Government should act to secure super savingsby Patrick J. ByrneNews Weekly
, July 27, 2002
In the face of substantial stock market declines, the Government should secure savings in super funds by issuing government bonds and investing the funds raised in a new development bank and in badly needed infrastructure. But do they have the political will to act, asks Pat Byrne?What is happening on the US stock market is important to the savings to million of Australians who, at government direction, have been required to save from their wages for retirement in superannuation funds.
Shaken by a continuing stream of corporate scandals - epitomised by the Enron and WorldCom collapses - investors now have the jitters.
For a decade or more, investors, media, stock broking firms and analysts have been prepared to suspend disbelief and virtually will up a surging US stock market to ever dizzier heights.
Even the US Federal Reserve was prepared to add fuel to the hype.
Companies had to deliver double-digit growth or face the wrath of investors. So when they couldn't deliver, they cooked the books to satisfy the insatiable markets.
A "new economy" was pronounced, one that suspended the well established rules of economics.
One much lauded advocate of the "new economy" predicted that the Dow Jones Index, which peaked at about 12,000, would grow to 36,000.
The accounting and boardroom scandals that now make regular front page headlines have pricked the market bubble. The best indicator of US stocks, Standard & Poor's 500 Index, has shed 40% of its value since its peak in March 2000.
Last year, a major paper by leading US funds manager and critic of the 1990s stock market "irrational exuberance", Warren Buffet inferred that the marked was so overvalued that it would have to fall by about two-thirds in value to return to its historical norm.
This was confirmed recently by US Treasury Deputy Secretary, Ken Dam. He effectively told the Australian Financial Review's
Peter Hartcher that despite the 40% fall in the Standard & Poor's Index, it could still fall a further 50%.
Dam said, "The historical valuation for the S & P-type stocks is about 14 times earnings and we still are apparently a lot higher than that." (The ratio of stock prices to earnings is a standard yardstick for evaluating the true worth of stocks).
Currently, the ratio of stock prices to earnings on the S & P Index is 30, twice the historical average. This prompted Peter Hartcher to comment, "To reach Mr Dam's historical benchmark, US stock prices would have to fall by half from current levels."
This means that the current decline could see a substantial fall in those huge investments that our super funds have in the stock market.
Australians have saved over $A500 billion in superannuation, and over 20% of that has been invested offshore, much of it in US stocks. A substantial amount of the rest is invested on the Australian stock market, which will inevitably be pulled down by a falling US market.
This could represent substantial losses to millions of Australians.
Is there a way to minimize these losses and to secure our super savings?
Yes, if the Federal Government has the will to act.
Recently, it was suggested by Australian Treasury officials that the Federal government raise $A50 billion by issuing government bonds. The suggestion arose out of concerns that as the government reduced its debt to near zero, it would stop issuing government bonds that are an important source of investment for Australian super funds.
That much of the Treasury proposal was sensible. A further suggestion, that the $50 billion raised should be invested in what is a declining stock market, was ludicrous.
There is a much more sensible suggestion.
Issue $50 billion in government bonds to the super funds, considerably more if the funds need to secure more of our savings from declining stock markets. What to do with these funds?
Firstly, use much of those funds to rebuild Australia's declining infrastructure. There is a crying need for major investment in roads, rail, water, port facilities, energy and telecommunications infrastructure. This type of investment is most economically and effectively done by governments, not by the private sector.
Government bonds may not offer fund mangers double digit returns like they were used to getting on the 1900s stock market, but single digit returns are better than ongoing losses on markets that are unlikely to return to anything like the 1990s levels.
Government investment in infrastructure is also a way to return funds to rural and regional areas. Super funds have drained savings out of these areas and invested them in ways that mostly benefit those in the central business districts of the major cities. Super funds don't have the expertise to invest the massive funds they collect in ways other than in the stock and bond markets.
Secondly, use some of these funds to establish a government backed development bank, run by a statutory authority like that which runs the Reserve Bank of Australia. A new development bank is badly needed for the expansion of small-to-medium business, family farms and possibly for part of the housing market.
Bank deregulation has seen a major change in the mission of the commercial banks, and left these important parts of the economy in need of a different form of banking and credit that is long-term and geared to the cash flow of the business.
Again, super funds have the capital but not the expertise for this specialised form of lending.
If the Federal government can have a statutory authority competently run a Reserve Bank, surely it can establish an appropriate authority to run a development bank.
There is more at stake in securing of the funds saved by Australians in superannuation than in the vague hope that a full sale of Telstra would secure a higher value for shareholders.