Stop Thinking the Government is Meant to Do Right By You

Stop Thinking the Government is Meant to Do Right By You

Despite all the angst and hand-wringing, global markets just keep pushing higher. Overnight, the S&P 500, the NASDAQ, the UK’s FTSE 100 and Germany’s DAX index all hit record highs.

The catalyst for the move was a 2% jump in oil prices. As the Financial Times reports:

Oil jumped after Saudi Arabia and Russia said they backed extending an Opec-led agreement to cut output until March 2018, intensifying their push to shrink excess inventories that have kept a ceiling on prices. Saudi energy minister Khalid al-Falih and his Russian counterpart Alexander Novak pledged on Monday to do “whatever it takes” to reduce global oil stockpiles and balance the market.

‘Whatever it takes’? Haven’t we heard that somewhere before?

Whatever — the market liked it. Aussie stocks should have a better day today. It’s been tough going over the past few weeks.

Banks have been under pressure ever since ANZ reported a softer than expected result two weeks ago. And resources have corrected too, thanks to China’s attempts to remove excess liquidity from its financial system.

Despite this, the market still looks pretty healthy. Check out the chart of the ASX 200 below:

Source: Bigcharts.com

Click to enlarge

The broader market is still in a healthy upward trend. The recent correction has been entirely normal. If the rally continues from here, new highs around 6,000 won’t be too far away.

However, a fall below the mid-April low would suggest the correction still has a little way to play out. That could happen, depending on the extent of China’s slowdown. But given major global markets are breaking out to new highs (again), it bodes well for the Aussie market to make a fresh run at 6,000.

It just might need to shrug off the bank tax hysteria first.

Look, no one likes a tax. And any tax imposed on business usually works its way through to the end user. So it imposes higher costs for no additional benefit.

But it is funny listening to the wailing going on right now about the 0.6% tax on bank liabilities imposed in last week’s budget. Here’s a selection of doom from the big four, as reported by the Financial Review:

ANZ Banking Group said the tax will increase funding costs, lower returns for shareholders, reduce the banks’ international competitiveness and create potential regulatory conflicts

‘…CBA warned the Reserve Bank of Australia must be consulted on the design of the levy, given its potential to “impact on the functioning of the monetary system”.

‘…Meanwhile, Westpac Banking Corp said funding transactions such as repurchase agreements (repos) with the RBA, which provide liquidity for the financial system, should be excluded from the levy.

“Application of the levy to these transactions will increase the cost of execution, deter market participation, reduce market liquidity and adversely impact functioning of the payments system,” warned Westpac.

Jeez. Sounds pretty grim. Better rethink the idea — we don’t want to ‘impact on the functioning of the monetary system’.

In a separate article by the Financial Review, former bureaucrat Ken Henry, now Chairman of National Australia Bank, was predictably scathing:

‘…While Dr Henry was scathing of the overall fiscal policy settings in the budget, he saved his particular wrath for the bank tax announced in last week’s budget, which he says has been proposed without comprehending its impact on financial system stability and governance or the fact it represents a massive step backwards in tax policy.’

Although Henry is obviously conflicted, he’s right.

But just because politicians refuse to implement genuine structural reform of the tax system, why should banks be immune from their incompetence?

The simple fact is that the federal government spends way more than it earns. Over the past 10-plus years, it’s generated cumulative deficits of $400 billion. It spent the dividend from the resources boom, but didn’t reign in any of that spending when the boom turned to bust.

And that’s the problem. Once you give the electorate something, you can’t take it away. They ‘earned’ the payment, or benefit, or whatever, but they certainly don’t ‘deserve’ to have it taken away when times get a little tougher.

And that’s where the politics of the bank tax come into it. In the eyes of the electorate, the banks deserve a 0.6% tax…at least until voters realise the cost will be passed on to them.

Banks get an enormous implicit guarantee from taxpayers. That is, investors know that if banks get into trouble, the government won’t let the banks fail. They will receive a bailout, which will protect the debt holders.

Up until recently, the banks have received this support free of charge. But you can’t expect to make record profits and not have the government come looking for some easy money.

The banks’ warnings — about the tax being a threat to the payments system or monetary system — are self-serving scaremongering tactics.

But it is true that the tax is a dumb one. It’s not part of an overall plan. It’s not designed to encourage the efficient allocation of capital, as good taxes should be. It’s just a desperate government trying to plug holes in a budget deficit that shows no signs of ending.

And that’s because we expect too much. We expect the government to make our lives easier or better, instead of taking on the responsibility ourselves.

To all you youngsters out there, stop thinking that the government is meant to do the right thing (whatever that is) to improve things or make things fair. The government will simply do whatever it needs to do to stay in power.

The best thing you can do is to take responsibility for your own wellbeing, success and happiness. Taking ownership means the buck stops with you. There is no one else to blame.

In fact, I would argue that taking ownership and responsibility for everything you do, and refusing to blame others for whatever misfortunes befall you, is the secret to a happy and successful life.

Regards,

Greg Canavan,
Editor, Money Morning

Greg Canavan

Greg Canavan

Greg Canavan is a Feature Editor at Money Morning and Head of Research at Port Phillip Publishing.

He likes to promote a seemingly weird investment philosophy based on the old adage that ‘ignorance is bliss’.

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