Thoughts on the mortgage tax, is Weimar New Zealand starting to panic? ::: NZ Gold

Thoughts on the 'mortgage tax'

Is 'Weimar' New Zealand starting to panic?►4th March 2007

O.k., so we know it's a cliché - but at NZ Gold we don't know whether to laugh or cry! The suggested - and just as rapidly abandoned - idea of a 'mortgage tax' leaves us in a dilemma as to where we might begin our critique, once emotional equilibrium has been restored.

At the outset we would suggest to readers, who may have comforted themselves that the idea is 'dead and buried' following understandable public opprobrium, that a little circumspection might be in order. Two thoughts bring us to this conclusion. Firstly, we are minded to the observation of former United States President Franklin Roosevelt - "in politics, nothing happens by accident. If it happens, you can bet it was planned that way". At NZ Gold we note, that along with the consummate pursuit of self interest, politicians have become masters of another skill - 'kite flying'. Within this arena, where proposals are floated aloft and then carefully observed to see if there is enough public or vested interest 'firepower' to 'shoot them down', are found the most destructive of creatures - politicians with ideas!

At NZ Gold we have always had a high regard for the Finance Minister Michael Cullen. Not that we like his politics! On the contrary we greatly lament - what we perceive - as the determination of the New Zealand Labour Government to replicate Tony Blair's (and no doubt in due course Gordon Brown's) Britain. Certainly, progress has been impressive thus far and the current abyss of rampant credit excess and unaffordable housing into which New Zealand is now gazing is textbook British folly! Yet we come back to what particularly troubles us. Why would as astute an operator as Michael Cullen suggest something so obviously akin to political suicide as a mortgage tax? Perhaps he was just caught off guard and was simply floating one idea - that apparently had its origins in the treasury - amongst various other possible measures. A classic 'kite flying' exercise? Moreover, given the narcotic like addiction that New Zealanders now have to ever larger mortgages, which news reporter would not want to publicise even the hint of a tax/levy on 'the peoples new opium'?

In essence, at NZ Gold we find ourselves suspicious. Our thoughts inevitably return to the observation of Franklin Roosevelt - "in politics nothing happens by accident. If it happens you can bet it was planned that way". Does this mean that we think a mortgage tax will be imposed? No, we consider this to be very unlikely because 'the kite that so briefly soared' fell very rapidly to earth - peppered with the firepower of legion apoplectic mortgagees. Much more likely, we suspect, will be alternative 'measures' that - against the stark relief and transparency of a mortgage tax - will seem less unpleasant but will none the less assist in the time honoured political process of wallet and purse emptying. Indeed, bear in mind that a 'capital gains tax' on property already exists - it is called rates. Quite simply, the more the government valuation of your house increases the bigger your rates bill. Rates, of course, are currently a source of growing resentment - especially for those on fixed incomes. Yet what particularly alarms us are some of the astonishing new imposts that the British government is planning via their rating system. We will be addressing these during March in the England Expects section of the website. Our chosen title is an 'An Englishman's home was his castle' which we believe to be very apt! Changes to the New Zealand rating system, in which those unlikely to vote for the left of the political spectrum have their incomes further confiscated, whilst the 'booty' is used to reinforce and further 'purchase' votes for Labour and their potential coalition partners, would seem to us a rational - if deeply cynical - alternative to the mortgage tax. Furthermore, do not rule out the possibility that some form of 'stamp duty' on property purchases over a certain level might be introduced, and bear in mind that 'death duties' are probably not dead - they might just be lying 'doggo' until 'apparition like' they appear when other rich veins of plunder have been exhausted.

At the outset of this article, we suggested that two thoughts had caused us to be circumspect over suggestions that the mortgage tax was now 'dead and buried'. We have addressed the first of these - our cynicism that such a contentious subject could somehow have entered the public debate purely by accident. Our second reason finds connection with some of the alternative taxation scenarios we have briefly covered above and arises because our interpretation of history suggests - that when politicians are able to tax without losing power - they will do so even if the money is not needed. Increasingly, like Britain, New Zealand appears to us as an emerging 'mob-ocracy' in which the incomes of the 'middle class' can simply be confiscated and the funds used to buy the votes of a socially engineered, 'welfare and transfer payment dependent hegemony'. This is compounded in the case of New Zealand because, so severe are the structural imbalances in the economy becoming, that the more astute politicians, such as Michael Cullen, may have realised that the odds on a real financial crisis are shortening.

In essence, we wonder if the ruling elite are not now becoming trapped in an environment of both greed and fear as regards the housing market. One the one hand - for the dominant 'redistributive establishment' - it must be galling to see vast paper profits being accumulated on housing when the only current vehicle of punitive taxation thereon is the rating system. We wonder, if in their fantasies, they don't see nominal house prices rising to infinity - thus justifying ever more punitive and elaborate ways of relieving house buyers and home owners of their real monthly income! On the other hand exporters - who represent the true economy- are screaming for 'exchange rate relief' from the current interest rate driven strength of the Kiwi Dollar. Of course, the fear is that a cut in interest rates - designed to lower the currency and give some relief to farmers and those that actual make things - would simply encourage a still more rampant orgy of house price speculation and concomitant inflation. Interestingly, we recently saw an alternative view advanced. Bearing in mind that a huge source of the fuel for New Zealand mortgage funds is coming via the so called 'Yen carry trade' we noted one correspondent's suggestion that a cut in interest rates could actually precipitate a credit squeeze rather than a new 'lending frenzy'. This could potentially arise because raising money in Japan - and then lending it at relatively handsome rates of interest to Kiwis might suddenly become much more risky. After all, it would hardly be worth lending money to New Zealand - even at a still respectable nominal rate of return - if the New Zealand Dollar were suddenly to take a severe nosedive. Hitherto there has tended to be 'one way traffic'. Borrow money cheaply, lend it to Kiwis at high relative interest rates, and then enjoy a nice 'exchange rate bonus' before ultimately repatriating the swollen funds back to Japan., Herein we 'sense the fear' of our leaders. As we noted in our update of December 3rd 2006 - The housing market; will 'scowls on jowls replace smiles on dials'?

"We are persuaded that the euphoria associated with booming house prices has effectively become a new - highly addictive - opium of the people".

We thus enquire, what happens if the current 'bull run' in housing comes to a 'sticky end'? More importantly - from the perspective of incumbent politicians - what happens if it comes to that 'sticky end' on their watch? In a sense, there is something delightful about such conjecture - especially if a government as arrogant and self-congratulating as the current one finds itself in charge 'when the music stops'. The problem is that it will be 'Joe average' and not the ruling elite who will suffer if our foreign creditors decide to become more risk averse about lending Kiwis their savings. Mind you, if 'push comes to shove' we could always just crank up the printing presses and perhaps the government could simply give the newly created banknotes away. After all, it's been done before - with predictably disastrous consequences!

At NZ Gold we are seriously concerned that, at some stage, economic reality and New Zealand's housing bubble are going to collide - and we suspect that there are 'those in high places' experiencing similar disquiet. We would suggest that what is primarily driving that bubble is an astonishing money supply expansion - with the M3 measure reportedly some 16.5% higher in December 2006 compared to one year previously. For all the pious drivel talked about "proud and independent nationhood" we find ourselves, at NZ Gold, lamenting New Zealand's outrageous dependence on foreign money - for our 'easy credit driven' standard of living! New Zealand's current account deficit is now approaching a flabbergasting 10% of GDP and simply reflects a nation living seriously beyond its means. Historic precedent suggests that, at some stage, equilibrium will have to be restored and that could mean a dramatic rout of the currency. The unedifying scenario we fear is that of a credit squeeze - with the Kiwi Dollar falling rapidly. This, of course, would be wonderful for foreigners - since they would be able to snap up depressed Kiwi assets at effectively bargain basement prices! All the heavily mortgaged locals would be able to do is 'press their noses up against the window' and watch the party from outside. In considering these matters we are drawn to one of the many observations of the great Austrian economist Ludwig Von Mises (1881-1973):

"True, governments can reduce the rate of interest in the short run. They can issue additional paper money. They can open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression".

Is Weimar New Zealand starting to panic? Discussions about a bizarre market distortion like the muted (very muted by now) 'mortgage tax' make us wonder! Yet we would suggest that such a mechanism would prove as unfair - and ineffective - as levying a grossly obese man for the dozen doughnuts he scoffed in a single sitting a couple of weeks ago. Apart from parting the man from his money what's the point - the damage has already been done! His indulgence should have been stopped long before things got to such a stage. Likewise, our grossly excessive addiction to mortgage debt - financed by foreigners! As Von Mises noted: "the final outcome of the credit expansion is general impoverishment". We offer a simple enquiry- are you holding gold?

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