What would happen if ...
THE GOVERNMENT OFFERED NZ CITIZENS CPI-INDEXED BONDS TO FUND ITS DEFICIT?

Most of New Zealand's (massively ballooning) deficit is funded offshore, exposing us to the whims of the bond purchasers overseas. Increasingly, the future generations will see the growing servicing costs of this deficit on the budget in external flows. Would it not be a preferable context to replicate Japan, where most of the government debt is held by its own citizens, and have significant holdings held domestically by individuals and Kiwisaver superannuation funds?

New Zealanders saving for the self-funded component of their retirement income stream are faced with largely three methodologies:

1. Term Deposits held with Banks

Term deposits with banks slowly erode the value of the capital. Inflation invariably exceeds the interest return, especially when the state ensures that this is the case by taxing all interest returns fully, even though the interest is insufficient to maintain the purchasing-power of the deposit. Inflation at 4%, interest at 3%, taxation at 1% and your savings are reducing in value a net 2% (compounding) per annum.

There are no guarantees that a depositor will be returned even the nominal value of their deposits. While limited-sum state-backed deposit guarantee schemes have been periodically emplaced at the time of financial crises and capital requirements on banks are strengthening (at the cost of return), term deposits do not attract the protection afforded by governments and local authorities with their unconstrained ability to levy taxes on citizens.



2. Equity in (New Zealand) Companies

The value of equities is subject to sudden and massive collapses, as we are witnessing with the current crash as a result of the coronavirus. The value of equity in New Zealand companies (which logically should represent a net present valuation of anticipated dividend streams) has precipitously plummeted, destroying much of the accumulated asset-backing of our superannuation funds and existing retirees. The immediate dividend streams that sustain the daily lives of many of our citizens has simultaneously evaporated for a 'double whammy', and any company considering a dividend of any context in the immediate future years will be undoubtedly castigated and condemned in our 'media' as being 'greedy' for not distributing all to the labour component in preference to those providing the capital/ownership. Longer term, the growing pool of KiwiSaver savings seeking investment in a limited pool of listed NZ companies will ensure that equity prices fail to truely represent the associated risk and company earnings stream, and spectacular collapses and periodic destruction of savings will be more frequent.



3. Rental Property

Rental property has been much favoured in New Zealand in comparison to the previous two for individuals, as it provides a return (via rental income and asset gain) that is typically at or above the rate of inflation, and is not subject to the huge volatility and sudden loss of equities nor the guaranteed loss of value by taxation of term deposits. In short, it historically has provided the only logical haven for those seeking to prepare for their retirement, and simultaneously has provided New Zealand with the required rental housing stock. But those owing a rental property in New Zealand are now cast in the media as 'greedy pariahs' to be ignorantly castigated and denigrated with impunity and subject to the vagaries of political expediency, rather than celebrated as self-responsible individuals pursuing the only no-loss, no-volatility avenue that the state has left open to them to secure their retirement.

I would suggest that most people saving for retirement are only desirous of two features:

1. Preservation of purchasing power so they are not losing the value of their accumulated, saved effort
2. Security against the risk of loss in those savings

They seek neither gains above inflation nor wish to assume a higher risk/return profile for their savings.

SO WHAT WOULD HAPPEN IF ...

THE GOVERNMENT OFFERED NZ CITIZENS CPI-INDEXED BONDS TO FUND ITS DEFICIT?

What would happen if the government were to offer government bonds to its citizens and superannuation funds to finance its deficit internally and these bonds carried a return that preserved the purchasing power? (or perhaps better still - as an incentive to constrain the blow out in unaccountable top-end salaries - the higher of an independently determined CPI rate which includes all standard expenditures, or the percentage increase in remuneration of a pool of state and local government funded employees - politicians, heads of state enterprises, judges, mayors, councillors etc.)

• DOMESTIC RATHER THAN EXTERNAL FUNDING OF OUR DEFICIT
• GUARANTEED PRESERVATION OF THE VALUE OF AN INDIVIDUAL'S EFFORT SAVED FOR RETIREMENT
• ALTERNATIVE BOND INVESTMENT AVENURE FOR NZ SUPERANNUATION FUNDS
• THE RELEASE OF ONE DEMAND UPON OUR HOUSING STOCK (AND CONSEQUENT PRICE & AVAILABILITY ADJUSTMENT)

June 2020
email comments