Foundation for Economic Growth - Newsletter

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Last Updated: Aug 15th, 2008 - 11:26:43

Newsletters : 2007 Newsletters : 13 April 2007
Thought for the Day

Last year I had a look at the Quotable value of a house I bought in Wellington in 1971 for $14,000. The value was $350,000. This is 25 times as much as I paid 35 years earlier - an increase of just on 10% per year, every year for 35 years. If I had rented out the house I would also have had a good income stream as well. Would I have done as well in the share market?

One of our problems in trying to ascertain how our wealth is increasing in New Zealand is that the measure we use changes constantly. My old house is still worth just what a house is worth. Its intrinsic value is about the same now as it was then. Our measure of what it is worth has just depreciated by 10% each year. Imagine if I had kept the $14,000 in the bank. I would be feeling a trifle annoyed by now at saving money in the bank for my retirement.

New Zealanders are just reacting logically when they buy houses and other property as a safe place for their money. We seem to have learnt that governments are not to be trusted and that property is a haven for wealth. The secondary benefit is that our mortgage becomes less with time - by the same old 10%. It is no wonder that New Zealanders have a love affair with housing.

This state of affairs is great for those that can buy houses and particularly if they can claim a loss for renting out the house and subtract that loss from their normal earnings. This has led people to buy houses when they are only making 5% return gross and have a 100% mortgage on the property. With mortgage costs of 8% (or more now) and repairs, insurance, rates and etc the house is not a good investment - except that the house retains its value where money in the bank loses its value.

The share market might be alright, but how many shares gain 10% per annum plus 5% dividends for 35 years straight? And how can one tell at the beginning of the 35 year period which are the ones that will make this gain?

So Kiwis protect themselves from the government printing presses by buying property.

The government solution is not to stop the money presses rolling but to legislate to make it harder and more costly to buy houses. So fewer people can afford to build a new house and the demand for the existing houses goes up - pushing up the price even further. Increasing the cost of a mortgage raises interest rates and kills off the export sector so that is a tough solution.

The government is between a rock and a hard place. If it is not careful (but sooner or later anyway) the economy will stall and many over-committed house owners will not be able to make their payments. As this happens the stalled economy falls more steeply because retail sales will drop and with the export sector struggling the only sector with any money will be the government itself. In this situation they can either opt to tough it out or to roll the money presses once more and inflate their way out. When things got tight at the end of 2005 this is what they did and they increased the money supply for 2006 by 16.4%. And we are all still carrying on as before.

The longer we run our economy by inflating the money supply the worse it gets. How bad can it get? Just ask the Zimbabweans!


Apr 13, 2007, 13:09

 Newsletters : 2007 Newsletters : 13 April 2007
Zimbabwe: Best Performing Stock Market in 2007?

If Western countries are issuing credit or printing more money per year by 10% or 15% then inflation should be showing up in the system somewhere. Consumer price indices as measured by governments seem to be staying benignly at around 3%. GDP growth is lowish at around 3% (1.5% for NZ) and population changes are by and large less than 1%.

Where is all the money going?

Zimbabwe with its hyperinflation may give us a clue.


Apr 11, 2007, 11:35

 Newsletters : 2007 Newsletters : 13 April 2007
The Relevance and Importance of Gold in the World Monetary System

Those of you who have been following our story for the last few years know that we started by trying to find out how we could best assist our government to maintain a steady and relatively high (4% - 5%) rate of GDP growth.

In 2002 we thought that the then current government actions and legislation would reduce our growth rate rather than enhance it and so it has happened. Our current growth rate is now only half what it was while Australia is still booming away at nearly 4%.

Further investigation has shown us that we do not a have a very stable monetary system in New Zealand. It is a well documented fact that whenever governments are not tied to a gold standard and are able to print as much money as they like - they do. And New Zealand is no exception. Neither are we alone in this activity. In the Western world, inflation seems to be the method for governments to keep the population happy and voting for them. This "bread and circuses" philosophy cannot last but it is good fun while it does.

The best information I can find shows that after these boom times comes the bust. As far as I can determine this is inevitable and is a consequence of the boom being started. The only way to avert this continual boom-bust cycle is to tie the local currency to a gold standard.

So this has led to a study of gold and how it has been the world's money since civilisation began. This article on the website indicated shows what has happened since the world went off the gold standard in 1914 then on again and then off again in 1971. It would seem that the world must again adopt a world wide gold standard in the near (years or decades) future.

It would also seem that all is not well with the way gold is being accounted for by central banks and this may occasion some problems.

One interesting side effect of all this fiat currency manipulation is that it looks as if gold may be in for an extensive price revaluation. A good old fashioned gold rush!

It is certainly food for thought.

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Apr 10, 2007, 12:56

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