Littlewood’s Five Suggestions

February 23rd, 2009 at 5:58 am by David Farrar

Superannuation expert Michael Littlewood has five proposals for the Government:

  1. Review the need for the New Zealand Superannuation Fund
  2. Change the NZSF’s investment strategy
  3. Stop pre-funding the ’s liabilities
  4. Remove the rest of breaks
  5. Fix the income tax system

I very much agree on (1). We are now borrowing every dollar we invest in the fund. At a minimum contributions should be suspended.

In (2) Littlewood proposes that there be no minimum proportion to be invested in NZ (as National proposed) but instead it should be directed to “invest in new businesses or in the growth of existing businesses that, for example, have export potential.”

I disagree with both National, and Michael. I want the Trustees to focus on just one thing – maximising returns over the long term. This fund is designed to help fund future Superannuation.

If there is a desire to have the Government invest in businesses to help with job growth (I am not convinced), then that should be done from a seperate fund – maybe through NZ T&E.

Also not sure I agree on (3) but open to persuasion. I don’t think we should move to full funding of liabilities too quickly, but it is a desirable end goal. Partly because it would also allow private sector to compete fairly also.

On (4) I agree. The employer contributions provide enough of an incentive to go into KiwiSaver – an effective 1:1 subsidy.

And totally agree on (5) that the tax system needs a total overhaul.

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8 Responses to “Littlewood’s Five Suggestions”

  1. Frank (320 comments) says:

    “Mike, the gas station attendant, leaned into my window and said something as profound as it was poignant:

    “I think people better count their blessings, these are the good old days. There’s hard times a’comin…”

    What’s interesting, is that despite all that’s happened this week, I think the vast majority of people including many of our leaders and the world’s central bankers don’t understand things the way Mike does. As such, they remain incredibly naïve about the severity of this downturn and, more importantly, how long it’s going to take to work through all of this. But I think they’re starting to get the picture.

    At the risk of sounding like a broken record, even though the Dow is more or less at 1997 levels and could fall further, there is not much understanding of the situation by World LeaDERS. are still simple steps every one of us can take today that will help us preserve our portfolios and even prosper despite the market’s incredible uncertainty.

    Some are cut and dry. Like using specialized inverse funds to rack up profits at a time when the markets are going to heck in a hand basket. As readily available and easy to buy as these things are, I remain stunned by how many investors

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  2. petal (706 comments) says:

    by Gosh Frank, I think under the circumstances you can say Hell.

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  3. PhilBest (5,125 comments) says:

    Apologies because this will look like a threadjack, and because it is long, but Frank’s comment above makes it apropos: I have already posted this at TBR.CC on the thread “US Federal Debt Now Exceeds Total World Output”.

    I have been meaning for a while to get around to composing this essay. Here is what really bothers me.

    It has long been true that stock markets are a good indicator of future economic outlook. They go up and down in response to the announcements of policy by politicians and central bankers.

    But “derivatives” are a more recent phenomenon, and if we read them like we read stock markets, the signs all point to catastrophe. Derivatives started out as insurance policies on investments. They have turned into a form of gambling on markets.

    The Wall Street Journal’s Judy Shelton recently commented:
    “…..The total outstanding notional amount of financial derivatives, according to the Bank for International Settlements, is $684 trillion (as of June 2008) — over 12 times the world’s nominal gross domestic product. Derivatives make it possible to place bets on future monetary policy or exchange-rate movements. More than 66% of those financial derivatives are interest-rate contracts: swaps, options or forward-rate agreements. Another 9% are foreign-exchange contracts……”

    What is the point of that amount of derivatives having been bought and sold, other than that massive gambles are being made on the worsening of the economic situation? The fees that will have been earned by the sellers of these derivatives, will be of a significant size even relative to the normal profits of financial institutions. Is this how some of those institutions have earned such sizable profits in recent years, only to fail catastrophically once they began to be required to pay out on those derivatives?

    Worse, how much taxpayer “bailout” money and government guarantees are being staked against the “derivative” liability black hole?

    Left wing politicians are in the ascendancy at the moment. These people combine economic ignorance and conceit; they are “rescuing us from the consequences of the failure of capitalism”. Their central bankers are no better. Central bankers are not bankers at all, they are “planners” in the worst sense of the word.

    George Soros has become famous for being able to outwit the central bankers of even the world’s fourth largest economy, to enrich himself colossally at the ultimate expense of the hapless people of the United Kingdom. I think Soros has merely stepped up a notch, and probably many, many other clever uber-investors.

    The politicians and the central bankers believe they are in the process of turning the world’s economy around with their “bailouts” and guarantees and stimulus packages. $684 trillion of derivatives contracts says that there are a lot of very very wealthy speculators (the fees they have paid out to buy these derivatives is substantial and has inflated the profitability of the financial sector) who are gambling on the exact opposite happening. My guess is that they are right and the politicians and central bankers are wrong.

    If the politicians and central bankers can even see the brinkmanship they are engaging in, their conceits will never allow them to “fold”. They think they can hold the tide back, and we, like King Canute’s people, are stupid enough to trust them. We have become so used to huge, comforting nanny state hovering above us, that we are blissfully unaware even that the size of the mortgage market is several times as big as our govermments are, let alone the size of the bets that these speculators are placing on the inability of those politicians to turn the mortgage markets, and other markets, around.

    Of course the politicians believe that by doing what they are doing, they will turn the markets around and the derivatives liabilities will not eventuate. So, too, do most of the executives of the financial institutions that have been taking these derivative bets; otherwise they would not have taken them.

    This is a story begging to be investigated. As governments pour taxpayers money into financial institutions, and borrow and print more and more money for that purpose, how much of it is flowing straight out again into the pockets of George Soros and other successful derivatives speculators? Is that the purpose of politicians mortgaging the futures of their citizens and their citizens descendants of the next few generations?

    And who is in the know whether this is what is happening, and why are they not speaking out? The temptation must of course be strong, if you are clever enought to understand what is going on, to participate in the derivatives gamble and enrich yourself. Of course, some people are speaking out and are being politely ignored; like Peter Schiff, Nouriel Roubini, Steven G. Horwitz, Karl Denninger, Bruce Bartlett, George Reisman, Paul Kasriel, David Kenner, Bill Bonner, Harvey Golub, Roger W. Garrison, Steve Eisman,
    Ivy Zelman, Meredith Whitney, Robert Blumen, Thorsten Polleit, Hans F. Sennholz, Joseph Salerno, Bill Fleckenstein, Ambrose Evans-Pritchard, Ron Paul, Dean Baker, Frank Shostak, Christopher Mayer, Kurt Richelbacher, Mark Thornton, Antony Mueller, and Stefan Karlsson, to name but a few. Many of these people are followers of the Ludwig Von Mises school of economic theory. I suspect that George Soros and other successful “market breakers” have also absorbed the principles of economic theory that are the achilles heel of our current crop of central bankers, and are using their knowledge and genius to outwit them.

    This also raises suspicions whether politicians, central bankers, and executives of financial institutions are complicit. George Soros practically owns the main Left wing politicians of the major countries, from President Obama down.

    If you thought that this part of the world was exempt from this kind of risk, think again. Here is Adele Ferguson, in “The Australian” in February 2008:

    “…..Australian banks have a big exposure to derivative markets. Their total shareholder value of $110 billion is dwarfed by the size of the banks’ collective exposure to derivative markets of $12.9 trillion.
    Put simply, the total derivative positions of the banks are 117 times as big as the banks’ shareholder value. If even 1 per cent of these derivatives contracts default because third parties at the other end get into trouble, the whole shareholder wealth would be wiped out and our banks could be broke.
    Given total bank assets are $2.1 trillion, it begs the question why Australia’s banks have exposure to $12.9 trillion of derivatives positions. All banks hedge to reduce risk, but this is a big amount of hedging…..”

    Adele Ferguson fails to identify that this is not hedging, this is gambling. She also falls into the classic error that I have expounded on above, when she goes on:

    “….Banks worldwide are in a favoured position. While most are listed entities, they can always count on the shareholders being underwritten by the taxpayer in a crunch. The most recent examples of this were Northern Bank in Britain, which reportedly had about €25 billion ($54 billion) pumped in by the Bank of England, and Societie General attracted immediate support from the French Government. In the US, the Federal Reserve has been helping out its commercial and investment banks…..”

    This confidence is completely and utterly false. The amount of the liabilities taxpayers are exposed to are astronomically bigger than anything they can cope with. This false confidence that politicians are engendering in us, whereby we all line up happily to give our life’s savings into the care of our “safe and secure” banks, is merely setting us up to provide an increased haul for the biggest fleecing in investment market history; and more than that: the biggest POSSIBLE fleecing: almost all mom-and-pop and elderly folk savings and investments, and the future earnings of several generations of taxpayers.

    It just remains to be seen what the recipients of all this wealth choose to do with it. We will all be at their mercy.

    Can someone please explain to me where I am completely wrong? I simply cannot understand why this situation is not patently obvious to at least a few people who have it in their power to alert us.

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  4. baxter (893 comments) says:

    DPF……….I very much agree on (1). We are now borrowing every dollar we invest in the fund. At a minimum contributions should be suspended.
    BB………..Not only that we are then investing it overseas, generally losing money.

    DPF………n (2) Littlewood proposes that there be no minimum proportion to be invested in NZ (as National proposed) but instead it should be directed to “invest in new businesses or in the growth of existing businesses that, for example, have export potential.”

    I disagree with both National, and Michael. I want the NZ Super Fund Trustees to focus on just one thing – maximising returns over the long term. This fund is designed to help fund future Superannuation

    BB…..Disagree, situation so grave productive employment of New Zealanders has to be the main focus. There is no money for a separate fund without borrowing more or raising taxes. Investing in other countries productivity by over taxing never made much sense to me.

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  5. PhilBest (5,125 comments) says:

    Our whole tax system definitely needs radical change to ensure that investment money goes into productive activities, rather than get-rich-quick asset bubbles. That has been the main problem, not “deregulation” and free markets. Who’d want to start a business in NZ or invest in one today, given that that sector is the favourite whipping boy of every populist socialist politician, and the whole regulatory structure and penalties and taxation burdens, reflects that.

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  6. doncr (2 comments) says:

    Good comments – very interesting. I just would to make one observation:

    “I want the NZ Super Fund Trustees to focus on just one thing – maximising returns over the long term.”

    Up to a point – higher returns = more risk. It is fine to chase higher returns with money you can afford to risk, but if you cannot afford to loose the money, security is more important. We cannot afford to take risks with the superannuation fund, so will have to accept lower returns.

    But seeing as I am here:
    “the whole regulatory structure and penalties and taxation burdens, reflects that.”

    A World Bank study rated New Zealand as the second easiest country to do business in (after Singapore). The New Zealand tax system is one of the simplest in the world. Did anyone catch Bernard on Black Books trying to fill out a tax form? “If you live in a flat that faces a river, don’t have children but do drive a car, then … ” or something and so on. A lot of countries are like that – in Britain if you went to a service station, bought a pie and then heated it up, it was VAT exempt. If you heated it, then bought it, it was not (mid ’80’s). Australia were going to exempt ‘educational books’ before they realized they would have to define what they are.

    I agree with the rest of the post – years ago I questioned the strength of our economy – seemed to be based entirely on people borrowing money on the increasing value of their houses. I was told banks knew what they were doing and wouldn’t lend money if it was not prudent. But I would not want to go back to fiddling with the tax system so people get breaks for investing in horses or movies or whatever – as it was in the good old days of the Muldoon government. The only people who benefit would be the lawyers and accountants.

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  7. pdm (844 comments) says:

    re tax reform – isn’t there a McLeod report from 10/15/or perhaps even 20 years ago that needs dusting off and revisting. As I recall this will provide the basis for a tax system that will encourage investment and productivity.

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  8. slijmbal (1,236 comments) says:

    Christ PhilBest!!!! –

    I tend to agree with your views but the god awful size of your posts puts me off – please, please, please, summarise and link if you want people to read – stop cutting and pasting – lazy b****r (not lazy in terms of posting but lazy in terms of getting your message across) – you’re giving me RSI – it’s painful and irritating and detracts from what would be a very good message. Listen – I’ve heard this message to you now several times in my relatively short time on this blog.

    Anyway – back to thread.

    what can I say …..

    1) NZ superannuation fund – we borrow to invest at a loss – the last time I looked the Cullen fund cost NZ $13 billion dollars – marvellous – a true legacy for the undead history professor

    2) don’t need to change Cullen’s folly if it’s strategy that we dump it

    3) Prefunding of ACC liabilities – reduce the liabilities extended under labour(butterfly gave me a fright!) and put the liabilities back on those who cause them, which means the ACCs role should be enormously reduced.

    4) Kiwisaver tax breaks – every single piece of research I’ve seen is clear – tax breaks redirect savings – they do not increase them – compulsory saving does increase saving – get it right – compulsory and reasonable amounts or nothing at all

    5) Income tax plus working thingie plus taxing the 1st $x,ooo of income – 3 incredibly stupid policies – between the tax inefficiencies of taxing low income workers and then wasting some money giving it to someone to then give it back to the original worker as an element of largesse is just a waste of space – plus incremental tax rates under the working for Clark system etc – consumption taxes are more effective in that they tend to encourage investment and they discourage spending and tax those who have lots of dosh to spend – dumb dumb dumb

    got to go I need my calming tablets.

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