By Bron Suchecki, on June 1st, 2010
Sharelynx drew my attention to this 13 May 2010 lecture by Niall Ferguson at the Peterson Institute for International Economics titled
Fiscal Crises and Imperial Collapses: Historical Perspective on Current Predicaments. The following is on the last page of the transcript:
Finally, I guess one just has to ask oneself what’s going to happen in the world of dodgy paper currencies, of fiat monies, because you could quite easily get burned if ultimately we do get a crisis not just of the euro but of fiat currencies generally. And I keep thinking that maybe I should be valuing my portfolio not in terms of this or that currency but in terms of the barrel or the ounce—in terms of commodities like oil and gold.
Maybe one of the lessons of history is that periodically paper currency loses credibility so much that we have to revert to commodity standards, and I think that may well be happening. When you look at what’s happening in the gold market, it’s not so much fundamentals that are driving gold up from a $1,000 towards $2,000. It’s a fact that more and more people feel that they should hold gold as perhaps 10 percent of their portfolios. If everybody thinks that, if that becomes a standard investment strategy, then gold is going to go a lot further than its present price. So I’ve really re-thought my attitude towards gold almost on that momentum basis.
Note that this is a presentation made to the “elites”, mentioning ideas that were once considered crazy goldbug talk.
By Winton Bates, on June 1st, 2010
The Henry tax review into Australia’s future tax system recommends:
‘Subject to transitional arrangements, the new rent-based tax should apply to existing projects, replacing existing charging arrangements. The allocation of revenue and risks from the new tax should be negotiated between the Australian and State governments’.
The federal government seems to be attempting to ignore this advice in imposing the new tax. It is proposing to reimburse mining companies for existing royalty payments rather than to replace existing charging arrangements. It has decided unilaterally how it proposes to use the additional revenue from the new tax. In selling the tax to the Australian public it is asserting that mineral resources are owned by all Australians, contrary to the legal position of ownership by the Crown, with state governments having constitutional authority for resource management.
The government of Western Australia is threatening a constitutional challenge to the new tax, but the federal government doesn’t seem to be particularly concerned about this. I’m no lawyer, but I imagine the federal government think they are on safe ground in calling the tax a profits tax rather than a resource rent tax.
However, even if the new tax is legal, I think the federal government should be concerned about the viability of their proposal not to reimburse mining companies for any new or additional royalties that might be charged by state governments. Whatever the High Court might decide about the validity of the new federal tax, it is not likely to rule that the imposition of a new tax by the federal government has extinguished the rights of state governments to raise royalty rates.
Are state governments likely to impose additional royalties? Some proposals for higher royalties were already in the pipeline in Western Australia prior to announcement of the new federal tax and it is possible that these charges will be accommodated in transitional arrangements. The state governments review their royalty charges from time to time and I imagine that they will continue to do so. It is quite possible that having read and digested the Henry report a state government could decide to change the basis of their charging arrangements to a resource rent tax and to increase revenues from the resources sector. In considering such a change the state government might note that there is nothing particularly magical about the 40 percent tax rate proposed by the federal government. They might even read in the Henry report that Norway imposes a total tax rate on petroleum rents of 78 percent.
The point I am leading to is that the new federal tax has not extinguished the potential for state governments to raise royalty rates. This remains a potential source of sovereign risk for mining investment in Australia. This consideration is additional to the argument in my earlier post (Does a resource rent tax solve the problem of sovereign risk?) that the proposed application of the new tax to existing mines would lead investors to perceive that they have under-estimated sovereign risks in Australia. Even if the federal government comes up with satisfactory transitional arrangements for the new tax, miners will still need to factor into their calculations an allowance for possible future increases in state government royalties.
In my view the federal government should take another look at the recommendations of the Henry report and seek negotiations with state governments about the allocation of revenue and risks from their proposed resources rent tax.
By B.P.T., on June 1st, 2010
The figures for motor vehicle sales in May will be released today. The consensus estimate is that 8.9 million autos were sold in May, which would be an increase of 400,000 from the number of autos sold in April.
At 10:00 AM EDT, the Construction Spending report will be released, and the consensus is that there will be no change in spending compared to the previous month as weakness continues in all segments of the construction industry.
Also at 10:00 AM EDT, the ISM Manufacturing Index for May will be released. The consensus is that the index value will be 59.5, which would be an decrease of 0.9 points over April, but would be the tenth positive month in a row.
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