Loan-to-value ratio restrictions

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(US and European readers, take note that here in NZ we think we have escaped the housing crash and are somehow better than you, so read below with sense of déjàvu if you must)

So what is my take on the new lending restriction now in-place in New Zealand since October 1st 2013?

The likely outcome: 
  1. House prices will go down (if the demand is not soaked up by overseas investors)
  2. Government accounts about to take a U-turn down – along with the economy
“But wait,” you ask, “aren’t house prices hitting records highs right now, the government accounts are looking better and the transport sector is up?” Well, yes they are, but at least in my mind all these things are up because borrowing’s up, and with borrowing likely to head downward with this reserve bank move, things will suddenly turn negative with them. 

As a country we are in trade deficit (and more importantly current account deficit) year after year. This fact means we must, as a country borrow money to pay interest on our debt, plus the deficit of our current account year after year.... and a little more for those special extras in life!

So if borrowing drops, less money is around to pay the interest on our ever increasing debt.  So where does the money come from to pay for that? Asset sales and spending cut backs, which in turn mean less tax-take for the Government.

How soon will this happen? I think in a few months the lagging numbers will start to show.

My house, my castle

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Every home should be a place of rest, a sanctuary, a castle. In these busy and stressful times, we all want a place to retreat to at the end of a long day, or when life becomes too much.

But someone forgot to mention that some castles come with dungeons and chains. And the chains that hold you might just be the debt it takes to keep your castle.

Is your castle a place of freedom, or does it only harbour slaves in its deep recesses? If debt is the price you’re paying, then could your house actually be your master?
This takes some reflection. Have we become slaves by choice? Absolutely, but most don’t see it that way. Our society has totally normalized housing debt as good debt. Every budgeting show I’ve seen recently helps people get out of debt – but makes an exception for their mortgages! They actually help them get out of debt so they can enslave themselves to even greater debt: the socially acceptable mortgage. The “devil we know” – the good debt.

And when New Zealand’s Reserve Bank actually makes a good move to limit high leverage borrowing, there is the cry, “No, don’t limit our borrowing. Think of the struggling young couple wanting to own their first home!”

Why do we work for twenty, thirty or even more years just to pay off a house that gets built in a few months? Why are houses worth so much? We’re told it’s about supply and demand.  Sure, the supply of debt is enough to enslave, and the demand of people willing to bid up housing to the maximum available debt enslavement is endless.

But it takes two to tango. We bid up housing against our neighbour with debt money provided to enslave each other:

How can people’s eyes be opened to this insanity, to realise the level of misery that the lust for housing can create in this country, your family; your castle? When debt levels become overwhelming, from it can stem conflict, violence and broken homes.

Just how will the people manage with one less option of having a massive debt to equity burden?
Better in the long term I would guess!  Why isn’t the main stream media talking at least about the possible benefits of reduced debt and lower housing cost as a result of the Reserve Bank move?

The writings on the wall

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“The writings on the wall” It’s a well known term normally used to insinuate an impending negative outcome. It also hints that some see it and some don’t.

The origins of the saying can be found in the Bible (Daniel 5) where human like fingers miraculously appeared inscribing a message on a wall where Belshazzar (then king of Babylon) was throwing a mass drunken party for one thousand of his senior officials “lords”. None of the kings “wise men” could interpret the writing, finally Daniel was called and interpreted the strange writing saying the famous words “you have been weighed in the balances and found wanting” (Sorry to disappoint some who thought these words originally came from Hollywood)

That very night Babylon was sacked by Darius the Mede (The Mede’s & Persian empire starts). When I look at the world today the officials seem drunk and dazed, they can’t seem to read the writing on the wall..

It’s not that America, UK and Japan print money to “fix things” but that they are printing money in the first place!  It’s not that republicans and democrats may come to an agreement to avoid a US Government default but that there is a US government default possibility at all!
It’s not about the type of “bail out” or “bail in” a country gets, it’s the ever increasing list of counties that need help.

Ten years ago if people came across a wall where a financial newspaper from today was pinned up, and read it, they would be utterly shocked. There are dire warnings everywhere, debts have become too big, they are not sustainable or payable, default is inevitable. It’s not a time to have ones head in the sand, we need to be alert.

Clearly the world financial system is on borrowed time, it should be evident that the only way to maintain it is to print more and more money to pay for the interest on debt in an ever increasing spiral.
Printed money is fake money that does real damage diluting the capital base of a countries financial system.

You cannot have a capitalist system based on money that has no capital backing. The irony is that you can see capitalism being blamed for the impending situation yet it is the lack of and debasement of capital that is a major issue.
Howard Buffet (Warren Buffett’s father) stated:

  “Lenin declared and demonstrated that a sure way to overturn the existing social order and bring about communism was by printing-press paper money” 

With this in mind read the below excerpt from an article in the main stream financial press, It just sums up the state of the addiction to printed money, it would be really funny if it were not so tragic:

 “Stocks advanced for a second straight day on Wednesday as a broad measure of economic growth was revised down, easing investors' concerns that the Federal Reserve would begin to withdraw its stimulus early.” 
 So no need to worry, things are still bad so money printing will continue so things are good!

The writings on the wall.

On our 40th…

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The below chart is in honor of our 40th anniversary, one that we have all forgotten about. Yes I'm talking to you New Zealanders, how could we forget.. it has been 40 years since we last made money as a country:      

(Click image to enlarge)
NZ current account 40 years negative
40 years! Already! It almost seems like yesterday! Shouldn't we be broke by now?

You would think right...

The current account gets reset every year so we can have another go, but the money we borrowed in a deficit year does not get reset, it stays… it grows with compounding interest and each additional year in the red.

The below chart shows the cumulative effect of our current account deficits:
 (Click image to enlarge)
NZ Current account Cumulative debt
(PS: don’t confuse Government only accounts with the total countries accounts “Current account”)

It is important to note that the "current account" takes into "account" all the incomings and outgoings of our country. Even when we actually do have a trade surplus we are still going backwards these days due to interest payments on our accumulated debt.

At our 40th I have a serious question... if we don't turn that line around in the above chart what will happen? Can it keep on going down forever, I mean it lasted 40 years so far...

No, no it is not logical that we can keep borrowing money to infinity, if we did then money would be worthless.

Much of the "western world" is facing this issue. 40 years of no global currency backed by gold (USD 1971), 40 years of not paying our way.

Can’t we blame the Government for this?

No, we worked together on this, we encouraged and supported borrowing especially on housing, we loved bidding up house prices against one another with borrowed money, we were happy getting into debt and the government was happy getting tax from the imported funds, GST on our borrowed money every time we spent it, income tax from builders, carpet layers, painters and bankers.

40 years.. it's been fun but a messy break-up is on the cards.


(Data sources RBNZ and statistics NZ, I noticed that current (and even historic??) numbers do get revised from time to time so these totals are approximate, but the trend should be clear)

Money: “they don’t make it like they used to”

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Forty years ago this month on the 15th of August 1971 Richard Nixon “cut the gold window”. Before this time the US dollar was anchored to something, that something was Gold. Before this time if a foreign country sold more to the US than they bought from the US that country could send back excess paper dollars in exchange for gold (at that time $35 dollars an ounce!). This was a way to balance the trade, it made sense, it was logical. If a country wanted to keep its wealth it needed to balance consumption with its production.


Like rioting in the streets of London the financial crisis is not something that happened overnight, it was decades ago when the seeds were planted. Now we can say those seeds were not good.

But instead of learning a lesson we get more of the same, not only is money borrowed but it is printed with no promise of trade or effort or labour to back it, essentially it is counterfeit money. There is so much counterfeit money out there “trying to find a home”, but people don’t want to buy homes when they are going down in price, so the money goes to the stock market, but the stock market goes down, so it goes to US treasuries, but US treasuries pay less interest than inflation, so it goes “to the sidelines” (Banks) but if the banks can’t lend it out at a higher interest rate paper money is a liability.

I think this is the last stage, when not even banks want your savings in paper money, you know it’s not an asset but just plain trash. This actually happened just recently in New York where a bank not only did not pay any interest on savings but started charging for holding money (Click here to read the article.) Essentially the bank was receiving more money than it knew what to do with, with people selling stocks and “putting it on the sidelines”, but at the same time no one worth lending to wants to borrow.

So where, where….. can all these trillions of dollars go? How long will it take before dollars start to be taken out of stocks, treasuries and banks to buy real things, not only Gold and Silver but anything that is real and tangible?

We have already seen food and service price inflation but we have seen nothing yet, once the momentum gets going it is unstoppable, as prices go up it does not take people, businesses and governments long to work out their savings on the “sidelines” are becoming worthless, when they start to spend all those trillions out there, that will push prices up, more money will be spent, limitless paper money chasing limited things.

We have not seen anywhere near the full effect of decades of global monetary inflation yet as the money had somewhere to go, i.e. China, Japan, and many fancy monetary instruments.

How long will it be before it makes no difference if the US raises their debt ceiling or not? Rather will countries and businesses want to be paid in US dollars anyway? If the debt ceiling needs to be raised so you can be paid what are you being paid in? (More IOU’s). There will be a day when all those USD’s around the world will want to find a home, that home is ultimately in the US as it will likely be the last place they will be accepted, this will make inflation worse in the US than most places I think.

History may even hint that the US and other counties will not accept their own currencies one day. Near the fall of the Roman Empire, the once full silver denarius coin had been “watered down” to a point where there was almost no silver in the coin, at that time Rome did not want to be paid in its own currency rather they wanted payment in real silver!

Most “western” countries are in the same dilemma, the discrepancy in consumption to production is way out, with a gap that is either politically or practically now not possible to bridge, therefore I am expecting a relatively sudden and dramatic end to debt laden economies rather than a long drawn out one.

There is no will to change rather change will be imposed upon us.

Shadowstats’ John Williams Expects Hyperinflation Within Months

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Recommended Video:




It seems that many commentators / interviewers doubt these serious predictions simply based on the fact that consequences are enormous, basically they are saying "but how can that be possible that's really bad!" They have child like faith in central bankers to fix everything based not on logic but simply because things have been good for a long time, so things should therefore remain good, but they simply don't look at a big enough picture and avoid facts, logic and basic mathematics.

There is simply no logical arugment against this coming financial disaster.

Let’s take this seriously with a sober mind.

Financial advice from fish & chip wrappings

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After a busy day my youngest son and I picked up some take-a ways for dinner, that good old kiwi favourite of fish & chips, I noticed in the newspaper wrapping a big picture with gold bars and that caught my attention.

The article was called: “Gold Plated Investments?” by Chris Worthington, New Zealand Herald, 23rd November 2010. With a bold statement highlighted: “History proves protecting wealth by buying gold is folly."

I’m not sure how much history Mr Worthington has read, at a guess I would say not much. I did a Google search and found the source of the article on the Gareth Morgan web page
Unfortunately there is no place to leave a comment, also I could not help but notice there is only a button for “Like” at the bottom of the article but no "dis-like" button, wow.. this is a rose coloured web page! (Are you happy or.. happy with this article it's your choice)

Well I have this blog so will vent here instead:
Worthless paper moneyHistory is littered with the debris of fiat money failures, that is to say money with no backing of hard assets like gold. There is not one fiat currency that has survived long term, not one! Yet gold is still gold and still worth something while you can’t say that about paper money when it fails. So on the matter of history proving that protecting wealth by buying gold is folly, I would invite Mr Worthington to read about Weimar Germany before World War II or Argentina in 2001  or Zimbabwe or any paper currency in the history of the world that has been given enough time and rope to hang itself with.

Bundles of Zimbabwe currency
Some people might say, Zimbabwe? What has a banana republic got to do with the US dollar for example? Everything! The US is following the same financial principles of Zimbabwe and I believe that Zimbabwe is a warning to the world and not something to laugh about, they ran out of money to meet their commitments and instead of changing and being honest about fixing things they printed money instead. How is that different from what the US is doing? After hyper inflation the Zimbabwe dollar was replaced with a new version and the old one became worthless, so that currency will never ever become more valuable compared to gold because it is extinct along with any saving in that denomination.

Below is a link to a nice quick review of nine failed currencies as an example:
http://www.mint.com/blog/finance-core/hyperinflation-the-story-of-9-failed-currencies/

This is just a small sample! In-fact according to Standard and Poor’s between 1975 and 2005 no less than 35 national currencies have failed (43 if you count the repeat offenders) In all the above examples Gold is and will always be more valuable, so I don’t think Mr Worthington is looking at a broad enough picture.

Another example Mr Worthington makes as follows:
‘New Zealand gold investors might be surprised to learn that gold, in NZD terms, is actually down some 12 per cent from the peak in March last year”
First, people who are gold investors would not be surprised about that at all, second this seems an extremely narrow point against gold, why did Mr Worthington not publish the gold chart in NZD like I have below? Because it would obviously make his point well… seem pointless when you look at the big picture:


In-fact if some fund managers would have just bought gold back in 2000 they would now be heroes as gold has out performed the markets by a very long shot for the past 10 years.

I do agree that there are times to invest in gold and times not to, taking Mr Worthington’s worst case example of investing at the very peak and then selling at the very bottom, that is human nature, to follow a trend like housing until it is well over bought (when there are funds of some kind available to do so). I do expect that to happen to gold again relative to other things but not to currencies that we have in circulation now, the currencies we have in circulation now I very much doubt will ever become a better investment than gold looking at the big picture as many will not even exist in future.

The fact is Gold has outperformed mutual funds and the big stock markets for many years, and there are real and systemic failures in global currencies burgeoning because of debt, and debt is the nature of money with no gold backing, that is to say money today is debt based not asset based, thus will fail under its own compounding interest rate in countries where current account deficits are continuous (Like New Zealand, UK and America)

Mr. Worthington says Gold pays no interest, correct that is because it does not need to, it is an asset not debt. If paper money did not pay interest why would anyone want it? After all its just paper (or computer digits)

In the 80’s when gold finally came down compared to dollars, it was a different time and there were very different actions taken to “fix” the economy in America. Back then the man in Ben Bernanke’s role was Paul Volcker instead of printing money like Ben is doing today Paul made big cut-backs to really try to put the books back in order in a logical way, he increased interest rates higher and higher, while Ben is holding them down near zero by buying US bonds with printed money! Paul brought back trust in dollars by limiting supply while Ben is destroying trust with unlimited supply. These are very different times and they really can’t be compared. People did over buy gold in the 80’s but it only started coming down compared to dollars when interest rates were up around 20%! Can you see that happening today with the global debt situation? Rates like that would collapse the whole system very quickly and would not bring trust back to paper dollars, it would have the opposite effect. This is a very different time, one need’s to look at the bigger picture, where there are major cracks appearing in the faith of paper dollars with unpayable debt and ever increasing citizen anger at cut-backs.

When looking at Gold as an investment I would urge to look at it as a way to preserve saving rather than making money, for example in a paper money collapse bread will skyrocket also, but you can’t put all your savings if you have a decent amount, into bread as it will go off, while gold is a store of value that is its purpose. Take Mr Worthington’s example of an 85% fall from peak to peak that he calls conservative, the fact is it was still worth something in 2001 and that is a lot more than nothing… like so many extinct currencies and stocks are.

Look at the big picture below, then inverse it when thinking about the value of paper money, that is the same thing, that is to say while there has been inflation of “things” compared to paper money there has been deflation of things compared to gold, therefore gold has performed very well as a store of excess effort (savings). It’s a good time to hold some gold because governments like US, UK and Japan are going mad printing money with no end in sight.

London gold fix 2000 to 2011

PS using the conservative RBNZ inflation calculator $850 USD gold at its peak in 1980 was about the same in NZD as the rate was about 1 to 1 and according to the RBNZ calculator that would be $3,800 NZD now. So gold is currently less than half of the peak price in 1980, but the situation with global debt problems is far far worse now than 1980. $3,800 is calculated using the questionable CPI (I call it “CPlie) numbers, compared to housing inflation over that same time gold would need to be $10,000 NZD per ounce (USD $7,400)! That goes to show just how over valued housing is.

By the way, Silver is the better buy in my opinion, gold is not cheap compared to other things in historical terms while silver is still cheap. Gold however compared to currencies is another matter, measuring gold value against a paper currency is like using a rubber band measuring tape.

I conclude that Mr Worthington’s article was very useful for wrapping up fish & chips, and like all paper has returned to its intrinsic value

Bye for now.

 

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