Month: May 2010

I keep six honest serving men, They taught me all I knew. Their names are What and Why and When, and How and Where and Who.

Rudyard Kipling

There are those who do not know, and those who do not know they do not know. I belong to the former camp.

J K Galbraith

(1) It is unlikely that God’s plan for the universe includes making you rich. Success in the stockmarket requires effort, discipline and patience. (2) "Research" is to contemplate the possibility that, intuitively, you may not know the answers, and worse still, you may not even know the questions. Information insightfully interpreted will help avoid being caught in a position where you can lose a lot for reasons not understood. Try to avoid making the facts fit the theory, especially in relation to timing. Speculation is not investment.
Buffetology: Can we understand the business? Does it have a sustainable competitive advantage? Do we like the people? Are we getting it at the right price?

(10) In the medium and long term the stock market indices fluctuate around the upward trend in earnings per share.

Ecinya Investment Rules #1, #2 and #10.

(1) In many respects we, on our side of politics, still live with the attitude of capitalism being a system that will always exploit workers, and will always exploit consumers. But the truly equitable thing now is to say that the problem with capitalism is that there are not enough capitalists, and that the best social justice policy is to make the ownership tent as big as possible. (2) The miserable lot of the Third World’s poor results from a history of corrupt governments; it has nothing to do with Mc Donald’s or Coca Cola. The true enemy of the poor is the corruption of the state. Capitalism is actually part of the solution

Mark Latham former leader of the Labor party 10/10/2001 and 2/5/2001

We’re enjoying sluggish times, and not enjoying them very much.

George Bush Snr, 1992

The economic cycle in simple terms, is the process of moving from an excess of consumer and investment spending to stability, and then to deficit. New spending begins the next virtuous cycle. If income is pressured, so is spending. Lower taxes and lower interest rates drive the recovery phase.

The Ecinya pages 23/2/2001

THE ORIGINAL ESSAY WAS WRITTEN IN FEBRUARY 2009 and was re-produced on 1 September 2009 as it appeared to be more pertinent at that time when many (some of them self-serving) were exaggerating the ‘global financial crisis’, which now seems to have been not much of a crisis at all. All that was required was to simply throw large levels of fiscal and monetary stimulus at the problem. Keynes had done it before so that it was an old recipe. But it still seems to us that not enough current attention was being given to the basics – structural, systemic, and attitudinal – especially in America. The cult of ‘the free lunch’ had returned. The imbalances that provoked the ‘crash’ seem omni-present.

Australia is in relatively good shape, growing at circa 4% on a cum-stimulus basis and probably around 2.5% on a post-stimulus basis The underlying reason is our proximity to Asia where the Chinese economy is expected to achieve growth of 8.5%. But all of these figures are relative. In ‘normal’ circumstances the world should grow at around 3% per annum which means that world output doubles about every 24 years. Australia’s domestic economy enjoys high per capita GDP, a stable banking system, generally sound infrastructure, relatively full employment, a stable housing sector etc. But as a major trading nation we cannot expect immunity from the global economy.

Part of the original essay said:

"This has been written to attempt a brief articulation of a major concern that far from saving Australia from the ‘global financial crisis’ the actions, rhetoric and policies of the current Australian government are going to totally immerse us in it, or delay our recovery from it, or both. We are just 1% of the global economy. Time is needed to see where the stimulus packages of China, America and Europe will lead the world. Current local policy prescriptions seem to be pre-emptive, excessive, and poorly targeted."

"Ecinya has suggested that payroll tax relief, personal tax cuts being brought forward, and some relaxation of capital gains taxes for long-term residential property holders upon sale would provide sufficient short-term relief. We are totally opposed to the $950 per person hand-out which apparently will cost about $11 billion and we don’t understand the pre-occupation with direct infusions for commercial property as opposed to working through the banking system. We are strongly in favour of infrastructure spending, but the schools programme is blatantly political and can unfold more slowly than currently envisaged. Some of the ‘green’ programmes seem also to be politically inspired."

"On the rhetorical side we have suggested that ‘balanced free enterprise’ replace ‘capitalism’ and ‘socialism’; that ‘beneficial trade’ replace ‘free’ trade; and that the Chinese Communist Party change its name to the ‘China Central People’s Party’ to mitigate cheap shots from the west during its past 30 year transition and integration into the global economy."

Ecinya Insights article 1/9/2009

The principal contribution that monetary policy can make to economic well-being is to maintain low and stable inflation. I think it is true to say that if you wished to forecast the path of the Australian economy, and you were able to have foreknowledge of only one economic variable, the one you would choose would be the path of the world economy. That is not to say that we have no influence over our own destiny – we can make the situation better or worse than it would otherwise be – but we cannot escape the influence of the world business cycle and the other factors that feed off it.

Ian Macfarlane, former Governor of the Reserve bank, 14/6/2005

 

CONTEXT

Our global proxy, the SP500 is now 12% off its intermediate peak of 1217 reached on 23 April and the All Ordinaries index is 13% off its intermediate peak of 5024 reached on 15 April (our editor’s brother’s birthday who has lived in North America for nearly 40 years). Swans are flying everywhere and only the colour is confusing, some are white, others grey, and some are said to be black, but colour is often in the eye of the beholder. Prior to this retracement the SP500 was 53% off its March 2009 low and our market at the same date was 37% of that corresponding low. The current down-wave is now 22 days old with elevated downside momentum.

It is a time to go ‘placidly amidst the haste and noise’.

But just a bit of background. The IMF and OECD have upped their growth forecasts for the next year or so. These are the same people who were oblivious to the sub-prime fiasco, the depth of the Greek ‘crisis’ and the Euro currency ‘crisis’. We rate their prognostications at low levels. The Goldman Sachs story is alive and well and we expect further revelations and conjecture about their role in world markets and certain economies. The current rates of growth being achieved around the world are driven by stimulus and sustainability is an open question. US housing and commercial property is not ‘out of the woods’. There are stories circulating about downgrades of US government debt. The market technicals are weak, and gold, said to be a ‘safe haven’ is strong. The oil price is weak suggesting lower levels of global activity and this is even more pertinent as the northern hemisphere is entering its summer driving period. Commodity prices are volatile to the downside, currencies are volatile, the Gulf of Mexico oil spill is devastating.

The North Korea – South Korea ‘skirmish’ has just entered potential black swan territory. Black swans are random events as we all know.

The cacophony of the bears is now loud and the bulls are muted with technically driven zealots calling the "end is nigh".

At home our budget deficit and the resulting sovereign debt appears to have not achieved much at all of a lasting nature and the Federal government and the states (apart from Western Australia) have relatively empty wallets. A "responsible budget" means that you have depleted your coffers and cannot afford to buy votes. The Reserve Bank has responded to rising housing prices and poor fiscal settings (though they don’t mention the latter) by raising interest rates as the rest of the world generally has falling, or relatively low, interest rates as they fight various degrees of recession. Then just as interest rates are slowing down the economy, Mr Henry decides that it is a good idea to tax our best performing sector and our only sustainable growth state.

Question (Q): What to do? Answer (A): bring out the six serving men. Start finding questions to begin the search for answers.

 

WHAT

Q: What is happening? A: the glass is suddenly half empty, not half full. In depression the thesis is "Where is the glass?" Though we are far from depression, the ‘double-dip’ talk has re-entered the economic debate.

Q: What signals should we be watching for? A: All Ordinaries moving back towards 4500 in good context, the SP 500 moving back above 1110, takeovers occurring from the people not caught -out in the crash of 2007/ 2008. Plus a BIG BACK-FLIP on the Resources Super Tax.

Q: What will lower interest rates mean? A: That they are needed and that growth is slowing excessively. Retail sales look to us to be pressured with ‘sales’ everywhere, and not all are seasonal.

WHY

Q: Why is it happening now? A: Because the PIIGS problem is now in the open, there has been a change of government in the UK and they are preaching ‘austerity’. America is unwell.

WHEN

Q: When will it all be over? A: We do not know because many thought it was over anyway. But it seems to us that if the world is about to face higher taxes it needs to have low interest rates.

HOW

Q: How will growth emerge in a sustainable way? A: When housing recovers, when unemployment peaks (but watch for government employment making the stats look better than they are), when confidence returns. Calm is required.

WHERE

Q: Where should we focus our attention? A: The USA, China and Asia generally, the UK, Brazil and Australia.

WHO

Q: Who was responsible? A: Ronald Reagan, Alan Greenspan, George Bush II, Dick Cheney, Hank Paulson, Moody’s, S&P, Fannie and Freddie, Goldman Sachs, Bear Stearns, Lehman Brothers, Merrill Lynch, AIG, Morgan Stanley, various UK and European banks.

 

FINALLY

The global financial crash occurred in the northern hemisphere and the only real damage to Australia related to the banks access to capital. The government guarantee was good and necessary policy. The spending was, in an overall sense, bad policy badly implemented. The problem now is that the market weakness will/ is finding its way into Australian households. Anecdotal and observable evidence suggests the local economy is slowing appreciably.

It is the ninth year of inconclusive battle on the plains of Troy, where the Greeks are beseiging the city of King Priam. The gods are intimately involved with the belligerents as a result of jealousies generated ten years earlier when Paris, Prince of Troy, offended Hera and Athena by giving the golden apple as the award of beauty to Aphrodite, goddess of love. Not playing fair (as the Olympians, molded by men, were not disposed to), she had promised him, if he gave her the prize, the most beautiful woman in the world as his bride. This led as everyone knows, to Paris’s abduction of Helen, wife of Menelaus, King of Sparta, and the forming of a federation under his brother, the Greek overlord, to enforce her return.

War followed when Troy refused………………………..

Heavy with wine, the Trojans sleep. Sinon creeps from the hall and opens the trap door of the Horse to release Odysseus and his companions…… They sped through the city to open the remaining gates while Sinon signals to the ships with a flaming torch. In ferocious triumph when the forces are joined, the Greeks fall upon the sleeping foe, slaughtering right and left, burning houses, looting treasure, raping the women. Greeks die too as the Trojans wield their swords, but the advantage has been gained by the invaders.

The episode of the Wooden Horse exemplifies the pursuit of policy contrary to self-interest. The Trojans, having resisted for so long, celebrate the retreat of their foe and glory in the gift of The Horse celebrating to excess. Barbara Tuchman, ‘The March of Folly – From Troy to Vietnam’, 1984.

Gary D Cohn, president of Goldman Sachs, went to Athens to pitch complex products to defer debt. Such deals let Greece continue deficit spending, like a consumer with a second mortgage. Even as the crisis was nearing the flashpoint, banks were searching for ways to help Greece forestall the day of reckoning.

The New York Times 13/2/2010.

It’s amazing really that on average a derivatives trader earns more than a wheat farmer. I guess that’s where the expression ‘Man does not live by bread alone’ came from.

In conversation with Maximus (an Ecinya confidant), who has been both a wheat farmer and CEO of several derivatives departments, on 13/5/2010.

"We have a simple thesis" said Eisman: "There is going to be a calamity and whenever there is a calamity, Merrill [Lynch] is there." When it came time to bankrupt Orange County with bad advice, Merrill was there. When the internet went bust Merrill was there. Way back in the 1980s, when the first bond trader was let off his leash and lost hundreds of millions of dollars, Merrill was there to take the hit. That was Eisman’s logic: the logic of Wall Street’s pecking order. Goldman Sachs was the big kid who ran the games in the neighbourhood. Merrill Lynch was the little fat kid assigned to the least pleasant roles, just happy to be part of things. He assumed Merrill had taken its assigned place at the end of the chain [and was ripe for shorting].

Michael Lewis, ‘The Big Short: Inside the Doomsday Machine’, 2010 (page175)

What is it with you wogs? You always want to pay in cash.

Daryl Kerrigan, the family patriarch, talking to his neighbour, Costas Kilias, as each are facing resumption of their properties along with others in the street that has become a community. From the film ‘The Castle’ starring Michael Katon with Anne Tenney as his loving wife.

It’s a slow day in a dusty little Australian town. The sun is beating down and the streets are deserted. Times are tough, everybody is in debt, and everybody lives on credit. On this particular day, a rich tourist from down south, driving through town, stops at the local motel and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs in order to pick one to spend the night in. He gives him keys to a few rooms and as soon as the man walks upstairs, the owner grabs the $100 bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to repay his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill at the supplier of feed and fuel. The guy at the Farmer’s Co-op takes the $100 and runs to pay his drinks bill at the local pub. The publican slips the money along to the local prostitute drinking at the bar, who has also been facing hard times and has had to offer him ‘services’ on credit. The hooker rushes to the motel and pays off her room bill to the motel owner with the $100. The motel proprietor then places the $100 back on the counter so the rich traveller will not suspect anything. At that moment the traveller comes down the stairs, picks up the $100 bill, states that the rooms are not satisfactory, pockets the money, and leaves town.

No one produced anything. No one earned anything. However, the whole town is now out of debt and looking to the future with a lot more optimism.

Supplied last week by Prince Geoffrey (an Ecinya confidant) discovering how a fiat money system works in a closed economy.

When the discussion turned to taxes, Reagan’s fist came down squarely on the table. "I don’t want to hear any more talk about taxes" he insisted. "The problem is deficit spending!" It is difficult to politely correct the President of the United States when he has blatantly contradicted himself. The $800 billion worth of deficits were the result of spending he didn’t want to cut.

David A Stockman, ‘The Triumph of politics: Why the Reagan revolution failed’, 1986.

Quotes above: The Core Messages (note old journalistic adage – ‘90% of the message is in the head-note’)

1. Troy: Enduring fable of government folly
2. Goldman Sachs: Bad advice to Greece worsens the situation significantly.
3. Derivatives traders: Overpaid and counter, or unproductive actions, often tantamount to fraud.
4. Fat boy: Merrills not ethical or smart, now taken over by Bank of America, an icon becomes a victim of its own folly.
5. Daryl Kerrigan: There is a cultural aspect to the cash economy.
6. Country town: How a fiat money system works in a closed economy.
7. Reagan: The source of America’s current calamities, a very poor fiscal President, often cited as an example of good fiscal policy.

 

GREECE IN PERSPECTIVE

Greece accounts for about 0.5% of global GDP, Australia 1.2%, the PIIGS (Portugal, Ireland, Italy, Greece and Spain combined) account for about 5.8%. China accounts for 12.8% and the United States of America 21%. It must seem bewildering to many that Greece could account for the unfolding calamity that occupies most of our TV space, air-waves, daily newspapers and the hyperbole of our Prime Minister and his Treasurer. As an addendum to the ‘Global Financial Crisis’ politicians in Armani suits can proclaim their brilliance and embark on bold adventures, all of which, if they fail, you get to pay for.

Beware of Greeks bearing gifts – the enduring legacy of the Trojan Horse.

 

LET’S KEEP IT SIMPLE

Greece has a simple economic system. Very few people work for a taxable wage; very few people pay taxes, and the biggest earners (remember Aristotle Onassis) pay low taxes relative to their income and have assets abroad, generally hidden. The people in the cities are mainly involved in tourism, construction, or work for the government. Apparently, around 25-30% work for the government. Because welfare is high and taxes are low the government has, in effect, borrowed heavily to meet their payroll and welfare commitments. All systems can survive a great deal of folly while conditions are favourable.

As the government ran out of money they decided not to tell the voters nor the European Commission. Rather they borrowed more money in the hope that things would get better before they got worse. Many of you may remember that old Irish sage, Murphy, who said: "If it can go wrong, it will." But our editor has met very few people who are aware of the old Scottish sage, McPherson, who said: "That Murphy, bless him, is an incorrigible optimist."

But when things get difficult, you call in a financial engineer and try to buy some time. His fees are seldom cheap. So Goldman Sachs turns up and creates a derivative that takes the large debts off the Greek balance sheet and they comply with their European fiscal obligations. Then people realise that all is not well and the Greek government has to seek a hand-out from others who are encouraged to look favourably on the proposals because their citizens savings are now at risk. Will a bail-out increase or reduce the chances of recovery?

The Trojan Horse is alive and well.

However, the now awakened populace revolt. They plunder, burn cars and buildings, and even kill some fellow citizens that are in the same boat as themselves. This could be fairly described as counter-productive behaviour. Living in a paradise, a fool’s paradise suddenly is revealed.

 

TOWARDS THE SOLUTION

When the global financial crisis was well advanced and we were trying to work out how it might unfold, in 2008 we purchased the Churchill speeches from World War II to determine how a real fiscal crisis unfolded, rather than the exaggerated cacophony we were hearing from people who didn’t know it was in the making anyway, such as the Bush administration, Mr Greenspan, Mr Bernanke, and the IMF, to name a few.

We then revisited Bill Bonners’ book ‘Empire of Debt’ (2007) and played the Churchill tapes over and over whilst driving in the car. Thus we were able to see ‘the beginning of the end’ in our March 2009 ‘Bounce’ paper and then later stated in our 2010 Overview Paper that the recovery would be complex. Messrs Bonner and Wiggin said: "Clearly, the central bank of Zimbabwee has overdone it. But if the central bank of the USA has overdone it few seem aware of it.  The secret is to give people more money, but not so much more that they realize all they’re getting is pieces of paper. Paper money may be a fraud, but it still represents purchasing power. When more units of it appear, people assume they have more purchasing power. And when they spend more, the merchants think there is more demand & increase production. Pretty soon there is a boom."

We added our own foot-note in January 2009 as we developed our thesis: "Fiscal stimulus should work based on historical precedent and barring a serious war, but some of it will be well & truly wasted."

We also added another Ecinya note at the same time to our working reference document, which said: "History never precisely repeats, but it certainly rhymes" (Mark Twain). The last bubble/ crash was the tech/telco crash when the S&P went from 1527 to 776 & made a final bottom in March 2003 at 800, just as the first shot was fired in Iraq. The recovery/ boom to 2007 then started and was sustained by the housing credit bubble led by Bubbles Greenspan. Top to bottom in 2000-03 was 751 trading days (2.6 years including weekends). Using that last crash as a template takes us through to about September 2010. My guess is that this quicker crash will be followed by a quicker recovery in the USA than last time, and also in Australia if commodities recover (though past dizzy heights will not  re-occur). This crash began at SP1565. REMEMBER THIS IS A ‘MADE IN AMERICA’ (GLOBAL) RECESSION.

When called to the Greek rescue, Goldmans Sach’s should have said: ‘Look, I suggest you fess up and we can underwrite some bonds for you at a reasonable price and interest rate. If you wait for the walls to tumble, it will be much more expensive later on, perhaps even terminal.’

 

THE SOLUTION

The solution is America. If it can get its house in order, the world will follow. Perhaps an early option would be taking the world’s top 50 derivatives traders to Christmas Island and then selling the island to the International Monetary Fund. But that is a story for another day. Derivatives are now the synthetic tail wagging the real dog, and the dog is visiting the veterinary surgeon on a daily basis. Hedges properly used can be constructive. Improper use is very destructive. Beware of Trojan Horses. Beware of Greeks, or bankers, bearing gifts. Exercise caution.

 

WHAT DOES A GRECIAN EARN?

Not very much at the moment, and not enough to pay off his debts in a timely manner.

One day perhaps someone will be interested enough to trace the point at which the journey into fog began. There can be no respect for the truth without respect for the language. Only when language is alive does truth have a chance. As the powerful in legend turn the weak or the vanquished into stone, they turn us into stone through language. This is the essential function of a cliche, and of cant and jargon; to neutralise expression and ‘vanish memory’. They are dead words. They will not do for truth.

"Death Sentence – The Decay of Public Language" by Don Watson, 2003.

A billion here, a billion there, and pretty soon you’re talking about real money.

Senator Everett Dirksen on fiscal policy, circa 1963.

There are many who believe that George Bush [insert Kevin Rudd] is a liar, a President [Prime Minister] who knowingly and deliberately twists facts for political gain. But lying would indicate an understanding of what is desired, what is possible, and how best to get there. A more plausible explanation is that words have no meaning for this President [Prime Minister] beyond the immediate moment, and so he believes that his mere utterances of the phrases makes them real. It is a terrifying possibiity.

Seymour Hersh "Chain of Command, the road from 9/11 to Abu Ghraib", 2004. The insertions are Ecinya’s. Mr Rudd is more akin to George Bush and distant from John Howard’s good attributes

Mr Walsh, who remade the national economy in the 1980s with Bob Hawke and Paul Keating, is regarded as a tough and uncompromising economic reformer but one who never forgot Labor’s working-class roots. He slammed Kevin Rudd’s reform credentials and style of governing. "The Prime Minister is an economic illiterate," he told The Australian; "an economic illiterate and an egomaniac. He won’t take any hard decisions. He’s capricious. He sees himself as some sort of Platonic philosopher king."

As reported in The Australian 18 November, 2009

The trip had been flawless and successful. It was a pity that among all the good news the ABC’s Jim Middleton reported that on the flight from Pusan to Beijing, in a conversation about Mabo and the premiers, Prime Minister Keating made unflattering remarks about Wayne Goss and called his adviser, Kevin Rudd, a ‘menace’.

"Recollections of a Bleeding Heart: A portrait of Paul Keating PM" by Don Watson, 2002

When the legislative changes for the GST were back in the House of Representatives on 30 June 1999, a little known Queensland Opposition backbencher, Kevin Rudd, told the Paliament: "When the history of this Parliament, this nation and this century is written, 30 June 1999 will be recorded as a day of fundamental injustice – an injustice which is real, an injustice which is not simply conjured up by the fleeting rhetoric of politicians. It will be recorded as the day when the social compact that has governed this nation for the last 100 years was torn up. It will be recorded as the day when the nation’s taxation system moved from progressivity to regressivity. It will be recorded as the day when the Parliament of the country said to the poor of the country that they could all go and take a running jump."

From "The Costello Memoirs", 2008. Hyperbole in magnificent dimesion from out current PM just as he seeks to remove 33% of the States’ GST for his ‘health-care revolution’.

This model, not good luck, is the reason Australia has enjoyed a fifteen year expansion…. It is defined by a floating exchange rate that operates as a shock absorber, a credible medium-term inflation target that governs interest rate policy at the discretion of an independent central bank, a shift towards a more decentralised wage-fixing system, and a permanent budget surplus strategy set at about 1 to 1.5 per cent of GDP.

Paul Kelly, The Australian, May 2006.

The central issues in tax reform, therefore, are slated for the third term at the earliest. And governments are hardly famous for third-term courage. This is a cautious approach. Rudd Labor offers no road map, no broad principles, no statement of intent on future reforms. The juxtaposition between the sweeping nature of Ken Henry’s 138 recommendations and Labor’s caution is conspicuous. Second, with Australia having escaped a recession, Labor’s new focus is to target the resources sector for a revenue redistribution. This is its chief tax priority. This decision will define Rudd Labor. Its presentation is critical yet the government is unsure whether to depict its tax as an economic reform or a populist "soak the corporate rich" mantra.

Paul Kelly, The Australian, 5 May, 2010.

 

An Apology to Mr Ken Henry

The Prime Minister, Kevin Rudd, has a penchant for apologising in a grandiose way for things that have nothing to do with him personally such as ‘The Stolen Generation’. When confronted with the possibility of apologising for entirely scrapping the Insulation Programme, Mr Combet was given the task while Kevin went to Tasmania, no doubt to wear another hard-hat. Thus it is up to Ecinya to apologise on behalf of the taxpayers of Australia for the trivialising and disdain heaped upon the several years of blood, sweat and tears that produced the 3 volume "Australia’s future tax system" report dated December, 2009.

We have little, or no, doubt that Mr Henry and his colleagues would have wished to present the balanced alternative of including the GST in the tax reform proposals, but he has had the satisfaction of seeing the debate escalate, and though Mr Rudd did not intend this to happen in a way counter-productive to his desire to remain Prime Minister, he has certainly reduced his chances. The very excellent Henry Report has been rendered anorexic by Mr Rudd. Not all anorexic victims die, praise the lord.

Mr Henry and colleagues, we apologise.

 

PROLOGUE ON LEADERSHIP

Tax reform will fail because there is no leadership on the issue.

A sub-optimal Prime Minister carrying a litany of fiscal disasters on his curriculum vitae cannot be trusted to formulate proper tax policy nor to implement his misguided efforts in a near-enough-to-viable way. At Mr Rudd’s current level of fiscal recklessness Australia will gravitate towards the parlous state of fiscal folly currently in view in parts of Europe and the United States of America. You cannot run policy through the prism of a PM’s ego. Australia has tried that before, and failed. All countries that try it fail.

Prosperity is the tide that carries us all to fulfillment of our material and social goals and aspirations. You cannot be anti-business and pro-jobs.

Mr Rudd uses weasel words like "working families" without definition, prefaces his remarks about "long-term sustainability" and "Australia’s national interest while I am Prime Minister" whilst being engaged in short-term waste and miscallocation of resources. He was elected, not ordained, yet continues to give interviews outside of his church. Presumably Jesus Christ has given prior approval. He talks in platitudes of ‘stronger, fairer and simpler’ as layers of bureaucracy and complexity are added to an already stressed tax and fiscal expenditure system. In 11 years of absolute and relative prosperity John Howard ‘did not meet the challenges of government’ according to Mr Rudd. Boy oh boy, does this guy have a self-esteem problem.

In terms of primevil salesmanship, immediately upon Mr Rudd becoming Prime Minister, the neo-conservatives were responsible for our manifest fiscal and social folly. Now it is the turn of ‘the greedy miners’ where years of toil, often speculative exploration, overcoming extraction, production and transport difficulties and having to sell into often volatile and cyclical markets. But expertise and positioning over time count for nought. Mining companies re-capitalise themselves in the good times to sustain development in the bad times. Many developments do not produce a viable return for years and years.

In looking at the rhetoric coming from Mr Rudd on the tax "reform" package, the paras immediately above and Kevin’s quoted response to the GST in 1999, it seems certain that even when the PM is putting on his trousers each day it is an historic event. The nonsense never ends!

 

ECINYA’S TAX REFORM PACKAGE

• Extend the Federal parliamentary term to a maximum of 4 years and a minimum of 3.5 years to give policy time to work (or to be modified, abandoned, or fine-tuned).
• Abolish direct donations to political parties by pooling them into a fund with a formula for distribution to retard the growth of crony capitalism and crony socialism.
• Expand the GST to food which will be a big tax, and compensate "the losers" such as pensioners and genuine welfare recipients.
• Capital gains on the sale of residential properties to be treated as ordinary income on a long-term sliding scale basis, say 7-9 years.
• Abolish payroll tax collected by the states via a compensation system and many of the other taxes proposed to be abolished by Henry.
• Increase the tax free threshold and change personal and company tax rates as dramatically as is sensible.
• Have a target rate of total taxes to total GDP similar to the inflation targetting system e.g. 20% in good times.
• Introduce tax breaks on certain forms of savings particularly for younger people specifically saving to acquire a home.
• Have an exceptionally modest federal royalty tax on mining, say about 5% exceeded slightly by the mining royalties currently collected by the states.

 

KEN HENRY’S TAX REFORM PACKAGE

The key recommendations are set out below and we use the same numbers in our cross-reference commentary. We have ignored the 133 (non-key at this stage) recommendations not taken up by Mr Rudd and his Treasurer.

1. Impose a 40% "resources rent tax" on the mining sector.
2. Cut the company tax rate from 30% to 25%
3. Flatten personal tax rates, increase the personal tax-free threshold from $6,000 to $25,000
4. Replace state-based taxes such as payroll tax and stamp duty with broader consumption taxes including land tax on the family home.
5. Curb negative gearing.
6. Combine all family tax benefits into a single means-tested payment.
7. Taxes on interest earned from savings be slashed by 40%
8. Remove the medicare levy.
9. Restore fuel indexation.
10. Introduce traffic congestion charges.

ECINYA COMMENT

1. Emphatically disagree.
2. Agree.
3. Agree.
4. Emphatically agree.
5. Disagree; in fact capital gains tax on residential investment properties sold should be phased out over a holding period of say 7 to 9 years e.g. gain 100% taxable year 1, 90% year 2, 50 % taxable year 5 etc. No deduction for taxable losses (?)
6. Emphatically agree.
7. Emphatically agree, except for land tax on the family home.
8. Don’t know.
9. Don’t know, but do not like indexing anything….. CPI numbers are too rubbery.
10. Agree.

Mr SWAN’S KEY CHANGES (our comments are in brackets)

1. Impose a 40%"resource super-profits" tax on the mining sector from 2012-13 (expedient rubbish).
2. Raise the compulsory superannuation rate from 9 to 12% by 2019-20 (agree)
3. Cut the company tax rate from 30% to 28% by 2014-15, two years earlier for small business (Agree, let’s hope that the definition of small business is not the same as for the wrongful dismissal laws. Lot of potential silliness here.)
4. Create a $700m infrastructure fund to help build state infrastructure from 2012-13. ( Disagree: Unwieldy, complex, hopefully the Building Education Revevolution and National Broadband are not the templates.)
5. Continue to allow workers approaching retirement to top up their super by $50,000 a year. (Agree)