Gareth Vaughan on whether Grant Robertson & Jacinda Ardern have the courage to follow their Aussie & US counterparts, and the whacky world of cryptocurrencies

This Top 5 comes from interest.co.nz's Gareth Vaughan.

As always, we welcome your additions in the comments below or via email to david.chaston@interest.co.nz. And if you're interested in contributing the occasional Top 5 yourself, contact gareth.vaughan@interest.co.nz.

See all previous Top 5s here.

1) How much courage do Grant Robertson & Jacinda Ardern have?

Today, Thursday, is Budget Day. One of the many issues written and talked about will be government debt. Opposition politicians, business lobby groups, pundits and others will make out that it's a problem. Even the Budget's father himself, Finance Minister Grant Robertson, is likely to talk about how there's "more scope to keep a lid on debt and look towards a faster reduction in that debt once the recovery is secure." He certainly said this in a recent speech.

All this teeth gnashing is, however, unnecessary and the attitude's frankly wrong. New Zealand government debt is not a problem.

S&P Global Ratings upgraded our sovereign credit ratings in February. The big three international credit rating agencies being S&P, Moody's and Fitch, all have NZ's sovereign credit ratings at or near their highest investment grade ratings. (See credit ratings explained here. And you can see a full, detailed explainer of NZ government debt here).

The vast majority of our government debt is bonds issued for fixed terms that are denominated in the NZ dollar, of which the Reserve Bank - on the government's behalf - is the monopoly issuer. Interest rates are at historic lows meaning the interest rates paid on our highly rated debt are very low. This means it continues to be a great time to invest in things we desperately need such as housing and infrastructure.

Kiwibank's economists explained this in their First view report this week. They point to the recent stimulatory budget in Australia, where government debt's heading towards A$1 trillion, suggesting the Aussie Budget demonstrated "courage we can only hope to see in Wellington" where our government pushes for a public sector wage freeze. As the Kiwibank economists point out, someone's surplus is someone else's deficit.

Last week, the Australians delivered a bumper budget, with a giant leap in the right direction. The Aussie budget showed a dramatic improvement in the Government’s finances, with strong economic performance and commodity prices (as we’ve seen here in NZ). The forecast budget bottom line was lifted by a whopping $104bn through to 2024/25. The Government paid back most of the windfall, with $96bn in new initiatives. As a share of GDP, it’s the second most stimulatory budget ever delivered in the nation’s history. Second only to last year’s pandemic budget. The budget included tax cuts to low-to-middle income households, childcare subsidies, SME business tax cuts and incentives to invest, even more infrastructure spend, education and skills packages, and supercharged spending on the vaccine rollout, aged care and mental health.

What we like about the budget, is the focus on jobs. The budget was geared towards maximising employment. Fiscal policy is being ramped up in support of job creation and boosting the Australian tax base for tomorrow. So, despite the massive improvement in Government revenues, forecast deficits remain large, and debt levels will only improve marginally. The Australians understand that fiscal sustainability of debt means generating nominal growth over and above the record low interest rates on that debt. Stimulating growth (and inflation) is a sure-fire way of smashing debt/GDP ratios. It takes courage to deliver a budget like this. Courage we can only hope to see in Wellington this week.

Budget teasers already released point to a much more austere affair for this week’s NZ Government Budget. A budget that is tipped to be a balancing act. A balance between the ongoing covid recovery, and a premature desire to reduce a pile of debt that is by all accounts modest by international standards. The Government’s books start from a much stronger position. The latest accounts revealed a $4bn upside surprise in tax revenue leading to a $5bn smaller deficit in the nine months to March 2021 than forecast at the half-year update back in December.

We know that the Government has signalled increases in both operating and capital allowances from those previously pencilled in. But despite upward tweaks to spending, a larger nominal GDP track is likely to see the Treasury project smaller operating deficits over the forecast period. An operating surplus by the end of the forecast period is also in the realm of possibility. We feel that a rush to fiscal surpluses is the wrong step. After all, someone’s surplus is another’s deficit. NZ also continues to face both massive housing and infrastructure deficits. And there’s the ever-present need for action on climate change. Bold investment in NZ’s infrastructure and public housing stock will underpin future growth and help speed-up inevitable debt reduction ahead.

Smaller deficits and a more upbeat outlook should show a smaller peak in net debt as a share of the economy from 52.6% at the half-year update. A smaller debt profile will most likely flow through to a downgrade to the Debt Management’s planned issuance programme over the next four years. A programme that could be around $20bn smaller than the $115bn previously predicted.

Meanwhile, the US government, whose debt is significantly higher than NZ's, is eyeing a massive investment programme. Secretary of the Treasury Janet Yellen explained why in a speech this week. Yellen argues the US government has under-invested in key areas such as infrastructure for decades, and the country must now "reorient our framing of US fiscal policy."

We haven’t maintained our infrastructure let alone modernized it. We haven’t sufficiently supported public research and development to ensure that America will maintain its technological edge. We haven’t embraced the investments in education and training that we need to keep up with technological change and to compete in the international marketplace as we once did. And we haven’t built support systems for families to improve child health, education, and well-being, and provide adequate childcare.

That is why the President proposed the American Jobs Plan and the American Families Plan. These policies will promote a dynamic economy with greater opportunity for workers, higher living standards, and, over time, reduced inequality.

Public investments not only create good jobs, they also increase the value of our existing resources. The Jobs Plan proposes a range of productivity and profitability-boosting public investments totaling $2.2 trillion over the coming ten years—about three-quarters of one percent of GDP—a large number but an achievable one. The Jobs Plan will build and modernize physical infrastructure like bridges and roads. But there will also be investments in an infrastructure for the future: broadband, research and development, public transportation, modernized schools, and a more expansive network of child-care providers.

We know that, like any private sector investment, the payoff to any one infrastructure project is uncertain. But what we propose is a portfolio of public investments that together will have a significant positive payoff directly to the American people: to workers, and entrepreneurs—whether in convenience, connectivity, educational opportunity, productivity, or business efficiency.

Do Grant Robertson and Prime Minister Jacinda Ardern have the courage to reorient our framing of fiscal policy like their Aussie and US counterparts?

2) Elon Musk's cryptocurrency fun.

As a young financial journalist in London I had my eyes opened by the dotcom bubble. What's going on with cryptocurrencies at the moment reminds me a lot of those days. The cryptocurrency world is a wild west. (Note, at the time of writing cryptocurrency prices are tanking, albeit that might have changed by the time you read this).

Here Bloomberg's Matt Levine takes a look at the amazing hold Tesla and SpaceX founder Elon Musk has over Bitcoin and Dogecoin. Levine notes the almost magical ability and inclination of Musk to move the cryptocurrency prices.

Imagine if you had gone to Warren Buffett 30 years ago — or J.P. Morgan 120 years ago — and told him: Here is a lamp. In the lamp is a genie. When you rub the lamp, the genie will come out and invent two assets. They will trade like stocks in many ways, but unlike stocks they (1) will not be subject to U.S. securities laws, (2) will trade 24 hours a day, seven days a week, and (3) will not represent claims on any businesses or cash flows. One will have a market cap — a total circulating supply — of about a trillion dollars; the other will be smaller but still like $65 billion. They will be liquid enough, with lots of people trading many billions of dollars’ worth per day; you can buy or sell lots of them without too much price impact. And: Any time you want the price of either one to go up or down by 10% or more, you can just whisper “price go up” or “price go down” into the lamp, and it will happen instantly. You are the only person who can do this, and you can do it as often as you want.

Levine goes on to say that he has no particular reason to think Musk is monetizing his magical ability and assumes he’s not. But if he wanted to...

1. He definitely has the power to move Bitcoin and Dogecoin prices whenever he feels like it.
2. He definitely exercises that power with some frequency and with no apparent pattern.
3. He definitely has the money to buy lots of Bitcoin and Dogecoin before making them go up.
4. If he did do that, he probably would not have much in the way of disclosure obligations, at least not real-time disclosure obligations.[2]
5. Similarly he could easily sell them before making them go down, without much in the way of disclosure obligations.
6. The regulation and policing of Bitcoin and Dogecoin trading are rather less comprehensive and aggressive than the regulation and policing of stock trading.

So if he was doing the magic-lamp trading strategy — which, again, I don’t think he is — it would look, to an outside observer, more or less exactly like what he’s currently doing. 

3) "If it is a Ponzi, get in on the ground floor."

Depending on your point of view, some things going on with cryptocurrency could be viewed as hilarious or frightening.

One of the latest examples of this comes from Dave Portnoy. Portnoy is an American internet celebrity, blogger, and founder of the sports and pop culture blog Barstool Sport. In the tweet below, which Portnoy describes as "my s**tcoin announcement," he declares that he has bought $40,000 worth of the SafeMoon token, having chosen it over an array of others including Shiba Inu, Litecoin and Dogecoin.

Inspired by Musk's ability to move cryptocurrency prices, Portnoy does, however, warn people to invest at their own risk, adding he has “no idea how this works.” 

“It’s time for me to choose a side and I have done that,” Portnoy said, selecting SafeMoon among “a new breed of sh-tcoin.”

“SafeMoon is now in the Dave Portnoy business and vice versa,” Portnoy said. “Why? I don’t know. it could be a Ponzi scheme,” he said. “If it is a Ponzi, get in on the ground floor,” he quipped.

My shitcoin announcement. Invest at your own risk. I have no idea how this works pic.twitter.com/G1iW8iZTWG

— Dave Portnoy (@stoolpresidente) May 17, 2021

4) Bloomberg journalist has cryptocurrency named after him.

As the madness, or entertainment, continues, Bloomberg journalist Joe Weisenthal had a cryptocurrency named after him, or his Twitter handle, the Stalwart, at least. This happened after Weisenthal pointed out just how easy it is to create your own coin.

See, it used to be in prior crypto booms that if you wanted to create your own coin, you had to do some development work. And then you probably had to pay a fair amount of money for some exchange to actually list the coin, so that it could be traded for money. But in this new world of decentralized exchanges — where the trading happens on a blockchain itself — there’s no gatekeepers and no listing fees. You just create the coin by copying and pasting some code, tweaking a few things and listing it. 

Also, on some chains, the trading fees are super low, so you really can just make any old joke coin at a low cost, and then pump it to a network of Instagram and TikTok influencers to make the price go up (in theory). 

Anyway, I’m curious about how easy this is, and I’m planning on having someone walk me through how all this is done. But in the meantime, someone just went ahead and made one.

In less than an hour after tweeting about it, someone called Tulpamancer Chaser had created the Stalwart Network coin ($JOE) and listed it on PancakeSwap, a blockchain-based trading platform that runs on the Binance smart chain. 

Anyone I follow in the weeds of launching memecoins on PancakeSwap? Would love to do a Q&A with you. Shoot me a DM.

— Joe Weisenthal (@TheStalwart) May 18, 2021

The Stalwart coin had a roller-coaster ride.

After this post, the coin soared and briefly had a notional value of over $100,000 (though there was never anywhere near enough liquidity to actually sell that much. And now the coin has completely crashed. An entire market cycle in the span of a few hours.

5) US regulators reportedly probing cryptocurrency exchange Binance.

With all the hype and attention around the cryptocurrency world it's not surprising that regulators are watching. Binance Holdings, the world’s biggest cryptocurrency exchange, is reportedly under investigation by US authorities for potential money laundering and tax evasion, as Barron's reports.

Binance, which is incorporated in the Cayman Islands, is being investigated by the Justice Department and Internal Revenue Service. According to Bloomberg, “officials who probe money laundering and tax offenses have sought information from individuals with insight into Binance’s business.”

Binance says it has a “robust compliance program that incorporates anti-money-laundering principles and tools used by financial institutions to detect and address suspicious activity,” according to a statement emailed to Barron’s. Binance cooperates with law enforcement, the firm said, adding “we don’t comment on specific matters or inquiries.”

Regulators have long had concerns that cryptos are funding illegal activities such as money laundering or tax evasion. Hackers also appear to be trafficking in cryptos. The operators of the Colonial Pipeline paid Eastern European hackers a nearly $5 million ransom in an untraceable crypto after its pipeline was hacked, according to Bloomberg.

The scope of the Binance investigation isn’t known. But the market is interpreting it as the “start of a long-feared crackdown on the crypto space by the U.S. government,” according to BTIG analyst Mark Palmer.

Meanwhile, the Financial Times reports European regulators are examining whether Binance has complied with securities rules over its launch of trading in stock tokens.

In a new initiative that started last week, Binance says it allows users outside the US, China and Turkey to “trade equity shares through crypto coins”, with tokens that “represent a share in a stock corporation”. The move marked one of the most significant forays by a leading digital currency venue in to a specialised and heavily regulated market.

Changpeng Zhao, Binance’s chief executive, said that when the tokens launched they “demonstrate how we can democratise value transfer more seamlessly, reduce friction and costs to accessibility, without compromising on compliance or security”.

But regulators are seeking to determine whether the tokens comply with rules governing transparency and corporate disclosures.

The two companies at the centre of the token offer are well known to cryptocurrency enthusiasts.

The Binance tokens are designed to track the share performance of companies they represent, but cost only a fraction of the price of the stock. Investors can trade tokens on Binance that shadow the price of two stocks: US-listed electric carmaker Tesla and rival crypto exchange Coinbase. Deals are backed by a “portfolio of underlying securities”.

Binance says users are also entitled to the “economic returns” of owning the shares, including potential dividends.

But there's no prospectus, just a one page service agreement, which may be a problem for Binance.

Lawyers say the regulatory status around the tokens is a grey area since Binance does not make clear on its website whether it is a security or a derivative. “Taken together with the information from Binance, it’s simply not consistent,” said Thomas Tüllmann, a partner at law firm Eversheds Sutherland in Hamburg. “If I was BaFin, I’d write immediately to them and ask where the prospectus is.”