanent trade-off for putting the rate up to 15% (as they will surely do in the Budget - probably to take effect in the last quarter of 2010: 1 October.)