Category Archives: The economy

Trade with other countries, exports, imports, manufacturing, agriculture, forestry, building. How do we make ourselves a living. The economy’s purpose is not “to grow” but to provide every citizen with the basics of life and do this in an efficient way. Every section of New Zealand must be just as well served as every person deserves the basics of life.

Derivatives for Dummies

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This I found on the web. Sorry I can’t acknowedge the writer. Others seem to have put it on their websites too. I asked a meeting of 35 people in New Plymouth the other day how many people know what a derivative is and only one person put up her hand. It is worrying that the shadow economy of at least $700 trillion is at least ten times as big as the real economy yet so few understand the shadow economy.

A financial reporter in Australia said in 2009 all banks are exposed to toxic derivatives. If 1% of these contracts default because third parties get into trouble, the whole shareholder wealth would be wiped out and the banks could be broke.

So here is the derivatives for dummies piece. Nice and easy.

Derivatives for Dummies

An Easily Understandable Explanation of Derivative Markets

Heidi is the proprietor of a bar in Detroit . She realizes that virtually all of her customers are unemployed alcoholics and, as such, can no longer afford to patronize her bar. To solve this problem, she comes up with new marketing plan that allows her customers to drink now, but pay later. She keeps track of the drinks consumed on a ledger (thereby granting the customers loans).

Word gets around about Heidi’s “drink now pay later” marketing strategy and, as a result, increasing numbers of customers flood into Heidi’s bar. Soon she has the largest sales volume for any bar in Detroit .

By providing her customers’ freedom from immediate payment demands, Heidi gets no resistance when, at regular intervals, she substantially increases her prices for whiskey and beer, the most consumed beverages. Consequently, Heidi’s gross sales volume increases massively.

A young and dynamic vice-president at the local bank recognizes that these customer debts constitute valuable future assets and increases Heidi’s borrowing limit. He sees no reason for any undue concern, since he has the debts of the unemployed alcoholics as collateral.

At the bank’s corporate headquarters, expert traders transform these customer loans into DRINKBONDS, ALCOBONDS and PUKEBONDS. These securities are then bundled and traded on international security markets. Naive investors don’t really understand that the securities being sold to them as AAA secured bonds are really the debts of unemployed alcoholics. Nevertheless, the bond prices continuously climb, and the securities soon become the hottest-selling items for some of the nation’s leading brokerage houses.

One day, even though the bond prices are still climbing, a risk manager at the original local bank decides that the time has come to demand payment on the debts incurred by the drinkers at Heidi’s bar. He so informs Heidi.

Heidi then demands payment from her alcoholic patrons, but being unemployed alcoholics they cannot pay back their drinking debts. Since, Heidi cannot fulfill her loan obligations she is forced into bankruptcy. The bar closes and the eleven employees lose their jobs.

Overnight, DRINKBONDS, ALCOBONDS and PUKEBONDS drop in price by 90%. The collapsed bond asset value destroys the banks’ liquidity and prevents it from issuing new loans, thus freezing credit and economic activity in the community.

The suppliers of Heidi’s bar had granted her generous payment extensions and had invested their firms’ pension funds in the various BOND securities. They find they are now faced with having to write off her bad debt and with losing over 90% of the presumed value of the bonds. Her whiskey supplier also claims bankruptcy, closing the doors on a family business that had endured for three generations. Her beer supplier is taken over by a competitor, who immediately closes the local plant and lays off 150 workers.

Fortunately though, the bank, the brokerage houses and their respective executives are saved and bailed out by a multi-billion dollar no-strings attached cash infusion from the Government.

The funds required for this bailout are obtained by new taxes levied on employed, middle-class, non-alcoholics.

New Paradigm economics for jobs in a post fossil fuel economy

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I have uploaded a revised version of the slideshow on new paradigm economics. This is similar to the first one, yet addresses the question of how you get a financial incentive built in to an opt in scheme. It also comes after realisation that an opt in scheme will need to operate under current law. Homeowners will negotiate a land fee payable to government and agree under contract law. We no longer talk of leasehold land, though it is rather similar. This one suggests we burden the title with a covenant while the title remains with the property owner.

The other change is that we are not referring to Zeals but are talking about a tradeable tax credit. We don’t use the term land rental or land rent much, but talk about a land fee or land rates. These terms indicate more accurately that the fee is payable in exchange for the value provided by society in the services to the site.

We have also returned to the idea we had in the first place, that of mortgage relief. If the government pays for the land and effectively takes land out of the market, then the homeowner’s interest payments to the bank reduce while they have some precious new currency to spend. It naturally flows towards productive enterprise or the relief of more private debt e.g. student loans. So it is an ideal policy for first home buyers.

Since posting it, I have realised only one more thing. The land fee will rise or fall depending on the zoning of the land.

Private capital gain from houses eclipses government gain from progressive tax

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Being a political junkie I have been following the Labour leadership issue closely. I have been addicted to twitter. I have read all the good commentators and I became especially enthusiastic when reading David Cunliffe’s speech called Dolphins and the Dole. It said all the right things. But when he announced he was standing, and just when I was getting really excited about his possible leadership, I heard him endorse higher taxes for the rich. Then I remembered why the policy of the New Economics Party is different from Labour’s.

I recalled a short video I had seen where Fred Harrison, the author of Ricardo’s Law – the Great Tax Clawback so I watched it again.

In this video Harrison visits the Hyde Park area near Harrods in London and says the houses are worth millions of pounds. The location of these houses means they benefit from the park, good transport and some superb businesses in the area. These improvements are the work of the community. It is the community that have added value to that land. The poor in apartment homes has paid for the infrastructire in their taxes. It is the poor who are subsidizing the rising land values of the privileged near Hyde Park.

Harrison says sure, the rich with progressive taxes pay about five times as much tax as the poor, but this is all made up for by the huge gains their well sited homes enjoy from these services to their sites.

I couldn’t help thinking about the houses in Parnell, inner Remuera, Epsom, Herne Bay, Freemans Bay and Orakei. It might be their homes. Yes, we owned one once in Mt Eden and made hundreds of thousands when we sold after 13 years. Although at the time we smiled and patted ourselves on the back for making such a good buy, we knew in our bones there was something really unfair about it all.

In Parnell a home might sell for $2 million and the 12% rise on that house price would bring in an extra unearned $224,000 in the first year. This money rightly belongs to society who provided the infrastructure, built the other homes, made the roads, developed the good schools, the CBD, Newmarket and the boutique Parnell shopping centre.

In swanky Herne Bay the capital gains made since 2000 have been astronomical. As one writer says of Herne Bay; “Nip/tuck surgeons live side-by-side with interior designers, ad agency chiefs, and entertainment lawyers.” (Jane Phare, NZHerald)

In 2008 houses in Herne Bay were the first to average $2 million. Their homes are worth 50% more than Remuera houses. Jane Phare in Dec 2008 said the average house price was $2.19m there, and there had been a gain of 24% in house prices over the last year.

A quick look at trademe shows a few houses for sale in the millions.

Dean Barker bought a house in Herne Bay for $5.6 million in 2007. An article on rising house prices TVNZ Aug 8, 2013 said “in Auckland the rate of increase has been even higher, at 12.8% over the last 12 months.” If Dean Barker had been experiencing an average of 10% yearly rise in property value since then (and this is quite likely), his home would be worth $9.9m today. That is a jump of $4.3 million. Even with the steepest progressive tax system, the government could never charge him this amount in income taxes. And whatever it was his tax lawyers and accountants would minimize it. The difference in the two amounts is what the taxpayers are missing out on by not recouping the cost of the government and community services to Dean Barker’s property.

And if the rise in house values on a $3 million Herne Bay property continues at its current rate of 12.8% a year, next year that house will be worth $384,000 more.

In September, 2012 Auckland businessman Grant Nola and his former Bulgarian tennis pro wife Pavlina sold their bungalow on William Denny Ave in Westmere for $2.25 million – $350,000 above its council valuation of $1.9 million. They had bought it three years earlier for $932,000. This is a cool $1.93m profit in three years – once again money belonging to society not to the owners. A progressive tax rate for him would be nothing but a nuisance to be dealt with by tax lawyers and accountants.

Now just imagine if all those capital gains had been captured publicly instead of by the landowner and the bank which issued higher a higher mortgages. The public purse is missing out on billions. And think of all those young people working for a pittance in cafes, bars and hotels and paying their GST and their income tax. Not fair. Or the taxidriver who made just $3 a hour on his long day’s work. Capital gains on houses in Orakei or Takapuna or Queenstown or Fendalton are in their dreams.

Some politicians, arguing for increased income taxes for the rich, will be telling the public they don’t mind paying this tax themselves. But the wealth of the wealthy comes from land ownership and not from a salary, no matter how high. An owner of a home in an elite street makes money from the monopoly privilege of owning this precious land, while Auckland develops round about him.

The gap between the rich and the poor is not the gap between those who earn big salaries and the others. It is the gap between those who own valuable property and those who don’t own property at all.

If we don’t tax what we use (land and other natural resources) but tax what we earn, then wealth pools with landowners while the poor can’t buy food for their children let alone buy land. The effect of progressive tax systems is minor compared with the gains made from rising house values. Those who have the privilege of living in inner Auckland grow rich on the work of others while those who live in small towns or those who rent grow ever poorer. While the part time professional working for a council pays GST on everything he buys and pays income tax, the landowner watches his house value rise.

I don’t know what the solution is for any one person. Martin Adams whose excellent new book Sharing the Earth, puts it rather more strongly. He says the capital gains you make from your house is really stolen from the public at large.

We must get a fairer tax system, where we tax what we hold or take, not what we do or make.

Auckland homeowners benefit at the expense of other New Zealanders

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Media statement

Auckland homeowners profiting from booming house prices are really benefitting at the expense of the rest of New Zealand, according to the New Economics Party.

Spokesperson Deirdre Kent said “If all the private landowners and private banks had reimbursed the public for their windfall gains from rising Auckland land values over the last few years, the Auckland rail loop would have been paid for.

“Or it could have paid for the railway be electrified from Waikanae to Levin or to fix the Gisborne to Napier railway.” She said rising house prices are always due to rising land values. Land values rise because of the action of the community in providing hospitals, transport, roads, schools, sewage, water, businesses, shops and parks. So landowners should pay the public back regularly for this privilege.

“While we allow the private capture of rising land values, we can’t help but get a widening gap between those who own good real estate and the rest of us. The Auckland housing bubble where obscene profits are to be made from selling a house is affecting every New Zealander who pays tax to line the pockets of lucky private landowners and banks. Moreover the relentless rise in the supply of bank credit makes all of our money less valuable.

A regular land fee should be paid to hold land while taxes on labour and sales should go.

For further comment phone Deirdre Kent 06 364 7779 or 021 728 852

 

 

Slideshow on the Post Fossil Fuel Economy – Jobs, leisure and innovation

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The new slideshow is at http://www.slideshare.net/deirdrekent/steady-state-economy-jobs-for-a-postgrowth-economy. It addresses many of the questions our members have been asking and hopefully makes it easier to understand. There are presenter notes with most slides.

Christchurch Eastern Green Frame presents opportunities

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Christchurch has a unique opportunity. The plan of the inner city area includes three “frames”. The largest one is to the east and contains 13 ha of land which will end up as park. Apparently there through the park will be cycleways and walkways. Cyclists will ride past some residential houses and some inner city up market apartments. The south frame will contain the health precinct and the Avon Precinct to the north will have civic buildings.

It is the east frame I have been thinking about. If there are to be private homes in this park – and there is no date for it – then let’s do it right. There are 92 properties to be acquired by Government in the eastern frame. 52 agreements have been reached and there are 30 sites with negotiations being finalised.

In the Press (Sat July 13, 2013) there is a story describing the bitterness of property owners. The Christchurch City Development Unit is  apparently offering ridiculously low sums of money for these properties. The Government can acquire the land under the Public Works Act. If property owners allow this, they can seek compensation through the courts.

The article talks about the Government onselling the land at a profit and it is here that I really started to get interested. Putting aside all the unfairness of not paying market prices for the land and getting it on the cheap, this issue of onselling it is where I draw the line. My view is that the Government should keep the land and then auction the leasehold property to the highest bidder. Thus a full ground rent would be payable. The revenue should ideally be shared by local government and central government.

IMF economist Michael Kumhof says the key function of banks is to create money

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imfToday I made the mistake of going to a website where there was a sentence which made me mad. It said that in New Zealand, banks like finance companies can only lend out deposits made with them. Well I rarely get mad these days but I don’t like untruths being perpetrated. So I thought the best way to recover would go and transcribe the first seven minutes of a talk Michael Kumhof, economist from the IMF made to a seminar in January 2013.  It is on youtube here and here is my transcript, give or take the odd aside I left out.

“Virtually all money is bank deposits.

The key function of banks is money creation not intermediation. The entire economics literature that you see out there today is that it is intermediation, taking the money from granny, storing it up and then when someone comes and needs it I can lend it out to them. That is complete nonsense. Intermediation of course exists, but it is incidental and secondary and it comes after the actual money creation. Banks do not have to attract deposits before they create money. I’m a former bank manager. I worked for Barclays for five years. I’ve created those book entries. That is how it works. And if a leading light economist like Paul Krugman tries to tell you otherwise, he does not know what he is talking about.

When you approve a loan, as a bank manager you enter on the asset side of your balance sheet the loan, which is your claim against this guy and at the exact same time you create a new deposit on the liability side. You have created new money because this gives this guy purchasing power to go out and buy something with it. Banks have created money at that point. No intermediation, because the asset and liability are in the same name at that moment. What happens afterwards is that that guy can spend it somewhere else later but it is still in the banking system. I care about the aggregate banking system. Looking at the microeconomy and transferring the logic to the macroeconomy is really wrong. Someone will accept that payment.

money

What that means is that it becomes very, very easy for banks to start or lead a lending boom even though policy makers might not, because if they feel that the time is right, they simply expand the money supply. There is no third party involved, just the bank and the customer and I make the loan. The only thing that is required is that someone else will accept that deposit, say as payment for a machine, and he knows that is acceptable because it is legal fiat.

There is an important corollary to this story. A lot of loans are not for investment purposes, in physical capital. Loans that are for investment purposes are a small fraction. The story that is often told in development economics is that first you need to have savings, then once you have the savings, you can have investment. So a country needs to have sufficient savings in order to have enough investment. Nonsense too – at least for the part of investment that is financed through banks because when a bank makes a new loan it creates new purchasing power for the investment to go ahead. The investment goes ahead. Then the investor takes his new bank deposit and gives it to someone else In the end someone is going to leave that new deposit in the bank. That is saving.  The saving is created along with the investment. It’s not that saving has to come before investment. Saving comes after investment, not before. This is important for development economics.

The deposit multiplier that is taught in economics textbooks is a fairytale. I could use less polite terms. The story goes that central bank creates narrow money and there is a multiplier because banks can lend out a fraction. It is actually exactly the opposite. Broad monetary aggregates lead the cycle and narrow monetary aggregates lag the cycle.”