Month: July 2020

There was a time , a long time ago now, when interest is what you earned for lending people your savings ( also known as your capital). The amount of interest you could charge and receive depended on the risk you were taking and the demand for capital.

Now we have a Central Bank—the Reserve Bank of New Zealand (RB) — who control short term interest rates to stimulate or slow down the economy. If inflation appears to be exceeding 2 % they raise interest rates to “slow down the economy”. I knew a time in the era of Robert Muldoon when I was paying 26% interest on my borrowings!

However we believe the idea that an economy can be manipulated in this way is based on a false premise. The economy is actually the interaction of millions of human decisions, wants, and wishes. These play out in the market place of the capital system to determine outcomes. Poor use of capital means those businesses don’t survive and new ones spring up. Trying to manipulate this natural process causes growing distortions through each cycle.

Gradually we have allowed the Government to take over our decision making and with the support of the banking system they are now bailing out and rescuing most sectors of the economy and creating a huge welfare state. The productive sector of the economy is shrinking and carrying a massive burden of the costs to maintain a huge bureaucratic network. This is now so dominant and pervasive it is unlikely it can be stopped apart from having outright revolution.

However to keep the system operating governments all over the world have realised that since 1971  they can just print money out of nowhere, put it out in the economy as capital and use it to meet whatever needs there are. Up to 1971 money could only be issued against the value of gold available to back it. Money up to then represented capital and this gave it value as a real commodity was backing it. If Governments needed money they had treasury bond auctions . Now it is issued via “ Quantitative Easing “ or QE.

The situation now is that the world is awash with debt to the extent that it now represents                 ( together with promises called derivatives) many times the value of all the world’s assets and there will never be any hope of paying it back.

To keep the whole situation from imploding interest rates are continually being reduced to make the debt affordable. They are now lower than at any time in history and in some countries the interest rate on savings is now negative. We are using debt to pay for interest coming due in an upward spiral. This whole process helps the rich become richer as they can use the cheap money to buy out businesses and assets at little cost. The poorer in society are being encouraged to be consumers of money to keep retailers in business and so create employment. The idea of saving money is a distant consideration.  

Wages can remain low as the cost of borrowing reduces and ordinary workers can access cheap funding.

Therefore talk we hear from banks that interest rates will rise on the premise of controlling inflation are wrong . There could be a situation where the circulation of this printed money is so large that inflation of prices may occur but then asset prices would also fall as no one could afford the extra cost of the debt. This will result in stagflation—a situation the government, together with their banking partners will not allow to happen ( assuming they could prevent it ).

The most likely outcome is a complete reset of our financial system by issuing a digital only currency, a new international currency, and writing off all the printed money that was not created via the normal process of creating capital through productive processes in the economy.

However you do not need to fear this process. As a client of THE BROKERS  we will help to educate you and look at your own situation and put in place a plan to help you benefit from the issues we have outlined above. All the above developments will affect families, businesses , and individuals in different ways. Intergenerational wealth planning will become very important.

THE BROKERS have over 30 years of accumulated experience — why should you not learn from this real world knowledge                  

With the guidance of our team at THE BROKERS we can show you how you can progressively develop your own protection against the risks you face as you progress through life.

The key is to start young when generally you are free from financial and medical issues.

This means that time and compounding are on your side. You can never win this back later in life.

Insurance companies are available to help with this effort in the short term but you must give them your money, they want to minimise their risks, and they must remain profitable to survive. Also they invest the funds you pay as a premium to make profits on top of their underwriting profits. Apart from what is paid out in claims the balance is essentially free capital for them.

At THE BROKERS we work with all the insurance companies and lending institutions to put together tailored solutions to best suit you to keep more of this capital ( your income ) under your control.

Done with our guidance this can build a secure financial future for you, your children, and even future generations with you in control.

Most people would argue that debt is bad because you owe money to someone else and now you have to spend many years paying it back with money from your income. Plus there is the cost of interest to be added on. How could this be good for your pocket?

Well this is true if it is debt you have taken on to buy a car, a holiday, furniture, or anything that drops in value after you have bought it. Now the debt remains and it is often greater than the value of the item you purchased. Therefore you cannot even sell the item to get your money back!

These sorts of purchases should be done from your savings only. This also saves regret setting in after the purchase as you cannot get out of the debt cycle you have landed yourself in until it is repaid or it sends you broke.

Also the interest rate is very high ( relative to good debt ) as the lender knows it is risky lending and they may not be fully repaid if things go wrong so they charge more in interest. These lenders can also be very aggressive if you don’t pay on time.

At THE  BROKERS  we can review your financial situation and help you grow your wealth using good debt to buy your home, business, or other investments. We can even show you how to get rid of any bad debt very quickly.

Good  debt used wisely will grow your wealth, reduce risk, and lead to a comfortable retirement.

THE  BROKERS  are specialists in this field and their staff have been showing clients the right way forward for over 30 years. Make sure you become one of them.

By international standards NZ is a very small economy. Yet the NZ dollar is the 10^th most traded currency in the world. This is because the NZ$ is trusted as it is backed by a country with little corruption, a strong rule of law, and relatively low dept levels.

However NZ has a dilemma. Widely held economic theory shows that a country can’t have all 3 of the following:

   —- A fixed foreign exchange rate

   —- Free capital movement

  —- Independent monetary policy

   If you want two of these, you need to give up on the third.

For example to fix its currency to the US dollar, Hong Kong basically gave up independent monetary policy and instead embraced America’s monetary policy. It will be interesting to see if this changes with the new controls China is imposing on Hong Kong!

For most developed economies a desire to have both free capital movement and to control their own monetary policies has led to floating exchange rates.

For large economies the majority of commerce occurs inside their borders so it is better to let foreign exchange ( forex) rates float, and have more control over monetary policy in other ways. NZ has tried to operate this way but it has resulted in wide movements in exchange rates which can harm our exporters.

Some stability has been achieved by manipulating interest rates. A lower local interest rate causes our currency to weaken thereby making exporters more viable in the international economy on which NZ depends.

However as we approach near 0% interest rates and unlikely to break materially from these levels, the government can no longer use this tool to manage forex rates. This will lead to more forex volatility.

As per the above dilemma it is assumed NZ will want to maintain an independent monetary policy. If it then fixes the foreign exchange rate ( as floating it at 0% interest has no effect)  we will need to place controls over the flow of capital. We are already seeing this start with the requirement to report money flows. However the disguise is that this is for anti money laundering.

At THE BROKERS we believe the above considerations should be taken into account when investing and that if you are a serious investor you should diversify your investments into several countries to spread your country and exchange rate risks. Working with THE BROKERS we can show you the options available and even how this can greatly enhance your plan to achieve Intergenerational  Family Wealth.