questions growing up to business. how we get prosperity into all homes education / retraining jobs...
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Questions Growing up to Business
How we get prosperity into all homes • Education / Retraining
• Jobs
• Higher salaries
• Higher salaries requires more profitable businesses
• More profitable businesses– Better economic framework for
business
– Significant changes to monetary policy, tax and banking regulations
Page 2
Grow the size of the economic pie
“Growing up to Business”
We don’t know what we don’t know
• Children– Think money comes out of
a Hole in the wall
• Employees– Think more $/ hour
• CEO / Manager– Think reduce cost to
buy/make– Increase price to sell
• Directors and owners– Think shareholder value– Cost of capital– ROI– Corporate responsibility
Page 3
Hole in the Wall
Employee CEO Director or owner
0
5
10
15
20
25
30
Understanding wealth creation
“Growing up to Business”
So why am I here
New Zealand is strategically challenged
• No Vision or Strategic Imperatives Identified
• Our current course will soon lead us to Iceland's demise
• The “free market” is enslaving us in debt
• Via speculating boomers, Banks & Monetary policy
• The left has passively participated
• Not playing to our strengths as a nation
• We don’t know our enemies
• Economic Sovereignty must be our goal
That’s what drives me and that’s what I am going to talk about
Page 4“Growing up to Business”
Can you trust my opinions?Previous Experience• Avnet Asia Pty Ltd: Senior VP (Singapore)• Prolificx Ltd: Founder and CEO• Endace Ltd: Founder former CEO / Chairman
Currently • Imarda Ltd: Founder / Chairman and CEO• Endace Ltd: Director• Swaytech Ltd: Founder / Director• Northstar Logistics Pty Ltd: Founder and Director• Storm Distribution Ltd: Founder / Director• The Demo Room: Founder / Director
Page 5“Growing up to Business”
Benefit to the country in the last 12 months
Earned over $80 million in foreign currency
Employed over 170 people (120 in New Zealand)
Average salaries over twice the national average
Corporate and PAYE Tax contributions circa $5 millio
n
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Support another 125 entrepreneurs and in 7 years that could mean
• 10 billion in high tech exports.
• 15 thousand high paid jobs
“Growing up to Business”
My Vision for New Zealand
I want New Zealand to be the exemplar among small economies on how to build
a sustainable, high-wage, high growth, hi-tech economy that benefits all it’s citizens,
while fiercely protecting it’s economic sovereignty and ensuring we create new strategic options
for generation X & Y
Page 7“Growing up to Business”
Lofty ideas, or a deliverable vision?
“If you have built castles in the air, your work need not be lost; that is where they should be.
Now put foundations under them”
Henry David Thoreau
Strategic Planning Must
• Start with a vision from the leader (or leadership team)
• Have strategic imperatives clearly identified
• Put strategies in place that will deliver the strategic imperatives
• Contain tactical actions plans (TAPs) that will deliver the strategies
Page 8“Growing up to Business”
But how depressed do you want to be?
Page 9“Growing up to Business”
How we got there….simple anology• Wealthy couple in their 50s
– with good education and jobs, with children at university
• Lifestyle is high– mums income is modest but completely disposable
• Father dies unexpectedly – and suddenly the world is a very different place
• Mum maintains lifestyle – at previous levels but the money in doesn’t match money out
• The bank points out that the house has increased in value– and perhaps a small mortgage is the answer
• Spending continues un-interrupted. – No attempt to increase income or decrease spending
• Children leave home and repeat the behavior
• Bank forecloses on their houses and then mums
Page 10“Growing up to Business”
My analogy of New Zealand
• In the 50s the boomers arrived
• No 5 in the OECD thanks to primary exports to England
• Our protected export market suddenly died
• Population pretend nothing had changed and maintained current lifestyle
• Borrow and hope inflation, future commodity prices or another generation will take care of the debt
• Behavior becomes intergenerational and accepted as normal and sustainable
• New Zealand lines up with Iceland
Page 11“Growing up to Business”
No magic bullet!
Many things contributed to this problem
How to destroy economic sovereignty
NZ money supply increases
This attracts foreign funds
RBNZ Increases Interest Rates
RBNZ Forecasts higher inflation
Consumption increases
House / Farm pricesincrease
Financial Failures
More careless lending
NZ$ exchange rate increases
Carry trade drives up NZ$
Tradable economy stalls
Page 13“Growing up to Business”
HONG KONG
SINGAPORE
NEW Z
EALAND
SWIT
ZERLAND
SWEDEN
NORWAY
DENMARK
SOUTH AFRIC
A
AUSTRALIA
TAIWAN
POLAND
CANADA
MEXIC
O UK
KOREA
JAPAN
RUSSIAIN
DIAUSA
BRAZIL
CHINA
0.0
10000.0
20000.0
30000.0
40000.0
50000.0
60000.0
70000.0
Export vulnerability (2007) [D]
=Volume of currency
tradedCountry’s GDP
Value of exportsCountry’s GDP
Country’s GDPWorld GDP
x ÷
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Don’t have our form of monetary policy !
“Growing up to Business”
Monetary policy does matter (example)
Money to lend
Where does the bank get the best
return
Floating
Pegged
Managed
X
X
Monetary Policy
Demand for Credit
Asset Appreciates
Yes
No
No
The monetary polices of Korea and Singapore are designed to protect their productive economy
Page 15“Growing up to Business”
The extent to which NZD is traded (2007)
SWIT
ZERLAND
NEW Z
EALAND
HONG KONG
AUSTRALIA
SINGAPORE
SWEDEN
USA
NORWAY UK
JAPAN
SOUTH AFRIC
A
CANADA
DENMARK
POLAND
MEXIC
O
KOREA
TAIWAN
RUSSIA
INDIA
BRAZIL
CHINA
0.00
20.00
40.00
60.00
80.00
100.00
120.00
140.00
Volume of currency traded
Country’s GDP=
Times GDP
Page 16“Growing up to Business”
FX traders love volatility
Page 17“Growing up to Business”
Trade Weighted Index matters
• Like Singapore, we need to protect our exporters by managing the exchange rate within acceptable bounds relative to our trading partners.
Page 18“Growing up to Business”
OCR only effects tradable inflation
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Tax policy mattersDo I invest in property that
• I can leverage cheap long term bank money
• I get a tax write off against my PAYE
• The asset typically appreciates
• I am aligned to in interests of 90% of the population and therefore politicians
Or
Do I invest in a business that
• I pay a premium for money and then only short term
• I get no tax write off against my PAYE
• The asset (business) requires constant reinvestment
• I become the minority in society with no caregivers
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Stability matters
• Would you invest in an exportbusiness where…
• revenue could vary by 60% (while your production is constant)
• your funding could not be guaranteed beyond a few months
• the cost of funding was linked to property speculation and inflation
This is why New Zealand has one of highest participation rates and one of the lowest productivity rates
Page 21“Growing up to Business”
Capital Gains Tax matters
CGT exists in• Australia• UK• USA
New Zealand• (without it)
over shot all other property bubbles
New Zealand
Page 22“Growing up to Business”
The results….. Business v Housing (excluding agriculture)
Latest Change Decade agoBank lending (Billions) To Individuals 165.4 175.20% 60.1
To Business 87.5 85.80% 47.1
Interest rates Floating Mortgages 6.44% 6.50%Business lending rate 9.85% 7.38%
Asset values (Billions) NZ house values 568 163% 216NZ stock exchange 43.7 -14.50% 51.1
Stock exchange /GDP ratio Australia 92% 95%NZ 24% 49%
House values / GDP ratio Australia 277% 218%NZ 316% 209%
NZ Dollar US dollar 67.2 26.30% 53.2 TWI 62.1 8.90% 57
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Equity matters and its eroding!
• A stalled export sector is only part of the damage caused by the inflow if capital
• Not surprisingly the increased debt is eroding our net equity to GDP
New Zealand Net International Asset Position
Page 24“Growing up to Business”
Banking behavior REALLY matters
• Banks took advantage of the last upswing
• They managed the inflow of funds attracted by the workings of the OCR mechanism
• The inflow was then passed on to eager property investors
• Dramatically increasing national debt
• Lifting the OCR, exchange rate and thus killing exports
Page 25“Growing up to Business”
Banks via the OCR fueled the last bubble
• Money in circulation increased as the OCR went up
• Flooding the market place with money will fuel inflation
• Which will further increase the OCR
Page 26“Growing up to Business”
Know your enemy (economically)
• Australia and its banking system are farming our best…– People– Companies– Investments– Ideas
• Last year the big four Aussie banks made total profits of $3.6 Billion
• The rest of the NZX 50 made only $2.8 Billion
Page 27“Growing up to Business”
The scourge of property speculation
• The pyramid selling scheme that is property speculation– doesn’t create any sustainable jobs;– earn any foreign currency or– pay any tax
• Yet its existence has– created a vacuum to suck in foreign capital (and increase our national
debt)– drives up interest rates via the OCR as the property markets become
inflationary– drives up the exchange rate as the OCR increases– made our housing amongst the least affordable in the OECD
Page 28“Growing up to Business”
Remove the “poverty tax”• Bill and Jim work together
• Bill invests in property Jim doesn’t
• Bill gets deductions against his PAYE reducing his tax
• Jim must therefore carry a higher % of the tax burden
• When Bill sells his house he doesn’t have to repay – The lost tax, or the lost tax and interest or the lost tax interest and opportunity cost
• So in effect a portion of Jims earnings (via tax) has ended up in Bills pocket.
• This process is a poverty tax on all hardworking productive New Zealanders.
• Why would you allow something that is actually destroying our country become a tax on our poorest people and our exporters.
Page 29“Growing up to Business”
You have to plan to succeed
Types of Capital management techniques Objective of capital management techniques
Page 30“Growing up to Business”
Singapore is an acknowledged success
Page 31“Growing up to Business”
Monetary Policy in East Asia: the Case of Singapore,
Bennett T. McCallum, August 2007, IMES Discussion Paper Series
"..use of the exchange rate, rather than a short-term interest rate, as the principal instrument/indicator variable for monetary policy, may provide a relatively more effective
way of managing aggregate demand"
"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"
Singapore delivers
Page 32“Growing up to Business”
Singapore has no natural resources
Page 33“Growing up to Business”
Current account gives options
Page 34“Growing up to Business”
What I would do
• Stop unproductive property speculation
– CGT or ring fence losses against PAYE?
• Get investment flowing into productive businesses
– Requires tax incentives
• Adopt a monetary policy that gives stability to exporters to make long term investments
– Singapore would be a good reference point
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What I would do• Progressively introduce compulsory
superannuation.
– a must for regaining economic sovereignty
– stimulates our flagging capital markets
– lifts the value of our companies
• Vary contributions to superannuation according to inflationary conditions
• Recapitalise Kiwi Bank for market share growth
• Hardwire Kiwi Banks behavior into our RBNZ direction settings as part of monetary policy.
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Yes we need a bigger Kiwi Bank!
Page 37“Growing up to Business”
What I would do
• Create national hero's of our entrepreneurs
• Support them to create new innovative export focused businesses
• Encourage any possible moves in farming into higher yielding specialist products
– reduce the need for over farming
– selling on commodity pricing
Page 38“Growing up to Business”
What I would do
• Protect strategic assets as opportunities for national competitive advantage
– Power Generation
– Power reticulation
– Telecom
– Air NZ
– Ports etc
• Privatise activities like NZTE
Focus 150% on regaining Economic Sovereignty
Page 39“Growing up to Business”
Summary• New Zealand’s economic fortunes start with a vision
• Left and Right is irrelevant to 80% of the population
• Right and Wrong is relevant to 100% of the population
If you don’t know where your going any road will get you there
• The country needs a strategic and coherent vision
• With strategic imperatives, strategies and tactics to deliver the Vision
Page 40“Growing up to Business”
Some parting thoughts for us all
“Try not to become a man of success but a man of value”
Albert Einstein
“Men do less than they ought, unless they do all they can”
Thomas Carlyle
Page 41“Growing up to Business”
Questions Growing up to Business
Productive Economy Council’s Visionsaid in plain English
• We should aspire to be the exemplar among small economies on how to play to our strengths instead of allowing the world to play to our weaknesses
• We can build a new sustainable and high value export economy that compliments our existing exporters
• We must ensure the benefits of success are distributed equitably to all our citizens instead of allowing land and building ownership to suck up all the available wealth and investment
Page 43“Growing up to Business”
Productive Economy Council’s Visionsaid in plain English
• Success will come from fiercely protecting our ability to control our own destiny (our economic sovereignty) and making New Zealand “the place to live and work” for the worlds best and brightest.
• We are small so play to our strength, be nimble and fast in everything we do.
• Our ultimate goal is to create a better New Zealand, where our children and grandchildren have choices about their future that we don’t enjoy today
Page 44“Growing up to Business”