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So, borrowing to save makes sense afterall…

Written By: - Date published: 9:59 am, June 8th, 2011 - 29 comments
Categories: bill english, budget 2011, debt / deficit, superannuation - Tags: ,

Do you remember back in the day when Bill English didn’t want to put any money into the Cullen Fund? Remember how certain people on the right of the political spectrum started talking about how silly it was to borrow money in order to save money. If you go back a little further we find that Bill English himself thought the whole idea of borrowing money to save was “nonsense

Well I remembered being told that borrowing to save wasn’t a good idea, so I was a little surprised to learn that over the past few months the government has been borrowing $100 million a week more than necessary because they wanted to put the money away in the bank. Of course, they have a fairly sound reason for doing so, the government can borrow money fairly cheap now compared to what is expected towards the end of the year, earn interest on the money, and, so, both reduce its costs for rebuilding Christchurch and spread that cost over time. It’s a very sound strategy; the same strategy as putting money in the Cullen Fund now to spread out future superannuation costs, and make returns on the savings over and above the cost of borrowing.

The main thing to take from this though is that the government recognises that in some circumstances it is prudent to borrow money to invest in entities like the Cullen Fund. So, when National ignored Treasury’s warnings on lost returns and suspended contributions it had more to do with the National parties dislike for the Cullen Fund than conservative fiscal management.
-Aug

29 comments on “So, borrowing to save makes sense afterall… ”

  1. ianmac 1

    Good thinking Guest. Perhaps Mr English wanted to undermine the Cullen Fund and used the downturn as an excuse? Surely not!

  2. queenstfarmer 2

    Guest’s post is a non-sequiter.

    The big error is the assertion that a borrower would “make returns on the savings over and above the cost of borrowing”. Do you have a guarantee for this, and if so please tell us? If not then you presumably think it is prudent for a government to gamble by borrowing from offshore investors (and pay them interest for years) and then send the money back to big overseas companies (which is where most of the Cullen fund goes)?

    • Colonial Viper 2.1

      You’re another economically illiterate Right Winger aren’t you?

      Since when is borrowing money and owing creditors at a low interest rate then reinvesting that money and getting a HIGH rate of return a BAD thing?

      And of course, if you want GUARANTEES in the investment world you must be one of the usual batch of Right Wingers – can’t stand any real financial risk, and someone who has no understanding of the real world – where there are no such “guarantees”.

      NZ can borrow from foreigners cheaply at the moment, and if we were reinvesting that money overseas through the Cullen Fund etc for a higher return, this country would be MAKING MONEY from its borrowing. A lot of money.

      Of course, English actually put a stop to investing in the Cullen Fund and as Cunliffe has pointed out that decision has cost this country many hundreds of millions in investment returns in just a short space of time.

      If your mate English has got as much of a shitty financial grip as you do, that explains a lot.

      • queenstfarmer 2.1.1

        You talk about the real world – where there are no such “guarantees”, but then go on to say “this country would be MAKING MONEY from its borrowing”. Yet given your first statement, how can you be sure of your second statement?

        • Colonial Viper 2.1.1.1

          Can’t deal with you pretend Right Wingers who have no confidence in NZ and no ability to take real business risks. Get some balls man.

          • queenstfarmer 2.1.1.1.1

            Glad you admit there are risks. That is my point.

            The risks need to be weighed, not pretend they don’t exist, as per the author’s glib assertion that a borrower would “make returns on the savings over and above the cost of borrowing” and which s/he calls “a very sound strategy”.

            • Colonial Viper 2.1.1.1.1.1

              Meh. You don’t take the risks, you don’t get the payout. English doesn;t have the stomach to move NZ ahead and neither do you.

              English is costing this country a huge amount of money but what the fuck do you care as long as the already wealthy get their tax cuts.

          • Lanthanide 2.1.1.1.2

            Completely agree with queenstfarmer on this.
             
            Borrowing to invest in other companies inherently has risks that we cannot control.
             
            Bringing inevitable borrowing forward to when it is cheaper, to build a city that is inevitably going to happen, is really not the same as borrowing to invest in companies.
             
            They are fundamentally different. To suggest they are exactly the same is a nonsense, BUT that doesn’t mean that you can’t say that they are similar ideas, because they are, they just aren’t exactly the same.

            • lprent 2.1.1.1.2.1

              Bringing inevitable borrowing forward to when it is cheaper, to build a city that is inevitably going to happen, is really not the same as borrowing to invest in companies.

              And the forward projection of superannuation costs is not inevitable? Please elucidate how you think that they will be covered.

              That is the fundamental precept of this post. It is pointing out that the government has cut the tax take that is required to cover the forward payments of superannuations because it asserts that a taxcuts increase the economy. At this level of cut, there is no evidence that it does. What it does do is increase the risk that the forward costs of superannuation will not be covered.

              The risk of the borrowing now at current rates and reinvesting is almost certainly less than risk of the government going belly up when it has fewer tax payers and more superannuiants in the future. Because those costs are inevitable bearing in mind the voting power of the elderly.

              • Lanthanide

                “And the forward projection of superannuation costs is not inevitable? Please elucidate how you think that they will be covered.”
                 
                That’s true, the superannuation costs are inevitable. But taking borrowed money and putting it into the cullen fund isn’t going to guarantee that you will end up with more money than you started with.
                 
                In one case we’re borrowing money now, parking it in a (low-risk) bank account and then spending it in 12-48 months time. In the other we’re borrowing money now, putting it into international markets (medium-high risk) and then spending it in 15 years time.
                 
                If you throw in a theoretical “peak oil is going to destroy the modern economy”, then investing the money in the cullen fund is even more unwise. We’re much better off taking that money and building a city with it in the very near future, which is what we’re going to do.
                 
                I have no problem with the government borrowing to put in the cullen fund, and I think that they should be doing that. What I’m trying to point out is:
                1. The timescales of these two scenarios are quite different
                2. The risk profiles of these two scenarios are quite different

                I don’t think it is reasonable to say “the government has been borrowing several hundred million dollars a handful of months earlier than they technically needed it, so by the same logic they should also borrow to put money into the cullen fund a dozen years before they will need it”.

                • lprent

                  Borrowing in the short-term to rebuild Christchurch makes perfect sense, if only because it reduces a ongoing loss. Of course there isn’t exactly a plan on how to pay that money back. The fairy tale in the budget about growth fixing the deficit is quite simply bullshit, as is the idea that enough would come from asset sales, cost cutting the rather small public service, or any of the politically accessible benefits, or that the lamearse infrastructure projects from Joyce will do anything except cost the country money.

                  That is one relatively short-term project. I think that Aug’s question is more basic and longer term.

                  The basic problem is that the total amount in the current tax take is too small to sustain government and superannuation. It is pretty clear that it will not be so for quite some years. Unless the tax rates are increased and if everything else stays the same (and ignoring further disasters), my guesstimate is somewhere towards 2020 if everything goes well on a realistic growth rate. Basically this government has proved yet again that minor drops in tax rates do not cause stimulatory or productive investment growth.

                  Tinkering at the edges (like this government is doing) isn’t going to help much. At present they’re simply pushing debt forward into future taxpayers and hoping that lot of elderly die before it comes due.

                  Aug is saying that if there is a differential between the cost of borrowing and the current ROI, then we’d be best placed to borrow now to take advantage of that. Sure we’d probably lose some possible opportunity cost of infrastructure investments. But frankly almost all of the investments that the government could make are crap – just look at the ones Joyce is trying to waste money in. And this government doesn’t want to invest in ones that would give better returns (like Auckland PT) for political reasons.

                  What we do have is a really high forward liability and no plan by this government to even start to deal with it. That liability is starting to affect our ability to borrow for consumption – ie for Nationals tax cuts. However, that doesn’t really apply if we borrow for investment.

                  In the absence of raising tax rates it is probably the most productive use of our ability to borrow at relatively low rates at present in addition to rebuilding ChCh.

                • Colonial Viper

                  Lanth this is bullshit rationalisation. English has cost this country hundreds of millions of dollars by not investing in the Cullen Fund and in KiwiSaver, that is actual money he has left on the table over the last two years because of his piss poor decision making. He was warned at the time, he ignored those warnings, and those warnings came true.

                  • Lanthanide

                    Look, I completely agree that stopping funding the superannuation fund was a dumb idea and they shouldn’t have done it.
                     
                    I am simply pointing out that saying “Government did X, so they should also do Y” because X and Y are similar ideas is wrong and by making that argument you are ignoring the important details.

                    Actually it would be more appropriate to say “Government did X because of A and B, so they should also do Y because of C and D”, in this case A and B are really very different from C and D, and therefore it does not follow that government should also do Y because they did X, actually they did X because of A and B and chose not to do Y because of C and D. I’m not defending their choice of not doing Y, I’m just pointing out that C and D are different from A and B so therefore the simple argument that because they did X, they should also do Y, doesn’t work. Now if X and Y both depended on A and B, then yes, if they did X then they should also do Y, but that isn’t the case.
                     
                    X = borrow up-front so borrowing in future months is reduced
                    Y = borrow to invest in superannuation fund
                    A = short-term borrowing that if not done in these 6 months *will* definitely be done in the following 6 months (ie, inevitable, and on a short time frame)
                    B = low risk, short time frame
                    C = Long term time-frame of 15-20 years
                    D = medium-high risk
                     
                    This, I believe, it exactly what queenstfarmer is saying, although I think he is also saying that investing in the cullen fund was a bad idea. I am not saying that, but that doesn’t mean I can’t agree with his other point.

                    • Aug

                      I totally agree with you, when I wrote this I actually wasn’t really considering whether the borrowing now or for the Cullen Fund was a good or bad idea, and in retrospect I was probably a bit blunt when I called it “a very sound strategy”.

                      What I was more interested in was the reasoning, Bill English didn’t call borrowing to save, “unwise in long term, medium- high risk investments, but acceptable in a short term, low risk scenario”,he called it nonsense. Now we find that he is borrowing money and saving it for future spending, how could I not call him on it.

                    • Lanthanide

                      Definitely agree with that, Aug, he deserves to be called out on it.

      • lprent 2.1.2

        …and getting a HIGH rate of return a BAD thing

        Depends both upon the risk and the rate of return. For instance borrowing to put in a gas to gasoline plant in the late 70’s looked like a sure thing provided that the risk of a oil price drop was low. Problem was that it was not.

        However the investment strategy being followed by the Cullen fund is about as close as you can get to low risk whilst investing. The countervailing risk of not having funds to run National’s superannuation system is pretty damn high to our ability to service debt further down the track (just thinking about what the costs are to the kids makes my grey hair disappear). It makes sense to use the low borrowing rates to hedge that risk.

        Of course it makes even more sense not to borrow to do the same thing. However that would require increases in the tax rates – which would be preferable to what this current set of idiot cowboys in government are doing.

  3. Tom Gould 3

    @ queenstfarmer, what nonsense. Both scenarios rely on projections and assumptions, which cuts both ways, either way. Stop dancing on a pin head. The fundamentals of the Guest Post are sound. As is the politics.

    • queenstfarmer 3.1

      Both scenarios rely on projections and assumptions, which cuts both ways, either way.

      That’s my point: what is the author relying on for the assertion that a borrower would “make returns on the savings over and above the cost of borrowing”? And if it there is credible authority for it, I look forward to seeing which political parties propose to borrow billions of dollars to buy up the entire market.

      • Colonial Viper 3.1.1

        I look forward to seeing which political parties propose to borrow billions of dollars to buy up the entire market.

        What, as opposed to English who is today borrowing billions of dollars more than he needs to and then doing squat with it except paying interest charges to China?

        You right wingers are financially and economically illiterate.

        • queenstfarmer 3.1.1.1

          No, it’s a smart hedging strategy. As the article says (unfortunately omitted by the Guest author):

          But Westpac senior economist Dominick Stephens said borrowing in advance was wise as interest rates were low.. “I think it’s a good prudent strategy to borrow the money, be sure that you can borrow the money before you actually need it. It’s just good cash management practices.”

          [lprent: That interpretation wasn’t omitted because I read it in the post in the second paragraph. That paragraph said exactly the same thing about borrowing under current circumstances as what you quoted. I also note that you appear to have ignored the whole point of the post which is in the end of the third paragraph.

          I suspect that you have either a reading or assimilation difficulty? Should I restrain my sarcasm when it looks like you didn’t read a post? Or should I view it as being just diversion tactics by yet another troll acting like a fuckwit? Please read the policy before answering and consider that you have just wasted some of my precious time checking your statement and writing this. I particularly detest diversion trolling when you can raise any topic you like in OpenMike. ]

          • queenstfarmer 3.1.1.1.1

            Sorry you see it as trolling, when it’s totally on topic. The quote was omitted, it is the key part as it explains the rationale – which is NOT to borrow to invest overseas. And which, as I said originally, demonstrates the non-sequiter of the guest post which is that the Govt should borrow to invest overseas.

            [lprent: Actually you are sort of correct when I look at the whole conversation. However you have to remember I read the comments backwards through time, without the threading, and I have many hundreds of them to read at a time. It is up to you not to attract my moderating attention rather than mine to dig around trying to figure out what is inside your head.

            I read exactly what you wrote – which said that the post missed THE relevant piece of the article it was commenting on – which was incorrect. You should be careful about saying things that assert posts are deliberately incorrect unless you clearly state why. Making invalid assertions about what a post said is a classic troll diversion comment style that I look for and squash.

            BTW: Your assertion here is incorrect if you look at the forward projection of risk with respect to the superannuation payouts in the future. But that is a topic for comment rather than mod warning if I have time. ]

  4. Afewknowthetruth 4

    The price of gold has gone from around $250 to over $1500, a sixfold increase, over the past decade. So in real terms a US dollar is now worth around 16% of what it as worth a decade ago. The change in exchange rate makes the NZ scenario slightly less bad: our dollar is worth around 25% of what it was.

    We could compare with oil, which has gone from around $20 abarrel to around $120 over the past decade or so -again a sixfold increase.

    Japan’s Nikkei index since 1990 is the classic example of failure:

    40,000
    20,000
    10,000
    12,000
    7,0000
    11,000
    9,000

    The nearly 80% drop since 1990 is a raw figure and doesn’t allow for inflation. If we factor in the drop in purchasing power we see that money invested in the Japanese market in 1990 would have lost about 97% if its purchasing power.

    Anyone who understands the money system realises that paper ‘investments’ have no intrinsic value, and most ‘investments’ will soon crash in a manner similar to 2008 (or worse), since the entire financial system is dependent on a declining real resource base.

    What is a little surprising is that the house of cards hasn’t collapsed before now.

  5. Seeing as how Key has, according to estimates, 50 mil banked, has quite an extensive investment portfolio and apparently donates his salary to charity.

    Just wondering if he has started up any businesses and invested in the local economy at a real grass roots level. Y’know, put his money where his mouth is and not his mouth where the cash cow shits from.

    same goes for English too…case of, do as i say not as i do ?

  6. I am beginning to think that the extra 5 billion borrowed is some kind of decoy. For what? The fiscal messages can be interpreted as confusing e.g. trimming government costs but borrowing to the hilt, saying the Cullen fund is unaffordable, selling off energy assets which will generate more income in the future if left untouched, proping up DHBs with one off payments because the 2011 budget will not cover DHB costs…

    There is no purpose in borrowing more than you need to get out of a shitty situation.

    • queenstfarmer 6.1

      There is no purpose in borrowing more than you need to get out of a shitty situation.

      There is a purpose to borrowing while rates are good. Very standard practice by Govts, businesses, mortgage-holders everywhere (also see hedging). No different to filling up your car because the price of petrol is about to be put up.

      • Treetop 6.1.1

        Are the exporters not paying more due to EXCESSIVE borrowing?

        English acknowledges that the government can only borrow a billion or two more.

        I first learned about the borrowing a month ago because interest rates were low and I commented on this site. The country is 5 billion in debt more than it needs to be.

  7. tsmithfield 7

    Several points here:

    Firstly one of the fundamental concepts in investment is that the greater the return, the greater the risk. Therefore, assuming this principle applies in the specific situation of the Cullen Fund, borrowing money to invest at a higher return means that the borrowed investment is at greater risk. Otherwise, why would the lenders not set up their own fund rather than lending to NZ?

    Secondly, I would be interested to know if the returns on the Cullen fund are in USD. If so, the USD isn’t worth a bucket of shit at the moment. A lot of the Cullen fund investment took place when the USD was much stronger. Hence, if the returns are in USD, the exchange rate losses need to be considered to establish a true return to NZ. The exchange rate risk is a major consideration that contributors here may not have considered.

    In lefty Nirvana land where investments can be made in hindsight, there seems to be little value in considering the risk side of the investment equation.

  8. Looks like i might need to do some borrowing while the borrowing’s good too…

    …so’s i can afford to get me some of that kiwi mum and dad state asset firesale action English is touting come next National election win

    figure may as well borrow while my credit rating is still good enough to borrow against…

  9. MrSmith 9

    Our Government should never play the markets, they will get taken to the cleaners almost every time.
     
    They should instead be watching these markets like they are payed to, and if need be, they should be writing and passing into law stronger regulation of these very markets, that’s the job we elected them to do.
     

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