Monday, 13 August 2012

The pernicious effect of an over valued exchange rate.

Exchange rate distortions are at the very core of the current global crisis.   It is form them that everything else that is wrong arises – worse even than the debacle that is global banking.

Floating exchange rates are meant to reflect relative efficiency of the respective trading economies a weak and inefficient economy will have a very low valued currency while an efficient economy will have a high valued exchange rate.

There are two problems with this.  It only works if everyone is playing by the same rules and if there isn’t anyone gaming the system.

Unfortunately we have some economies that have rigged fixed exchange rate mechanisms that tip the balance in their favour.  We then rely on an infrastructure of global finance to operate the system.  Unfortunately those who operate the system run it for their own benefit when it needs to be run for the common interest of those who trade in goods.

Parties who trade internationally are using a system of currency exchange that is run by parties who are not just betting against them but who are actively interfering in with the demand for money.  These parties are doing an ENRON but with money.  They withhold money or flood money into individual markets to drive the price up or down and then bet on the consequences when they reverse their positions.  The fact that 95% of all foreign currency trades of the $NZ are for speculative purposes is illustration enough but when the absolute scale of this activity is included it becomes clear how corrupt this system is.  The daily trade in NZ currency is equal to half the country’s annual GDP.  This is crippling our ability trade as it imposes a huge cost to our export sector.  

It is also sending us broke.

It is also how our Prime Minster got rich.  He didn’t work hard, he didn’t create some innovative product, he didn’t add value to any process; he was just a filter feeder in a system run by filter feeders.  His wealth he skimmed from those who were working honestly in the field of international trade.

The deeper problem is the lack of a common set of rules for managing currencies. The true villains at the core of the current round of economic crisis are Germany and China.  Each have set up relationships with client states that contained an entrenched fixed currency imbalance in their favour.  The European Currency Union acts as a subsidy on exports for Germany and tariff on imports while it acts the other way around for all other countries in the EU.

Similarly China has had a pegged currency against the dollar for the past several decades.  Japan did the same thing for as long as it could.  These resulted in huge transfers of wealth from the overvalued economy to the undervalued economy.  Why the US and the rest of us have put up with it for so long is truly surprising as it is such an obvious and damaging yet simply rectified distortion.

As with all distortions when it does resolve itself the rectification will be rapid and hugely disruptive.   It will be like an overstretched rubber band - it will either snap or snap back - either way it will be a rapid and violent reaction.

Tuesday, 24 July 2012

Kiwisaver conned confirmed

The NZ Herald ran a story last weekend entitled Bigger KiwiSaver investment overseas predicted

Onepath predicts KiwiSaver will grow from about $12 billion now under management to $50b by 2020. At the same time it share of retail funds under management will increase from about 40 per cent to about 70 per cent, with total retail funds reaching about $70b, it says

This will mean that we have saved through Kiwi saver more than our share market is worth by 2020 and we will invest that money in the productivity of other countries – what losers we are!

Because our economy can’t absorb that level of savings under the current model the investment whizzo’s are going to put it into international share markets.  These while they have fallen back somewhat from their hysterical highs of the last decade are still horribly over valued and even the optimists expect no more than 2.5% return on capital from the Dow Jones for the next decade.  And that is if the money doesn’t disappear down the hole in the meantime either through business failure, skullduggery or inflation.  Remember that at the same time the EU, the USA and Britain are printing money like it was going out of fashion.  Your Kiwi saver will evapourate as this continues.

"The more money available [from KiwiSaver] the more money can come into the New Zealand capital markets and the more companies will use them," Body says.  "But the growth in the [KiwiSaver] industry will probably be too fast. That means more global exposure for a lot of fund managers.

So your savings are being used to help NZ’s capital markets grow fat- a bunch that even Stephen Joyce acknowledges as being less than honest over the past decade.  The investment advisors can’t see where in the NZ market they can invest so they are going to take it off-shore.  But BillE says that we need the money and the asset sales to build our capital markets.  The capital markets are saying that the asset sales wont make much difference.  And all that money pouring into the global capital markets is competing with all of the retirement funds of every other rich countries plus the money magic of the bank’s fractional lending and we will soon be wondering were our money has gone – a fool and his money – is an image that leaps to mind.

Body says state-owned asset sales will help. "But if you think about the raw numbers, we think KiwiSaver is going to grow $50b in the next 10 years and the [assets] float is about $6b in total.

Even if growing savings sees that triple by 2015, by that time the NZX may have a market cap of about $75b thanks to growth and proposed SOE privatisations, he says To date about $1b of KiwiSaver money is invested in the local share market from a NZX market cap of $58b

If the government wanted capital put into public assets why not just let KiwiSaver invest directly in our energy company through bonds.  Remember however that when all us old farts want our money out it wont matter whether it is through taxes or power bills - the next generation will cop the bill.

Why not use all this cash to get rid of the foreign banks that are bleeding us white and use the savings to fund our own internal borrowings – far safer and better returns than the share market, particularly the foreign share market.  Why not invest it in the rebuild of Christchurch?  Why not invest in energy self sufficiency? 

Do our leaders have no vision? No sense? No courage?

The current account deficit for the year to March 2011 was $7.2 billon, or 3.7 per cent of gross domestic product, Statistic New Zealand figures show.  Kiwi firms paid out $9.6b more to overseas investors than Kiwis received from other countries. On top of that we export another $4billion each year in Kiwisaver investments.  This is all stupid.

We are bleeding money and yet our leaders want to accelerate the bleeding.  Are they bleeding idiots or what?

Bigger KiwiSaver investment overseas predicted ELOISE GIBSON Business Day STUFF 23/07/2012

And Time magazine agrees with this current article...  Are Dividend Stocks the Next Bubble?

Dividend stocks are leading the market and some pundits believe the rally is a bubble about to end badly. But they may be underestimating the flood of income-starved retiree money heading this direction in a record low-yield environment

Monday, 16 July 2012

The answers are simple the solutions are complex.

We are broke and getting broker for some very simple reasons …

  1. Our exchange rate is too high
  2. Our exchange rate is open to manipulation (it is unstable).
  3. The worse our economy gets the higher our currency rises when we need it to fall – this is the complete opposite of what needs to happen
  4. We play by the rules of free trade and no one else does
  5. Foreign owned banks use inflation and speculation to fill the country full of debt and capture our productive surpluses.
  6. Banks can print money without any effective control by the state
  7. We spend more than we earn
  8. We are squandering the talents of our young while burdening them with debt
  9. Our retirement savings are inflating the share-market
  10. Anything of value is sold to foreign investors
  11. Our employers have to meet the social costs of trading in New Zealand while their competitors don’t (an effective subsidy)
  12. Labour is taxed while energy capital and land aren’t
  13. We treat basic infrastructure as an “investment” rather than as a basic function of production – roads aren’t there to make money they exist to allow business to function - same with power telephone and a whole raft of other things.
  14. And we too often allow the core institutions of community and commerce to act with impunity with regard to the law and to moral behaviour.

It is not foreign forces or some compelling logic causing these things to happen to us.

The last reason is that we have just suffered thirty years of ideological leadership.  

It is our leadership that has made us poor as we have wished this on ourselves.  The mess that is the Euro is the best illustration of the problem of exchange rates not reflecting the relative earning potential of separate national economies.  We have the same issue with Australia the US and China,  as Greece has with Germany - our principal trading partenrs are cheating on the free trade deal   and we are the losers.  Our dollars is over-valued to an extent of about 30% in comparisons to them.  This could be resolved overnight - but it would take courage.

It is this ideological base that is the first thing that needs changed. 

Once that has happened then fixing this country is easy - we are rich in resources, we are well educated, we should be energy self sufficient.  We should be the luckiest country in the world but our leadership prevents this from happening.

Wednesday, 11 July 2012

Kiwisaver Con

Are the asset sales necessary to suck up money being taken from working kiwi’s through the Kiwisaver scheme to fund their retirement? 

It seems so because Stephen Joyce thinks supporting our capital markets is more important than retaining state ownership of our power companies.

It seems most unusual that a Minister of the Crown would consider that supporting capital markets a key responsibility of government and the provision of energy infrastructure a key responsibility of investment markets.

"I don't believe the government's going to back down on that at all," Mr Joyce said on TV One's Q+A programme on Sunday.

He said the role the policy would have in strengthening New Zealand's capital markets had not been discussed enough.

"Now, the New Zealand capital markets actually historically, certainly over the last 10 years, have performed very poorly relative to the rest of the world, and that's because there's been some breaches of faith historically."

The sale of stakes in the energy companies would be an opportunity to list strong companies.

"That's an opportunity to actually strengthen the capital markets and get more kiwis interested," Mr Joyce said.
No backdown on asset sales, says Joyce NZ NewswireUpdated June 24, 2012, 2:13 pm

It is interesting to note that Mr Joyce comments that “there have been some breaches of faith historically” with reference to the capital markets not always acting honestly. Not only is this a profound understatement but Mr Joyce now expects this den of thieves to be trusted with these assets.

Power companies are nothing less than a pipeline straight to the wallet of every kiwi.  It is easier to avoid paying tax than it is to avoid paying the power bill. 

And this turkey also intends to rely on the Electricity Commission to regulate the “electricity market” which is about as useless a guard dog as any burglar could wish for.


Bill English also openly acknowledges on his National Party Webpage that the asset sales are simply another way of putting your savings in the share market's pocket at your expense.

As well as reducing the Government's debt, the mixed ownership companies will also provide New Zealanders with another investment option for their large and growing pool of savings.

In fact, New Zealanders are telling us they're hungry for other options as they look to diversify their investments away from highly-leveraged property and finance companies.

Kiwi investors have about $100 billion sitting in term deposits. And there are tens of billions of dollars invested by other New Zealand investors from KiwiSaver providers to the NZ Super Fund, ACC, Government Superannuation Fund.  
A mixed ownership model for state assets by Hon Bill English, Finance15 February 2012

Why Bill is so keen to give your assets to the share market?

The reason is that the quantity of money flowing into the capital markets from enforced savings is artificially inflating the value of the whole share market. Bill has acknowledged that in recent press comments. Bill needs more assets to be put in the market to soak up the enforced transfer of your cash in the form of your household savings plus your Kiwi Saver investments and ACC into the share market. You then pay the profit on these investments through your power bills. 

This is the circular idiocy that is Kiwisaver.

Kiwisaver and other retirement saving schemes are at the root of why the investment markets are so unstable and dishonest. The money is going into the share market because investment funds need to put the money somewhere and there are few other options that can absorb the vast volume of cash that these enforced schemes introduce to the market each year.

When there is no increase in the scale of the market – when new assets are not being created - but there is a constant inflow of cash, then there can only be an inflationary response in asset values.

The retirement fund managers also play the market as they attempt to generate decent returns and this reinforces the speculative behaviour. The investment advisors working for these firms are also not putting their own money at risk so they have no moral balance to their investment decisions. All they are interested in is producing paper returns on assets and so they play bidding wars with their fellows.

In effect what Silly Bill and even Sillier Steve are doing is using your hard earned spare cash to subsidise the very destructive behaviour that has brought the world to the precipice of a financial disaster.

Bill is old enough and rural enough to remember when farming was subsidised and the wreckage that happened when that distortion was corrected. He doesn’t seemed to have learned anything from that experience. Subsidising farming at least produced salable goods even if at a loss. Subsidised capital investment and subsidised banking just creates a vast and destructive waste.

Right now the best investment is getting rid of debt both private and public. It might have a low rate of return but it has a very high degree of certainty as to outcome.

Debt repayment also has the benefits of avoiding inflation risk. The chances of ever getting the real value of your Kiwisaver money back is slight. History provides good evidence of the erosive risks of both inflationary forces and share market under-performance. The future for both only looks bad in the longer term particularly as your money is, as Stephen Joyce acknowledges, being placed in the hands of thieves and the swindlers.

There is also a demographic issue with Kiwisaver. That issue is the same one that government raises for the impossibility of funding pensions from taxes and that is that there will be too many retirees and not enough taxpayers.

The same effect occurs when there are too many sellers and not enough buyers in the share market. When the bulge of baby boomers seek to withdraw their cash from the market it will collapse for want of buyers. Indeed the wisest long term investment strategy for both retirees and for future taxpayers is to build an essentially debt free society.

We need to be building an investment in the future. Instead we have loaded our children with debt. We have either run the assets we inherited from our parents into the ground or sold them off and we have not prepared ourselves, or our children for the future.

It is not too late to resolve this situation but there is very little time left and the best years for doing this have passed.

And the orthodoxy does not have the answer it just provides more fuel for the problem.

Saturday, 30 June 2012

Time for fundamental change

In a piece with headline Price of progress hurts Kiwis Fairfax media notes…
The rampant cost of living means two-income families are increasingly worse off than single-income families were a generation ago – and it is threatening to put them under.
While median incomes and the number of women in the workforce has risen substantially, the money that families are putting into servicing the long-term commitments of a standard middle class lifestyle – comprehensive health insurance, a house in the right suburb and investment in education – has soared.

Being old enough to remember that far back they are dead right, but to call it progress?

This is not the result of progress this is obvious consequences of thirty years of decline.  The consequences of Roger Douglas’s failed reforms are now at the point where the decline becomes terminal.  The sale of our energy companies and the Crafar farms are the signs of terminal decline as is the widespread increase in poverty – we are selling the last of the family silver to eat and we are chopping up the furniture to burn to keep warm.  Meanwhile we live in the most well endowed country on the planet on a per capita basis.  Given that one has to ask why we are in such a state.  Are we lazy? I would suggest not.

We are suffering this fate for no other reason than that we have had archly stupid, short sighted and unmoral leadership across both business and politics since Roger unleashed the dark side of private enterprise upon the functions of the State.  We have since then had leaders of both business and politics acting in disregard for the law and with impunity as the norm.  Worst of all we have an economic ideology dominating our society that is destroying us.

It is time for a change at the most profound level.  We need to take back control of our society and our economy, but most of all we need to take back control of our supposedly democratically elected leadership. 

Is Labour up to it?

Selling our future for pennies

Just how stupid can you get …

Chief executive Chris Kelly said the deal would allow it to enter China, where Shanghai Pengxin had access to 10,000 hectares of land for agricultural development.
"We're going to look at exporting genetic material. Shanghai Pengxin has about 100,000 sheep in China, and is looking to advance flock progress. It recognises that New Zealand has some superior genetics, and is keen to talk to us about spreading those genes through its flock."

He said the quality of China's sheep genetics was way behind New Zealand. "It's not always easy to distinguish between a sheep and a goat in China. What they're looking to do is have access to a secure supply of quality meat, which is what we produce, and they can't.

We have done this with Kiwi Fruit we are doing this with Fonterra and our tourism industry suffers from it as well.  Our leadership basically gives away our competitive advantage. Our ability to earn a premium lives in those genes.  These are the legacy of a century of government and private investment and this clown is proud to be selling it to China for a quick buck.  They must think we are the biggest bunch of simpletons breathing God’s good air.

The next thing is that these same clever dicks will talk the Government into letting them bring genetic material back into NZ just like the Kiwifruit industry did and we will have Foot and Mouth Disease just like the Kiwifruit industry has got PSA.

Did they negotiate any good deals for the Chinese to upgrade any of our technology companies for free while they were at it? Fat chance!

Idiots like this are only guaranteeing our children a future as peasants in our own land – the little left that we will own.

Thursday, 24 May 2012

On the benefits of public ownership of ports

The productivity commission some months back asked a series of questions relating to Port Ownership and port efficiency.  The Productivity Commission is a stalking horse for the “privatisation” of public assets, their agenda appears to be driven by Dogma, it is most improbable that true efficiency even comes to the hindmost parts of their consciousness when contemplating these matters.  The questions raised by the Productivity Commission speak for themselves.  As I hope do my responses to them.
Q1   Are there important issues that may be overlooked as a result of adopting an economic efficiency perspective for this inquiry?

1.        Ports are “enabling” infrastructure, their existence allows other economic activities to occur.  The whole of system effect needs to be considered when considering the “economic efficiency” of current services.  A simple example of this for is that without a port with log handling facilities and without a log service whole log exports are uneconomic within quite a short haul from a port.  Rail or road transport to another port do not appear to be viable economic options.  The profitability of the log export market to the regional economy, with a port and bulk log carrier services, is probably more significant than the profit on the port yet without a port this sector of the economy is rendered unprofitable.

2.        Ports are public infrastructure.  In the short term Ports can be run as stand alone enterprises with profit as the primary motivation for the business activity but in the long term the business is there to facilitate regional trade in the same manner that the road network does, not to make a profit.  There are times when Port investment needs to consider the “whole of economy” value ahead of profitability, and overall regional economic performance needs always to be paramount.  The original investment in developing  most of the Port Infrastructure only occurred because they were constituted as local authorities and could invest community money.  On pure direct economic returns the investment in the creation of port facilities would unlikely ever have been viable, but the overall value to the economy of the investment in port infrastructure and of the wide variety of businesses that are now facilitated by that investment has made it more then a sound investment, in each community the Port is an essential element.

3.        Ports and airports removed from community control also lend themselves to “gate keeper” or “highway robber” roles in the economy.  They provide the owner control of an essential monopoly with the power to tax the economy dependent on the services of the Port.   This highway robber effect is evident with Auckland Airport. 

Q2   Is the framework described in Section 3.2 appropriate for this inquiry and are there any important issues that might be missed?

1.        The most important issue missing in this is that “economic efficiency” is not the primary determinant of a viable economy. Infrastructure services have a “whole of economy” effect that unlock potential or enable activity. Most of these services are not necessarily possible to provide profitably while also maximising the economic potential of the region, some of these services even provided at least cost do not realise the full potential in the economy.  

2.        The consideration of third party costs is missing.  Much “economic efficiency” in the narrow “Neo Classical” sense is actually a transfer of costs or a loss of economic opportunity onto a third party dependent on a service.  The cost reduction provides a saving to the “efficient” infrastructure provider but a cost to the infrastructure user.  That is why infrastructure is publicly owned, it is cheaper to aggregate costs to minimise them through collective or public monopoly enterprise than it is to undertake them individually.  Road networks are a classic example; telecommunications are another that should be.

3.        It is possible to maximise the economic efficiency of all of the individual components of the economy in isolation from one another while at the same time reducing the scale or capacity of the whole system.  New Zealand suffers badly from a lack of realised potential through an inadequate investment in infrastructure and through over pricing.   This is primarily because the narrowest of economic efficiency measures are applied to these infrastructures where privately owned with investment decisions and because existing infrastructures are increasingly being run for profit rather than for realising the fullest economic potential from the broader economy.

4.        New Zealand also suffers from a lack of strategic control over its supply lines.  The whole concept of dependency on the investment whims of third party maritime freight service providers for the provision of the most profoundly essential service to our trade dependent economy seems unsound to put it mildly.  We are price takers in everything we do.  The country needs to break out of that mind set.

5.        In most rural parts of New Zealand the community holds public ownership of these assets in very high regard.  The strong ethic of community ownership recognises the significant indirect economic values that this report fails to recognise.  Ports were built using community money, the fact that community ownership is not as coherently represented in the market as private investment is, does not mean that it holds any lesser rights.  Council also owns its share as a majority holding in a publicly listed entity.

Q3   Which components and component interfaces warrant greater attention? What is the evidence that they are inefficient? What contribution could changes make to an improvement in the overall efficiency of the freight system?

1.     Nationally we need a vision that identifies the potentials within the economy and how these might be realised.  Particularly the cross linkages and displacements

2.     There is no future proofing, no conceptualisation of trends and drivers for change in the manner in which the economy will function in the face of fuel cost increases and changes in technologies and changes in market place dynamics.

Q4   What environmental considerations should fall within the scope of this inquiry? What issues are of particular importance?

1.     The cost of fuel and the introduction of a carbon cost is going to enhance the value of coastal shipping as the most fuel efficient form of bulk transport.

 Q5  To what extent is there effective competition for customers between New Zealand ports? Has this led to lower prices and incentives for productivity improvements?

1.        The small ports and national rail freight capacity do seem to be used by the major customers of the country’s ports to effectively develop competitive freight arrangements.  However non-freight cost components do seem to play a significant role in port users’ freight decisions.  Particularly space for port related facilities such warehousing and bulk storage and regional business opportunities seem to drive port freight flows.  The report does not seem to contemplate “whole of journey” costs. 
2.        Most major commercial relationships relating to port activity appear to be negotiated by parties with reasonably equal market power and that would indicate that the outcomes are likely to be fair and competitive.  The service decisions of the individual shipping companies seem to have a far greater influence on service levels and costs than the cost of port operations.
Q’s 6 – 12 Relating to Port productivity

1.        Most of the measures of port productivity are spurious for the greater proportion of NZ’s ports.  Many NZ ports are still based on infrastructure that was built prior to containerisation.  Substantial parts of the asset base are either fully depreciated or have a minimal residual or salvage value.  Most of the smaller ports have less sophisticated freight handling capacities but also have lesser overheads and most have intermittent services than these being mentioned in the benchmarking measures.
2.        Profitability is also a misleading measure.  The residual value or current value of port company assets is unlikely to bear any resemblance to their replacement value.  The key measure is the level of service provided to the regional economy.  A satisfaction survey would be the most effective means of achieving this.
Q 14 Does New Zealand have too many ports for a small country? If so, what barriers are inhibiting rationalisation?

1.        Given that each port appears to be economically viable the answer is clearly no.  The existing port assets are “stranded”, even if fully depreciated and run at a minimum of reinvestment they are clearly providing sufficient operating surplus to justify their existence.  The fact that ships still visit and freight still passes through them and given that there is no constraint on road or rail freight to other ports and that there is a clear cost advantage in the existing coastal freight network indicates quite clearly that we do not have too many ports. 
2.        If there were too many ports freight forwarders and shipping services would sort that out rapidly as there would be cost savings in freight aggregation at fewer larger ports.  If anything the smaller ports are keeping the bigger ones honest.  It is also important in this discussion to remember that a number of regional industries are port dependent. 
3.        The removal of elements of the coastal trade from a port may only result in higher overheads for the residual industry dependent port activity. If Bluff was only operating to service Tiwai and the fishing fleet it would still need nearly the same operating assets as it does with container and break bulk trade.  It would still need channel maintenance, pilots, tugs and an administration but it would have less than half the vessel berthings to carry the over head.
Q15     Has local-authority ownership of majority stakes in New Zealand’s commercial ports inhibited, enhanced or been neutral for the development of a more efficient and productive port sector?

1.        Most Ports are run on a day to day basis, on a commercial model at arms length from their local government owners.  An independent Board of Directors is likely to be the most important aspect of governance and ownership.
2.        Local government as owner is important for the same reason as the local government ownership of roads is important.  There is a greater strategic purpose to ownership that warrants for public ownership of the asset.  This does not mean that substantial elements of the commercial function of a Port cannot be conducted by private enterprise either as owner or contractor but ownership and determination of levels of service needs to be determined by the community for the community’s greater interest.  The asset also needs to be administered in a way that maximises the hole of community benefit from the infrastructure.
Q16     What changes in governance, regulations or ownership would offer the best means to improve port performance for exporters and importers?

1.        Elected members and staff of the owning authority need to be excluded from membership of the board of the port operating company.  Port companies need professional boards otherwise there do not appear to be any significant issue around port ownership other than that there needs to be regional infrastructure plans that tie port investment into long term strategic objectives for regional infrastructure.

Q 29    The objective of a port company under the Port Companies Act is to ‘operate as a successful business’. Should airport companies owned by local authorities have the same single objective rather than the multiple objectives specified in the Local Government Act?

1.        The concept of these infrastructures as strategic asset is as valid as it ever was.  Airports function as significant community gateways and air services have a much greater import to the community they serve than the direct value to the airline operator.  Air services are essential to business viability in provincial New Zealand and to the entire domestic and international tourism industry.   Airports are the entry point to the regional and national economy.  The most “commercial” of the nation’s airports do not operate for the benefit of the broader economy and exercise significant gate-keeper power and act as revenue collectors rather than service providers.
s5 Interpretation Local Government Act 2002
Strategic asset, in relation to the assets held by a local authority, means an asset or group of assets that the local authority needs to retain if the local authority is to maintain the local authority's capacity to achieve or promote any outcome that the local authority determines to be important to the current or future well-being of the community; and includes—

(a)     any asset or group of assets listed in accordance with section 90(2) by the local authority; and
(b)    any land or building owned by the local authority and required to maintain the local authority's capacity to provide affordable housing as part of its social policy; and
(c)     any equity securities held by the local authority in—
(i) a port company within the meaning of the Port Companies Act 1988:
(ii) an airport company within the meaning of the Airport Authorities Act 1966

Q31 Should the future size and shape of New Zealand air freight services be left to market forces and individual airport owners, or do lumpiness and interdependence (including with investments in connecting parts of the overall supply chain) call for a more deliberately coordinated approach?

1.        Certainty of freight service is essential to investment in export-based industries.  Airfreight-dependent Horticulture and manufacturing in particular needs to be assured of certainty of access to export markets for years into the future before an investment decision can be made.  Some services may also be seasonal.  International freight via regional centres, a number of which are international flight capable or could be made so with a modest investment would create opportunities for much higher value crops to be grown on land that traditionally the highest value use has been pastoral agriculture or dairying.
Q57 Should decisions on investments in ports and in the associated infrastructure links to ports be left to the judgements of the individual suppliers of the separate components? Or would some sort of overall strategic plan provide useful guidance and some assurance that complementary investments will happen?

1.        Strategic infrastructure planning is essential.  This should be conducted at both regional and national levels and be integrated across all infrastructures.
Q58     What is the scope for greater consolidation of ports, greater vertical integration of ports with domestic transport operators, or more use of long-term agreements between shippers and port companies, as possible means to overcome coordination problems and achieve more efficient international supply chains?

1.        At a national level it may be of benefit to negotiate multi year shipping service agreements however these could interfere with existing good working relationships between port companies and shipping lines and exporters.   These could disappear with little reference to the regional economic impact of their loss.  This lack of self determination as to levels of services is a root cause problem.
2.        If hub ports are to be used it is probably more logical to use existing hubs in Australia or Asia as tends to happen anyway.

Q64     Are import and export opportunities excluded or constrained by the lack of access to international freight transport services? Are there changes in institutions, policies or regulations that could lead to better outcomes?

1.        The lack of reliable airfreight particularly between the regional airports and markets in the eastern seaboard of Australia is considered to be preventing or limiting the development of horticulture.  This is an example of the enabling potential of infrastructure.  Without a reliable airfreight service from the South to potential markets the horticulture industry cannot develop and there will not be a freight service while there is no industry.  A very substantial potential for export of high yielding crops is left unrealised because there is no mechanism for establishing the freight links necessary for growers to establish businesses. 
2.        This is the classic infrastructure issue; without the necessary infrastructure there can be no businesses and without the businesses there is no demand for the infrastructure.  This is where political leadership, public investment and strategic vision come into play.  It is these components that seem to be missing from the picture.  Efficiency isn’t the problem it is the lack of strategic leadership and strategic investment that are the problem.
Q68     Are import and export opportunities excluded or constrained by the lack of access to international freight transport services? Are there changes in institutions, policies or regulations that could lead to better outcomes?

1.        A number of export activities are dependent on specific freight services being available regionally.  Bulk log exports are a simple example.  A broader issue is the unrealised potentials issues that come from there being no regional airfreight and the effects that has on the horticultural potential of the region.  The only way this could be realised is for a government funded development strategy with guarantees of freight services being established. The market left unaided would not initiate this. Certainty of access to international markets is not possible under the present arrangements.
Q74     What factors would favour the choice of decentralised vs. centralised strategic planning?

1.     Integrated infrastructure plans are required at both regional and national levels.  The regional level is the primary level for integrated “whole of economy” planning.

Q78 Has this issues paper covered the key issues? What other questions need to be asked?

1.     The paper has failed to consider the whole of economy value and the whole of economy function of freight infrastructure focussing instead on the narrowest measure of value.

Q79     What are the most important issues for the Commission to focus on to achieve the greatest improvements in the efficiency and productivity of New Zealand’s international freight transport services?

§   Invest in freight infrastructure for its whole of economy value
§   Freight infrastructure must be publicly owned at least at the extent of the serviced community determining service levels.
§   Plan for freight infrastructure as a set or system of interrelated economic functions at both the regional national level.

Sunday, 13 May 2012

More on Muldoon

It is my understanding that it was a deliberate strategy.   Muldoon came from hard times, he understood scarcity.  Muldoon also had a strong social conscience, he was obsessed by full employment.  When the financial crisis of the early eighties arrived he set up the PEP work program which again while it had its flaws it did wonders ( I ran a large one as a part of some other things I was doing) - these schemes got ruined by the unions in the end - but for a while it soaked up unemployment and crime disappeared in our area as everyone turned up for work- not always the most meaningful work - but it occupied people when times were tough.

The real fallout from Muldoon is the opening he gave Roger Douglas to destroy so much that was good about out public service and our society.  Again there was no doubt that much needed reformed about the public service but  Roger didn't reform he destroyed.  Muldoon saw the need for social justice Roger just saw that as economic inefficiency.  Our society since Roger destroyed the old moral order has since resulted in one after another of our leading economic institutions acting in ways that were nothing short of blatantly dishonest.

It is to the point where now we trust none of them.  That is why all the "capital markets"want to buy public infrastructures, they are guaranteed secure returns on assets that can't evaporate.  There is nothing else that can be trusted, the share-market is just an unregulated casino, the property market has flared and died,  investment banking has tanked taking $Billions with it.  Entrepreneurship has been severely eroded by the blatant untrustworthiness of the instruments of the marketplace. Those within society who have less power and advantage see their institutions acting with impunity and with a complete lack of morality and think well why should I be any better.

But I digress, the main intent of my commentary on Muldoon was the need for a strategic plan and for leadership from those who we elect to represent us.  For the past three decades we have been coasting pretty much on what was done in those days while our leadership has succumbed to pettiness and dog-whistling.  Nothing much has been built in Auckland in the way of major infrastructure that wasn't started by the old Ministry of Works Town Planning group.  Even Transmission Gully was drawn up in the 1980's.  The point I was making was that we haven't had a leader (for all his warts) since Muldoon.

Governments have a key role as strategic planners, markets can't plan. While much negative stuff is said about China the reality is that China has a plan that is working and we don't.  John Key's three big ideas so far are to build $50 Million of cycle trails to nowhere, the rugby world cup and asset sales.  This is the agenda of someone with no idea and not the vaguest concept of a plan - other than to sell everything.

When Muldoon was in power China was in the throes of the cultural revolution.  Then we used to look at China with disdain or at least mild bemusement.  Thirty years later China is on the way to owning us as we are in the process of becoming serfs in our own country with John enthusiastically selling us into serfdom.

Meanwhile we live in the most well endowed country on the globe in terms of natural capital per capita, much of that we don't value, lots we don't care about and the rest we don't use very efficiently.  People who don't value and care for their resource base, or who don't understand its true value, are on on the pathway to extinction.  The Maori experience is a classic example of that circumstance.  When the European arrived they saw a vast unexploited resource while the Maori were living at the upper limit of what their technologies allowed.  Quite a number of early Maori were rapid adopters of European Technology but many just used it to settle old scores and sold their assets to acquire guns to deal to old adversaries.  Infighting takes much less vision and leadership than adapting.   They to also had the problem of their leaders taking the guns and blankets and leaving the broader populace to their fate just when times were changing.  We are at a similar epochal horizon and we are stuck with leaders with no vision and no courage.

Even with their rapid adoption of the new way of doing things the Maori didn't adapt fast enough and they were divided while confronted with a common threat. They didn't see what was coming until it had arrived and was overwhelming.  They were confronted with a new moral and philosophical order they did not understand.  We are at a similar point in our history.  We are confronted by the challenges of demographics, energy scarcity, global power shifts and the radical changes that advances in computing are presently and increasingly will unleash upon society and the economy.  Much of what we do now we will not be doing in twenty years time or even ten.

Last week I finished uploading my entire CD collection, today I put them into a large trunk to put under the house.  I will never need to play them again.  It is unlikely that I will ever buy another one, it is far easier to do it on iTunes.  That is a metaphor for what is ahead of - as both threat and opportunity.  It didn't seem so long ago that CD's were a wonder that would be with us for a very long time, and now they are very nearly unnecessary.

In ten years time what will our universities look like, in twenty our hospitals.  One good academic can already teach to millions.  Surgery will be performed by robotics, diagnosis will take place on a microchip.  These technologies are here already but they aren't yet ubiquitous, they very soon will be.  manufacturing wil rapidly change as well.  The logic of vast industrial enterprise and of equally vast cities is likely to be turned on its head.

Meanwhile we have vast billions of people wanting to live the way we do but we do not live on a planet that will allow that. We have a labour force of billions just when it suddenly seems that they may be unnecessary.  How will that pan out?

Last time something like this happened, old Mother England put them all on ships and unleashed their labour surplus on an unsuspecting primitive world.

We the descendants of those who were unleashed have arrived at the end of that epoch and we have no leaders and we have no plan.

Wednesday, 9 May 2012

Muldoon Vindicated

Muldoon’s Think Big Projects are still vilified as all that is wrong with government getting involved in Commerce.  Muldoon spent a fortune (in those days) on a wide range of projects that were intended to make the country energy self-sufficient.   The process was not always well considered and it was hugely inflationary, though that was also caused by more than Think Big.  Much of what was wring with Think Big was more a failure of execution than of logic as Muldoon did unfortunately have the habit of surrounding himself with some of the worst stooges in politics.

Muldoon foresaw the need for this country to address the scarcity of energy that a growing world population and shrinking resource base would create.  He was reinforced in those views by the oil price shocks of the 1970’s.  These shocks arose from the occurrence of the oil production peak in America.  It was then that America lost control of the global price of oil.  When this happened the oil rich middle-eastern countries decided to get the real value of their product out of the market place. There were lots of political reasons as well but it wasn’t until America became an oil importer in 1970 that OPEC had the power to affect the US domestic oil price.

Muldoon initiated hydrocarbon exploration in Taranaki.  He drove investment in hydroelectricity, thermal power stations and reticulated gas networks.  He pushed for the electrification of the North Island Railway.  He also drove the conversion of a large part of the vehicle fleet to run on compressed or liquefied natural gas. 

What neither Muldoon nor the Oil Sheiks expected was the American response.  This was to install puppet regimes in places that allowed the oil companies open access to much of the world’s oil.  And also the Alaskan and North Sea finds.  This allowed America to eventually get the price back from US$40+ per barrel to below US$20.

Oil Price 1861 2010 Source EIA

That stuffed Muldoon’s calculations completely.  He had done his sums on the price staying high.  Instead we had a thirty-year glut of cheap oil.  All his projects looked like white elephants or worse – a vast drain on the economy.

But Muldoon wasn’t wrong, just that his timing was bad.  In hindsight he wasn’t even that wrong with his timing as nearly everything he caused to be built has contributed hugely to the economy over that period.  The real problem was that no one understood the true value of what he had built until now, when the cost of energy is being priced closer to its real value to society.

Now the time has come when the true farsightedness of his investment decisions are becoming evident.  This paper released this week by the International Monetary Fund puts it quite succinctly (for a paper of this sort) in the introduction to the paper.

The Future of Oil: Geology versus Technology IMF Working paper 12/109
We discuss and reconcile two diametrically opposed views concerning the future of world oil production and prices. The geological view expects that physical constraints will dominate the future evolution of oil output and prices. It is supported by the fact that world oil production has plateaued since 2005 despite historically high prices, and that spare capacity has been near historic lows. The technological view of oil expects that higher oil prices must eventually have a decisive effect on oil output, by encouraging technological solutions. It is supported by the fact that high prices have, since 2003, led to upward revisions in production forecasts based on a purely geological view. We present a nonlinear econometric model of the world oil market that encompasses both views. The model performs far better than existing empirical models in forecasting oil prices and oil output out of sample. Its point forecast is for a near doubling of the real price of oil over the coming decade.

The point this paper makes is that regardless of price, oil is getting harder to find and more expensive to extract. This simple fact is made more complicated by billions more people expecting to have an oil-supported lifestyle. 

Here in NZ the problem is compounded by the fact that we are also getting poorer relative to those who want to buy oil.

The simple fact is that if we don’t have energy we don’t have a modern economy.  Muldoon saw that.  He also saw that renewables such as hydro-power were an investment that produced what is in effect a perpetuity.  The value of the output only grows with time while the historical cost diminishes.  Unfortunately accountants and economists apply discount rates to perpetuities that emphasizes the short-term cost and undervalue the long-term benefits.  The same narrow view overlooks the fact that society and the economy that feeds it needs energy and the availability of energy to the economy has a value far greater than its market price.

And as for leadership, name one prime minister since Muldoon that has left a legacy that would be particularly missed as much as the assets built during the Think Big era.  There are none.  Indeed in most cases the loss of their legacy would be an improvement.

As with much of human endeavour there was plenty that was wrong about Muldoon and his reign but there were some things he did that we should be forever grateful for.  As with all things we should look at this time when government did serious visionary stuff and wonder why we are now so supine infront of a government who's only strategy is to sell us to the highest bidder.

Interestingly enough most of what they are now selling as so valuable an investment are the very Think Big assets that Muldoon has so long been ridiculed for.

How quickly we forget the inconvenient bits.