Their two year rate has risen +0.40% to 5.40%, their three year rate has risen +0.60% to 6.10%, and their five year rate has risen +0.35% to 6.85%.

These new rates are for term deposits of $10,000 or more, with standard interest-payment/accrual options.

At this level, ASB has the highest rates for these terms for any bank in New Zealand. In fact, they have trumped every credit union and building society as well. Further, these rises will also put the squeeze on a number of finance company offerings.

You can see the latest term deposit rates here.

It has been more than a year since ASB’s long term deposit rates were last at this level. At the end of October 2008, they fell from 7.00% to 6.75% after being at at 8.00% for a while before that. At that time, the rate curve was flat, for 2 to 5 year terms.

These new higher rates are also available as a PIE, enabling savers in the 38% tax bracket to achieve an effective yield of 7.73% for the five year term. An investment-grade credit rated bank return at this level will seem increasingly attractive for anyone with a finance company deposit, whether or not the finance company has the government guarantee.

See all term PIE rates here.

This move by ASB follows the new liquidity rules imposed by the RBNZ which encourage banks to source more funding locally, and to fund more at longer term periods. The market rate curve is steepening ‘positively’.

Expect ASB’s competitors to respond.

Kiwis may be looking on in awe at the rise and fall of the Kiwi dollar and the global stock market re-bound, but spare a little time for the rise of Gold.

Gold as hit a record above US$1,095/oz. It’s back centre stage, re-monetising as the balance of economic power in the global financial system shifts to the East.

Gold has de-coupled from the US dollar and is appreciating against all paper based currencies. The person on the street in New Zealand would probably never look at having Gold (the “hard asset”) in their portfolio for security to add to cash, shares and property. But we are now in an era whereby individuals in the 21st century should be acting as if they are their own Federal Reserve.

The latter half of 2009 has been an exceptional time for those wanting to hedge against the US dollar using Gold. The NZ Mint website has this chart showing the large role the US dollar has – affecting the gold price and the NZ dollar. (The lower line in the chart shows the NZ dollar value of gold, while the upper line in the US$ value of gold).

A real benefit to New Zealanders as they hedge and gain uplift in buying the “hard asset”.

Gold is now poised to target the psychological $1,100 an ounce. Today, across the Eastern world and elsewhere; people are buying gold as their own “reserve asset” to preserve wealth as part of their asset portfolio and to fight inflationary forces.

Gold futures have made a new high. Simply, Gold holds and preserves wealth as nations globally have enacted strategies to devalue their currencies to remain competitive as producing nations. So as we head into 2010; it looks as if Gold is on a march.

India has payed US$6.8 billion for 200 tonnes of IMF gold; a long planned sale by the IMF. The Indians have made their choice/ India’s central bank is now owns 557 tonnes of gold.

That gives it the tenth largest gold holdings among central banks. India & China could double (and then double again) its gold reserves and gold would still make up less than 10% of its total forex reserves. So lots of potential buying still to go.

Michael Lewis, Head of Commodities Research at Deutsche Bank states “India has (prompted) new speculation of pent – up demand for gold diversification for central banks. He goes on; “There is a long list of central banks which have very low gold ratios, and in aggregate central banks should be net buyers of gold over the next year for the first time in 20 years. It’s hard to know what’s going on at the IMF and the Euro central banks; they have a mandate to sell down gold reserves and give the money out as loans to governments.

Experts at the Daily Reckoning in Australia predicted earlier this year, the European central banks would rather hoard their gold than sell it in a rising market. They maintain there may be a price at which they do have to sell it, in order to pay down sovereign debts.

As we enter a period of further stimulus and quantitative easing activities, the spectre of probable sovereign debt crises scenarios will see the definite uplift in the re-monetisation of gold.

Have a look at the asset class and consider it in your asset allocation strategy. Right asset Right timing, perhaps? Be careful about buying Gold at top of the market as crowds and nations purchase at a central bank and household level.

A correction in the Gold price is when to acquire the precious metal.

* Damien Smith is a Company Director & Merchant Banker and heads the House of Smith. He is a gold fan and believes in its role as a wealth preserver.

By Selwyn Pellett

Neoliberalism has become so entrenched in the political and economic thinking of our country that we can no longer see the value in simply applying common sense to solve our economy’s problems.

It seems that unless a solution can be couched in terms of Neoliberal economic theory then we dismiss it as having no merit. We have ticked all the boxes of accepted, mainstream Neoliberal theory, often long before others were willing to do so: deregulation, trade liberalisation, free flow of capital, selling off state assets, semi-privatisation of remaining state owned enterprises, the removal of indiscriminate subsidies, tinkering with our tax system (hopefully way more to go) and the opening of our economy to all comers.

All of these measures we were assured, would help secure our economic future, because that’s what the theorists said they would do.

So here’s the surprise; some theories don’t work in the real world. New Zealand now languishes at No 46 in GDP per capita (PPP) wedged between Gibraltar and Slovenia and only just above Israel and South Korea. We are well below Singapore which sits at No 9 (CIA World Fact Book January 2009).

Those countries above Singapore in the list – Liechtenstein, Luxembourg, Qatar, Bermuda, Jersey, Norway, Kuwait and the United Arab Emirates – either have natural resources (oil) or are heavily involved in financial services (Liechtenstein, Luxembourg, Bermuda and Jersey) that bolster their economy.

So what does Singapore have that keeps it in such company? Frankly, nothing other than a Government that introduced common sense policies to make the most of what they did have (labour) and prevented exploitation because of what they didn’t have (capital).

Over time Singapore has grown a significant capital base that could now buy and sell New Zealand. There have been many articles and blog comments about why we can’t or don’t want to adopt some of Singapore’s policies and I keep asking why not?

Many of these criticisms have focused on Singapore’s social policies which we might not find palatable. Let’s be clear on this, there are economic policies and there are social policies and I’m not advocating that we adopt the latter. Critics of the idea that New Zealand should look carefully at the cause of Singapore’s economic success should not be side-tracked by debates on the merits of Singapore’s social policies.

If we had the death penalty for murder or drug trafficking, canning for some offences, limited opposition parties (but free elections) would that fix our economy? Of course not, so why have these social policies been used to justify why we can’t adopt some of the common sense economic policies.

I think, and it seems that many foreign economists agree, that Singapore’s absolute rejection of Neoliberalism has been its salvation.

In a paper on Monetary Policy in East Asia: The Case of Singapore, Bennett T. McCallum says “In light of Singapore’s macroeconomic success over the past 15 years, as discussed by various writers including Devereux (2003), Gerlach and Gerlach-Kristen (2005), McCauley (2001), Parrado (2004), and Rajan and Siregar (2002), it seems apparent that this type of policy regime could be an attractive contender for adoption by other highly open economies” — open economies like ours, in point of fact.

So why do we remain locked into this Neoliberalism mantra that our politicians keep chanting? I suspect we are suffering from what could be termed “battered country syndrome” and have developed a codependent relationship with our “abusers”, the international, freewheeling money markets.

You need look no further than the way the media and the consumers get excited by a high Kiwi dollar, as if it was some tacit endorsement of our worth by those outside our shores, to see this syndrome in action. Just today a commentator was talking about high yielding currencies like the Kiwi and Australian dollar.

Well high yielding to whom is the obvious questions and it’s not New Zealand. International banks can and do generate their profits anywhere. If the opportunity is good here they will take the quick gain and leave at a time of their choosing.

Could that explain the volatility of our exchange rate, an exchange rate that is traded at more than 118 times our GDP while the Singapore dollar is only traded at half that figure relative to GDP?

Could it be that Singapore’s Capital Management Techniques – that were introduced specifically to insulate the country’s economy against disruptive speculation, protect their soft foreign exchange peg and to increase financial stability – are actually working?

Imagine that; restricting capital flows actually improves financial stability and, dear I say it, delivers economic sovereignty as well. You will not see any cap- in-hand behaviour from the Singaporean government, sucking up to international financiers. Why? Because they don’t have too. Singapore has won economic sovereignty by believing in itself and showing the world it had the pragmatism and tenacity to go it alone. As long as New Zealand continues to employ variations to the OCR as its only monetary lever our economy will continually be played by foreign interests.

We have to introduce restrictions on capital flows. Reserve Bank Governor Dr Bollard has already said that he “can control the price of money but not the volume of it”. Frankly a high school economics student could tell you how flooding the economy with surplus cash will inevitably lead to asset inflation and that will lead to an increase in the CPI and a lift in the OCR and that will lead to a lift in the exchange rate and increase in our need for debt-funded consumption to balance the economy as exporters’ incomes die.

We can continue to sell houses to each other, using foreign capital to finance the transactions, until our ability to pay the interest component trends to zero as all our exporters shut up shop, but then what?

I’ve yet to see a “Plan B” for meeting interest payments without exporters providing the revenue to do so. Singapore knew it had to have a strong tradable economy and set about introducing policies to protect that first and foremost.

Isn’t it amazing how planning for a particular outcome instead of leaving it to the market to decide actually works?

Neoliberalism has failed us badly but the question is do we have the guts to stand up and say we too can go it alone? Nation building doesn’t happen by accident and it doesn’t happen by following popularity polls. It happens when people of vision stand up and ignite the passion within all of us to strive for something better.

The world has changed and those that can’t see that are locked into the past and need to be pushed aside so those of us who want to look forward can get on with building a nation that can actually support itself.

* Selwyn Pellett is the co-founder, director and former CEO of Endace Ltd, founder, CEO and Chairman of Imarda Ltd and Spokesperson for the Productive Economy Council.

By Neville Bennett

According to CNBC, the “cash-for-clunkers” program cost the US tax payer US$24,000 per car. Still, along with the stimulus, it helped to convince many people that the US is out of recession.

As a contrarian, I believe the GDP figures were horrible. Moreover, there are increasing doubts about the stimulus: recent research shows that a dollar spent does not create a dollar’s worth of activity, but only 60cents-80 cents worth.

I suggest it would have been more cost -effective to grant an income-tax holiday.

GDP Data

Most media failed to explain that the US economy grew by 0.9%. It reported the annualized figure of 3.4%; a figure which will be achieved if subsequent quarters are equally positive. They may not be because this quarter incorporated some one-off increases. The largest was a 22% increase in consumer durables, which was largely the clunkers, not consumer whiteware etc.

A rise in home construction was the result of tax credits for first home buyers. Much of the rest was money from helicopters. US consumer confidence is at a 26-year low: reflecting massive unemployment and other untoward patterns.

Imports exceeded exports, government expenditure increased by 8%, private industry decreased inventory. Real personal disposable income fell by 3.4% and savings fell as the cars and houses purchases increased debt. Any detailed reading becomes quite gloomy.

The market realized this when it received an update on consumer sentiment. The Conference Board reported an index figure fall of 53.5 to 47.7. Economists had predicted stability or growth, not this large fall. An index of 90 is needed before real growth can occur.

GDP rose because of exceptional spending and its rise seems a poor return for the massive stimulus expenditure. The US Government has spent about $10,000 per person. The next quarter could return negative figures.

Ongoing Destruction

As I write, the failure of CIT as been announced. This follows the failure of 100+ other banks this year. The housing deleveraging has hurt many banks world-wide, but the cancer is still spreading in huge write -offs of commercial mortgages and company loans.

These write offs have erased about 10 years worth of banking profits. Unfortunately, the banks have not been able to rebuild their capital sufficiently to feel secure in lending. Many authorities believe it will take many years before lending reaches pre-crisis levels. This view is supported by declining world trade and a shrinking world economy.

The world economy is projected to decline by 2.3% this year. As the trend has been a positive 2% growth, the loss is enormous (about US$ 2 tr). At a time when governments are pumping billions into the economy, the EU has declared that, for the first time on record, bank lending to business and households has fallen. This is an impediment to recovery.

China’s exports are down over 15% on September 2008. The OECD reports that the jobless rate in the OECD was 8.6% and predicts 10% next year. The crisis has put limits on future growth. Over the next few years government debt will be a call upon the budget. In the UK’s example, debt servicing in 2014 is expects to equal the present education budget.

As the IMF’s World Economic Outlook emphasizes, recessions that are caused by financial crises are twice as severe as ones from other causes. output is permanently impaired and 10% below trend for 7 years. The British Treasury accepts that 5% of UK output is lost permanently.

Stimulus:Effective?

The “Greater Depression’ has created debate on policy to smooth out fluctuations in the business cycle. Some governments gave taxpayers money, some cut taxes, all of them increased purchases of goods and services to replace falling private demand.

The assumption is that the multiplier is greater than 1: that is, the economy’s output will grow more than government purchases. Some empirical research by Robert Barro and Charles Redlick cover many years of US history and studied defense spending in particular. It concluded that the multiplier falls in the range of 0.6 and 0.8. They express doubts “that non-defense multipliers are larger”.

Granted that some stimulus was needed in the 2008 panic. Were there alternatives?

Barro and Relink opt for tax cuts as preferable, as“ a one percent point decrease in the average marginal tax rate (leads) to about 0.6% in the growth rates of real per capita GDP”. This is a very exciting finding. While there may be a good rationale for funding some projects with excellent long- term benefits, it is probable that others have dubious returns.

In the New Zealand context I favour a national cycleway, but regard some roading as equivalent to the wasteful funeral projects of the pharaohs: I would prefer the private sector bear the risk through toll roads, and apply user-pays principles rather than load our children with debt.

Job Destruction

The standard advice to middle class people at present is to extend their working life as savings and house values have shrunk. But in the US, where this advice seems very pertinent because it has had the hardest housing hit, there has been a rush to retirement. Why? The reason is that it is rational to retire.

Most older households have few investments; the median stock assets for households aged 55 to 64 is US$8,000. The research suggests that only higher educated workers in their 60’s respond to stock market fluctuations. Houses are more important as 81% of households aged 55-64 own homes with a median equity of US$140,000.

Courtney Coile and Phillip Devine found no evidence that workers responded to changes in house prices. But people in their sixties, especially those with low education, are responsive to the labour market: they accept retirement. They throw in the sponge, and rather than job seek and receive benefits from Unemployment Insurance, prefer to accept Social Security. The labour market (unemployment) is much more important than stock market wealth. The average US elderly person feels forced into retirement to make ends meet, resulting in lower income in later years and increased poverty in old age.

* Neville Bennett was a long-time Senior Lecturer in History at the University of Canterbury, where he taught since 1971. His focus is economic history and markets. He is also a columnist for the NBR where a version of this item first appeared.

neville@bennetteconomics.com
www.bennetteconomics.com

1. Elephant in the waiting room – I’m late in picking up on this, but it’s well worth a link. Brian Fallow wrote an excellent column in yesterday’s NZHerald looking at the amazing growth of health spending and what might happen in the future. It’s not pretty. Treasury has pointed out some things can be done to improve productivity and cut costs, such as a Pharmac-type buying organisation for medical technology and innovations such as key-hole surgery. But Fallow points out the inevitable issue of rationing and user-pays lurks over the horizon, even with the suggested improvements.

Intuitively they (the improvements) seem likely to provide only a limited or one-off offset to the big, intractable drivers of health costs: demographics, innovation, the dynamics of the labour market and the link between rising incomes and rising demand.

But the Treasury contends that between 2002 and 2008 at least half of the increase in health spending arose from discretionary policy initiatives by the Government.

They may have in mind things like moves to subsidise doctors’ visits and raising the income- and asset-testing thresholds for long-term care. “Dealing with future demand pressures will … require the Government to manage public expectations as to what the publicly funded health system can do for people.”

The clear implication is an expectation that people will have to fund more of their own health care. Doesn’t that mean rationing access to health care by income?

“Well,” says de Raad, “at the moment we ration by waiting lists.”

2. Squid food – The mysteriously prolific Tyler Durden (s) at ZeroHedge has a detailed analysis of how Goldman (Vampire Squid) Sachs is now making squillions of dollars trading Credit Default Swaps in the absence of competitors Bear Stearns and Lehman Bros. Now we understand why Goldman lobbied so hard within government a year ago to let Bear and Lehman collapse.

One of the more useful information items in Goldman’s periodic filings is granular disclosure on the firm’s CDS holdings, and specifically segregated data by maturity bucket and by spread as pertains to “maximum payout and notional amount of written credit derivatives.”

In essence, due to the firm’s monopoly in CDS inventory and, therefore, trading, this is the squid’s beating heart: between buying and selling (hopefully offsetting positions) CDS in billions of dollars worth of notional daily, and being able to capitalize on wide spreads, courtesy of the extinction of such traditional competitors as Bear and Lehman, the firm will continue to make hundreds of millions in profits every day, month and quarter, due to its newly found monopolist exposure when it comes to trading CDS, both as principal and as agent.

3. ‘Nutrition and traffic subsidy’ – Chinese farmers are so hard up they are selling their blood for US$25 a time to make money, ChinaDaily reports. HT Gertraud via email.

More than 6,000 poverty-stricken farmers in Central China’s Hubei province are selling their blood on a routine basis to make extra money, with some saying it’s the only way they can earn enough money to pay bills. Many have been selling their blood regularly for years to make ends meet.

Presently, nearly 6,400 local farmers sell their blood – 600 cc at a time – every two weeks at the blood plasma collection station authorized by the local health bureau in Yunxian county. The farmers earn 168 yuan ($25) each time.

Nearly 20,000 people have sold their blood at the station since it was established 11 years ago, China Youth Daily reported yesterday. The money earned is considered a “nutrition and traffic subsidy,” according to officials.

4. The deflation mystery - One of the curiosities of the last year has been the failure of massive money printing and bailouts to produce inflation. If anything, the global economy is mired in deflation. What gives? Keith Fitzgerald at Money Morning has four reasons why we have deflation rather than hyperinflation. HT Gertraud via email. They are:

1. Banks are hoarding cash
2. Consumers are still cutting back
3. Businesses continue to cut back rather than hire new workers
4. The US exports inflation to China

If China were to un-peg the yuan and let it rise by the 60% or more it’s supposedly undervalued by, we’d see jump in prices here in everything from jeans to tennis shoes, toys, medical equipment, medicines, and anything else we import in bulk from China. Chances are, the shift would not be dollar-for-dollar or even dollar-for-yuan, but there’s no doubt it would be significant. Many economists I’ve talked to privately think 25%-35% is probable. So the next time you hear a “Buy American” extremist, you might want to share this little inconvenient truth.

The upshot?

Any one of these factors could change at any time. And that means investors who are relying on the Fed’s version that everything is okay and that the government is managing inflation may be in for a rude awakening.

The only thing the Fed is doing is managing to manipulate is the data, and even then, not very well.

5. Asian property bubble – Kevin Brown from the FT.com in Singapore points out the amazing price rises in Asia’s apartment market at the moment. Is this helping to fuel New Zealand’s property price rises as cheap US and Asian money (because of the currency pegs) floods around the world. Deja vu is so ugly…

Residential property prices are rising across much of Asia, prompting fears of a real estate bubble. Apartments are selling for staggering prices, and central banks and finance ministries have begun to rein in property-related stimulus measures.

Luxury apartment prices in Hong Kong are now 30 per cent above their low point in the fourth quarter of 2008, with prices up 14 per cent just between the second and third quarter this year in favoured neighbourhoods. Similarly in Singapore, prices for private homes rose 15.8 per cent in the third quarter from the second, the first such rise in more than a year. In China, prices are up 37 per cent year-on-year.

So is Asia in the grip of a bubble or just enjoying a healthy reaction to excessive gloom and doom of the end of last year? No one really knows, but some governments and central banks are taking limited pre-emptive action just in case.

In Singapore, the government has shut down bank lending schemes that allowed buyers to defer mortgage payments on uncompleted developments, and hinted at land sales to increase supply.

6. Squid mine – Goldman Sach’s cost of funding on its long term borrowings was 0.92% in the third quarter, the WSJ.com reported.

All banks benefit from the Federal Reserve’s zero-interest-rate policy, but Goldman Sachs Group appears to be benefiting more than most.

Provided the Fed sticks to its word on keeping rates low, Goldman stands to juice its profits and bonuses for some time to come.

7. Money, money money – It turns out Goldman Sachs lost money on just one day in the last quarter, FTAlphaville reported. Most days it made more than US$36 100 million a day. It’s no wonder with implicit government backing and funding costs of 0.92%. And the wunderkind at Goldman believe they’re worth the massive bonuses…

8. The game is rigged? - Yves Smith at Naked Capitalism has a nice take on this.

OK, I have heard all the explanations, spreads are wider because there are fewer market makers, asset prices are rallying (market making firms are structurally long; it’s difficult and costly to go net short on that big a balance sheet), Goldman is currently the trading kingpin.

But I still find these factoids remarkable: Goldman lost money trading only one day last quarter and only two days the prior quarter.

Now maybe I am just hopelessly out of touch, or perhaps more accurately, the Fed has created such a ridiculously favorable environment for banks and traders that if you are moderately competent, making money is like shooting fish in a barrel. But a winning streak this consistent looks like a rigged game. Is this just, ahem, “information advantages”? Greater ease in pushing markets around that have fewer players? Just a function of those monstrously wide bid-asked spreads?

9. Have we learnt anything? – EconopicData has nice chart below on how almost all hedge funds are making money at the moment. Hmmm….could this be a bubble…

My concern now is that it appears we haven’t learned anything from the turmoil that happened all of 8-12 months ago. As NourielRoubini recently pointed out, the correlation of all risk assets has approached one as all assets have all moved in one direction… up.

Why? One reason is the world’s investors are turning to the US dollar for their carry trade currency of choice (if you haven’t read it yet… READ IT). At a high level it goes like this… the dollar’s decline is a one way bet. So why wouldn’t a foreign investor:

• Borrow the dollar at a 0% rate
• Plan to pay the dollar back at some point in the future when it is worth 10-20% less in their local currency
• Use that money to invest in ANY risk asset (as long as the asset doesn’t lose more than the gain on the dollar short, the investor wins… so why not ratchet up the risk?)

The issue is that at some point the dollar will stabilize (or gain in value), increasing the “real” cost of borrowing the dollar.

BUT… if the correlation of assets purchased is near one on the way up, it is sure as hell going to be that high or higher on the way down. And what happens to all these investors that are attempting to leave the same exit door at the same time? Massive re-purchasing of the dollar and massive selling of any risk asset… joy.

10. For absolutely no valid reason – Here is a video of an accordion player murdering music by Pink Floyd and Black Sabbath. HT John Burland…I think