Saturday, August 24, 2019

Henry Armstrong: Retirees beware - he’s after your savings!

Hundreds of thousands of older New Zealanders, after a lifetime of saving for retirement, were astonished recently to find those savings may be under real threat. 

The Governor of the Reserve Bank of New Zealand has made it abundantly clear that both RBNZ and Treasury are actively developing contingency plans for a negative interest regime.

In an interview with Bernard Hickey, Adrian Orr  raised an amazing range of methods with which to apparently stimulate our economy, as a world recession looms, principally at the expense of savers.

Large numbers of retirees keep their savings in low risk term deposits in major banks-which banks then onlend for other purposes such as mortgages and small business financing.

Orr believes these savings should be put to more productive use and outlined a series of bizarre ways in which  he sees this occurring. In essence, these methods present a punitive regime against savers, a group who can in many cases ill afford to see their savings commandeered by a rapacious government acting on Orr’s proposals.

Bank deposits are already accessible  under the RBNZ ‘s Open Bank Regulations which allow your bank to siphon off a percentage of your deposits if the bank is in trouble. This is known as giving your funds a “haircut”. You have no ability to prevent this appropriation of your savings.

What else is Orr proposing?
  1. Negative interest rates, whereby you will be paying the banks to “keep” your savings “safe”. Instead of earning interest on your savings, you could be charged a fee for  maintaining your funds in a bank. The idea behind this scheme is to disincentivise savers  and encourage them  to spend or invest in something “productive”. No matter that you have spent a lifetime NOT spending, in favour of saving!

  2. Quantitative Easing , which in essence means printing more and more money. The problem with this scheme is that it does not create real wealth. It is a fundamental principle of economic activity that, in order to re-distribute wealth, as the Ardern-led government is currently doing with great gusto, it must firstly be created. New Zealand’s wealth is created by our farmers, exporters, tourism operators and, until recently, our educational institutions attracting foreign students. Printing money is not a substitute for real wealth creation. Yet our real wealth creators are themselves under real threat, especially by the Ardern-led government and it’s  Green partners. Printing money ?

  3. Tax cash holdings. Orr sees no problem in taxing those New Zealanders who have cash in the banks. Rather than save, Orr recommends spending it or investing it elsewhere .If you desist, your savings will be taxed-again. Savings are already taxed when earned. Then of course, any interest earned on your savings is taxed (Residents Witholding Tax). In a negative interest scenario, paying the bank to hold your savings is akin to another  tax. And after all this, Orr sees further taxing of your savings as a means to “encourage” you to spend!

    No mention is made of course, of taxing KiwiSaver. Yet This  financial monolith is focused on encouraging New Zealanders to save! Would Orr therefore be selective over which savings programmes to tax?

  4. Helicopter money. On the face of it, this proposal, by which everyone would be showered with free money to spend within a certain timeframe, appears to be straight out of fantasy land. Mind you, there are precedents. In biblical times, people received “manna” from Heaven. Then of course there was the miracle of the loaves and fishes. In  more recent times, Melanesian people became firm adherents to the “Cargo Cult” whereby all sorts of good things mysteriously dropped from the sky by parachute. Indeed the Duke of Edinburgh flying in on a visit to PNG was held to be the person from whom this cargo emanated! And finally, the TOP policy of a Universal Basic Income for all was floated at the last election. So, perhaps savings in the bank are not really necessary in such generous circumstances? Hmmmmm.
What alternatives are there for those retirees with a stash of cash in the bank?

Orr has some suggestions.

Invest in productive activities such as innovative  businesses, the entrepreneur; the event; the equities markets. Most entrepreneurs  with great ideas seek to create a start-up small business which at a particular time of development either fails or is taken up by a larger enterprise. But research clearly shows that upwards of 80% of Small and Medium Businesses which start up this year will not be trading in 5 years time. The failure rate is high. I am sure most retirees would have already considered investing in stocks and shares, managed funds and other forms of medium to higher risk options-but they return to the relative safety of bank deposits. At least you know exactly where you stand, rather than be at the mercy of so-called investment experts .If these alternatives are so attractive, why do most retirees prefer the safer option of bank deposits?

Perhaps the answer is to hoard cash in a tin box under the bed-also referred to by Orr. The trouble with this option is his reference to restricting the number of $100 bills in circulation to deter” money launderers and criminals”. So a very large suitcase instead of a briefcase will be required if you plan to keep your cash yourself. The banks used to provide safe deposit facilities but no longer do so.

Other options might include gifting; becoming a landlord(but the Ardern-led  government is cracking down on this group);investing  in agriculture or other primary industries? The Greens and Iwi might have something to say about that! Best you talk to your accountant first.

In summary, what Orr has successfully done is to undermine that confidence most retirees rightly had that after a lifetime of saving, their savings would be relatively secure. Not if this guy has his way.

And the reaction of the Ardern-led government to Orr’s proposals? Not a peep!

Henry Armstrong is retired, follows politics, and writes.

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