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Here is what I think about Economics, the prolems and solutions  http://www.rainierbank.biz/economics.php

Malcolm James Lorenzo Baker

Baker Publishing,

44 Spencer Avenue,

Hillview Court,

Maketu 3189,

NEW ZEALAND.

Hon. Bill English M.P.

Minister of Finance,

Parliament Buildings,

Wellington.

12th June, 2009.

Dear Sir,

Thank you for your letter of 24th April, in reply to mine.

I would like to call this The Case for a Flat rate of Income Tax.

You say that not all of the government's revenue (deficit) is funded from income tax, and that 15% of taxpayers pay 55% of the tax.

This obviously makes a flat 20% rate of income tax difficult.

But consider the situation. It makes little difference to the economy overall whether half these tax payers receive their income from the government, or from private enterprise. Why, because the situation would be the same if all taxpayers worked for the government. There would still be a deficit in terms of what taxpayers pay, and what the government spends.

The fact is, many tax payers are employed by privately owned businesses.

The governor of the reserve bank has said interest rates for banks will remain at 2.5% or lower until the end of 2010,  

http://www.rbnz.govt.nz/news/2009/3658527.html "
 “We therefore consider it appropriate to continue to provide substantial monetary policy stimulus to the economy. The OCR could still move modestly lower over the coming quarters. As we said at the time of the April OCR decision, we expect to keep the OCR at or below the current level through until the latter part of 2010.”

however I would like you to strongly reconsider this approach.

While I agree with you that the economy does need stimulating at this time, borrowers who have at least 50% equity in their homes also want to know what the interest rates will be like in five year's time. It is of little use to them to know that 18 months of an interest rate of ? 7.5% will be followed by five years of 15%.

What the banks need to understand is that:

1/. Margins need to be reduced to the bare minnimum, ie. .25% or .5% for competition to be effective while maintaining some profits, and

2/. There needs to be an asurance that money will be available to refinance those maximum 5 year terms, at a rate less than 10%, 12% or 15%. How can you guarantee that the secondary, or non government rate will be less than 10% when private lenders (businesses other than governmen owned ones) will want to lend money at 10% when they can use that same money to invest in the expansion of their own profitable businesses, returning  15%, 20% or 40%?

You must first ensure that money will be available at 8% for the next 10, or 20 years, otherwise we will see an inevitable rise in inflation. 8% should ensure a steady but not too rapid rise. It is a guess, but about the right rate. 20% growth is too fast, but that is what properties have been achieving over the last 30 years (1982- 2009). 8% on 50% equity is effectively 4% profit anyway, as that is what teh bank is expecting on the capital value of the land (at 50% equity). Less than 50% equity would not ensure the bank could expect to recover its money in a worst case scenario.

Can you say that teh USA is not going to experience hyper or even high inflation in teh next period, with their loose control of money supply in place? They are effectively printing money to solve their problems, and that is always inflationary. Growth and inflation are not necessarily the same thing, yet the fact remains that while land prices increase, more and more productive wealth is being locked into land, and banks are taking a percentage.

Do you want banks to make more and more profits? Will it guarante that they will lend it? No, they will invest it in their own property portfolios, if the returns are greater there, as they will be if land price inflation resumes.

The fact is my house is going to cost someone $500,000 to purchase, and that person will not be planning on selling if they have the right location and plan to die there. Will banks lent to buy fine art or antiques, moveable assets?

My point, in case you cannot grasp it, and the point of Jossiah Wedgwood in his book, 'The Economics of Inheritance", is that it is equally effective to stimulate the economy by giving it to teh elderly, as it is to give it to private banks. You are taking it from one private bank, and giving it to another anyway when you lend money at 2.5% when the receiving bank can lend it at 8.5%. The alternative to borrowing it from a private bank, whether the State owned (guaranteed) Bank of England or another private lender, is to print it, increasing artificially the money supply. I do not believe you have a license to do this. Germany in teh 1930's proves the case. Money loses its value. You end up needing a wheelbarrow to buy a loaf of bread. Are food prices reducing compared to the minimum wage today? Wages have not increased for agricultural labourers, and we still need them, while some staples have increased by 25% recently.

If you do stimulate the economy by increasing pensions, in the expectation that this money will flow through to small businesses, encouraging those employers who can afford it, such as manufacturers of breakfast cereals and other processed food, and retailers who make substantial profits to increase wages by a dollar or two per hour, and putting interest rates to 8%, while explaining to banks that they must lend at no more than 1% or .5% above this if they are to expect a continuous supply of funding for their businesses, they will understand that there is more profit in prudent lending than in sitting on a useless asset for two or five years waiting for inflation to increase, ot trying to borrow at 10% to compete against this supply of mortgage money at 8.25%. They will still be borrowing at 10% or 12% if that is the market rate, and lending at 12% or 15% if they can get it, and still be paying 2% or 3% on savings accounts, because that is the rate of inflation. However,  if inflation is 5% and savings acounts pay only 2%, people would be foolish to save too much as they would still be losing money and they know this.

I really hope you see teh logic of my argument even though it is counter intuitive, and can convince people to accumulate more equity before they borrow the balance to invest in a profitable venture, but not one that they an use instead of decent wags or income from business, and business needs money in circulation.

These are not my ideas but those of Jossiah Wedgwood, an economist and successful businesman.

Wealth is not just money, it is having enough money to cover the expenses, and some assets, or a decent environment and a happy family.

Yours sincerely,

Malcolm Baker.