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August 2007 Edition ---- to page back through Previous Editions click here

Well we are revamping and adding to this page mid month. Let us start with the headline economic topic. It was pleasing to see Dr Don Brash come out and give his analysis of the inflation, interest rates and exchange rate situation. He seems to have put party politics behind him and what he said was very clear and sound. He said the high exchange rate, which was a likely a temporary phenomenon, was masking the rate of domestic inflation and this inflation needs to be tackled with urgency. We suggest that Dr Brash be given back. his old job, as Governor of the Reserve Bank.

The present Governor, Dr Pussyfoot shall we call him, is an ex civil servant from the office tower across the street, and would seem to be too used to following the Government's wishes without saying he is doing so. When he has got the governor's job he would seem to have just carried on following instructions. His job was to make inflation control the number one priority. That was and generally still is recognised as the most important long term objective. But politicians don't have very long term sights. Their's go no further than the next election. Temporary high exchange rates cause upheaval as labour intensive industries move off overseas. So the Governor is pressurised into treading carefully and the inflation keeps picking up speed.

The idea that buying real property is the way to get rich is something that has got to get knocked out of New Zealander's physic. The fact that the leaders of both main political parties own rental property as well as their own home typifies the attitude. Neither is inclined to personally tidying up such property as a convenient bit of after hours income. People with such inclinations and skills should be the only ones inclined to undertake such investment, these people having the comparative advantage. Otherwise professional corporate organisation should best own the rental real estate one would think. The stupid pattern of static house prices followed a short period of monstrous rises to unrealistic levels has got to be brought to a halt. House prices reached realistic levels about 2004 and that is where they need to return to. There was adequate warning from the governor and others about that time. He has a duty to see that his word is not dismissed with contempt. There would be limited damage to business if they got on with the job. Interest rates got to 20% in the mid eighties and stepping them up to there now would do the trick. This talk of soft landings cannot change attitudes to bad investment. The home owners with zero or negative equity can start again after a few year's and the mortgagees need to suffer for their stupidity. Well it will be their stupidity if they do so suffer.

We think the effect of interest rates on the exchange rate is overplayed. It is true the currency jumps with an interest rate rise but that might be due to peripheral traders who have minimal influence overall. The other overstatement is probably also media emphasis on comparing with the US dollar. The trade weighted index was invented for this purpose but they choose not to use it. The Chinese currency has been allowed to increase relative to the US dollar we understand and this will have allowed the US currency to fall back overall. The number one reason for the rise in the kiwi currency seems to be the rise in value of our high quality milk products. There is speculation that it is a rather short term demand but we are not so sure. The rich of the world want good food. It is tough on other export industries but there is scope for many of them to switch to dairy support. A good feature of dairy wealth is that it is well distributed throughout the country and many of the winners are obliged to stay here and will probably keep their wealth here. The country is currently nice and moist so should be able to produce the wanted goods.

The worry is about the public attitude to inflation. The effect of the scourge seems not seem to be taught in schools or by parents. It is not oil for the economy but a narcotic. The dose has to be continually increased to keep the good effects while the bad effects get to ridiculous proportions. Then we all suffer while it is squeezed lower. After World War 2 there were three US dollars to the NZ pound ($2). Inflation here changed that. And it robbed those with monetary investments. We suspect that is why NZers do not save and hence have difficulty looking after themselves. The Japanese are learning to live without inflation. We should be too.

Well none of the above is really accounting. There are similarities with the accounting situation however. There is no action against high profile accountants because, we suspect, the government is too much messed up in it. The latest case of improper influence concerns the Ministry of the Environment. The minister should have lost his job for inaccuracy in his public communications concerning the appointment and disengagement of a Communications Manager which he did. But it was not the perception he gave which was the wrong thing as the Prime Minister seemed to say. The panel who interviewed the appointee to be knew full well that her partner worked for the National Party. We would have thought that at least this fact would have been passed before the Head of Department and the State Services Commission prior to the appointment being made. But to admit that would be almost to admit that they changed their mind when the Government heard about it and unofficially voiced its displeasure. It was a tricky situation but they should have lived with their first considered decision. Some head needs to roll there as well. The Government goes on saying how independent these bodies are when we believe that nothing is further from the truth.

It is not just those under the State Services Commission who have become government puppets. The judiciary no longer has a foreign final court of appeal. The new one consists of more of the same which no doubt undertakes not to deliver any surprises. Modify the odd inconsequential thing to look like you are working but nevertheless the lower courts are going well. Get someone convicted and keep them that way is the rule for serious cases. We prepared a critique on the Court of Appeals three pieces of evidence that establish guilt in the David Bain case but will have to will have to more than a year to release that now.

There is a rumour of a rift or spat between the Prime Minister and the Chief Justice but we believe it was all engineered to give the appearance of independence.

Then of course we have the Securities Commission, the ultimate in independent bodies which are anything but. The minister appoints this lot so if they might want more appointments they of course obey without suggesting they do so. The 1993 Securities Commissioners were of course a classic act. They had a conspiracy of company directors, solicitors and auditors brought to their attention, and they managed to weld in the news media, prominent politicians, and the other eight of themselves into the conspiracy and leave it largely in tact. They were very critical here and there but said they observed no improper conduct.

They are a completely different set of people in the 2007 version. Most have been appointed by Ms Dalziel. She has come and gone but has been the Commerce Minister for most of the government reign we think. But she makes it clear that the rules say she cannot direct or influence the Commission. Yeah right. But she does seem to be able to praise the Commission however as she has done for them getting $20m out of David Richwhite. The implication is that others have not been so brave in dealing with this crowd in earlier times. Well she should be doing something about that. We cannot have people running away from their obligations for such reasons. But the $20m is chicken feed for FR. We say that we do not believe Mr Richwhite and Co fooled anyone over the true value of Tranz Rail. They just gave those fund managers who handed over their client's money to these and other vendors knowing that half it would be lost, an excuse and an argument which might work but should not work, of protection. The outcome to date over these Tranz Rail share parcels is pathetic. The company's annual accounts were one big mess and obviously so. And some or many of these purchasers have gone on to get Kiwisaver contracts.

The Commission's other big act in recent times was the one page Feltex report. What a joke that report was. All the hallmarks of a major scandal are there but the Commission gives this Initial Public Offer a clean bill of health. Of course an audit partner of the firm who did the audit at the time of the audit, one David Jackson, is now a member of the Commission but the one page report does not mention that. That is the same as in 1993 when a member of the Commission and this same audit firm, one Elizabeth Hickey. was undisputably right at the heart of the issue being considered but the huge report did not mention this membership. It is fundamental to any such report that potential vested interest be declared but the Commission is not interested in setting an example. It seems to think it can handle conflicts of interest and does not need to be seen to be doing so.

Well that bit wasn't accounting either but the dismissal of the Labour Party accountant sure is. How fussy should you be? is a fundamental accounting problem. Lisette Taylor lost her electorate treasurer's position and the possibility is that it was because she was allocating tax fairly. They said she was a difficult person and that is understandable if she was doing her job.

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