thewest.com.au Monday, October 7, 2013 It’s about ... · 10/7/2013  · While it’s probably a loophole that will end up being closed, at the moment it’s quite legal for people

Ever since Julia Gillard calledthe election back in Januarymost discussions about the sloweconomy included somethingalong the lines of “people arewaiting to see what will happenafter the election”.

Implicit in that was a beliefthat once the leadership was decided, it would all go back tonormal and the economy wouldpick up.

What exactly can we expect

from a coalition-led economy?Let’s look at some historical datarecently published by GoldmanSachs to get a better idea.

In three changes of power to thecoalition from Labor since 1949,the Australian sharemarket hasbeen up an average of 26.8 percent 18 months after an election.

For the nine runs of Labor Party rule since 1949, the averageperformance of the Australiansharemarket 18 months after-wards is minus 1.74 per cent. Forthe 16 runs of coalition govern-ment, the average performance ofthe market is 15.43 per cent.

While this suggests that coali-tion governments have a signifi-

cantly better economic recordthan Labor, it is possible the over-all global economic climate at thetime has as much or more to dowith these statistics as any inter-

nal influence by the coalition.If that is the case, with global

markets appearing to be improv-ing for the first sustained periodsince the 2008 global financial crisis, the coalition may well gainfrom another dose of good timing.

Benefiting from this globalprosperity by attracting foreigninvestors to Australia and by ax-ing the carbon and mining taxesis a focus of Tony Abbott’s effortsto stimulate economic growth.

Another factor that undoubtedly has an effect on the nation’s financial prosperity is havingconfidence in a government,whether Labor or coalition.

Following two terms in which

the incumbent Labor prime min-ister was ousted before even con-testing a second election, it is fairto consider that investor and pub-lic confidence in Labor govern-ment stability as low.

With Mr Abbott able to surviveas opposition leader despite con-sistently poor leadership pollingover recent years it is highly un-likely the coalition will follow La-bor’s blueprint for disaster.

It is that stability, along with asteadily improving global econo-my, that should give investorscause for optimism about Austra-lia’s economic future.Troy MacMillan is a financial plannerwith The Wealth Designers

It’s about stability — we all like it■ Troy MacMillan

Julia Gillard Tony Abbott

The US Treasury has warned of asevere recession and the Interna-tional Monetary Fund of a globalslowdown if US political grand-standing leads to a historic USdebt default.

President Barack Obama’sDemocrats or the Republicans,led by John Boehner, must agreeto raise the statutory limit on USborrowing before October 17.

Complacent financial marketsaccustomed to US officials bend-ing over backwards to soothethem have begun to stir as thedeadlock drags on, but few expectthe US to actually default on itsinterest payments.

Though markets might be un-derestimating the pig-headed-ness of US lawmakers and thefallout of a “selective” default,they are correct to assume overthe longer term there is limitedrisk of non-payment for US bondholders.

The credit rating will take a hitin the short term, but there sim-ply is no way that after spending$US3.7 trillion via the US FederalReserve to support global mar-kets, US officials will let the tech-nical issue of a nominal debt lim-it blot its credit rating.

It is unthinkable and unneces-

sary because as the issuer of itsown currency the US Govern-ment will find a way to make upfor any delayed interest pay-ments and any short-term notesthat matured during a strategicdefault.

Highly geared investors couldlose a lot of money as volatilitysoars, but the GFC in 2008 showedthere is nothing quite like a fi-nancial markets crisis to crystal-lise a bipartisan agreement.

The most likely scenario is thata deal will be reached at the 11thhour when one party blinks, butthere are other unorthodox

ways to conjure up funding.The option to mint a $US1 tril-

lion platinum coin was toutedback in 2011 as a solution to thedebt ceiling wrangling.

It has been raised again as alonger-lasting solution to circum-vent the increasingly regular political deadlock.

Regulations allow the US Trea-sury to mint coins, including anabsurdly expensive $US1 trillionplatinum coin, of whatever phys-ical size it chooses.

The coin can then be pledged ascollateral in a repo (repurchaseagreement) with the Fed to get

cash, less a nominal haircut.Putting aside the cream-skim-

ming, round-trip through the ma-jor banks, a platinum coin repo isessentially no different to thecurrent sale of US Treasurybonds to primary bond dealersand the subsequent purchase bythe Fed via its $US85 billion amonth quantitative easing pro-gram.

Every week the US Treasurysays the “paper” bonds it sells areworth anything from $US5 bil-lion to $US50 billion, so the onceoff issue of a coin it claims isworth $US1 trillion is little differ-ent, except for the perculiar na-ture and size.

US bond holders will most cer-tainly be made “whole” at somepoint, even if there is a default.

The risk for markets is an in-terbank cash lock-up where thecontinual “flow” of US dollars isessential to global markets.

The Fed would, as usual, pro-vide emergency liquidity to ma-jor US banks.

But any cash squeeze in therun-up to October 17 could bemost acutely felt by increasedmargin calls in the $US1 quad-rillion derivatives market. Itwould also knock emerging mar-kets like India, Brazil and Indo-nesia, where the brunt of taper-ing fears were felt in May.

In the gun: Federal workers rally in Washington to demand a vote to end the government shutdown. Picture: Reuters

Who takes the hit if Uncle Sam defaults?■ Gareth Costa

Analysis

5YOUR MONEYthewest.com.auMonday, October 7, 2013

Did you know that self managedsuperannuation fund memberscan provide interest-free loans totheir SMSF without any penaltyfrom the tax man?

While being able to make loansto the fund overcomes the issue ofthe cap on member contributionsthe ability to make interest-freeloans to funds would make SMSFborrowing even more attractiveto trustees.

The ATO has admitted that thelaw allows SMSF members to pro-vide interest-free loans to theirfunds because the fund suffers nodisadvantage under the limitedrecourse borrowing arrange-ments. The ATO agreed that thelaw does not prevent related par-ties providing interest-free loansto their funds. However, the ATOis certainly not publicising this.

While it’s probably a loopholethat will end up being closed, atthe moment it’s quite legal forpeople to do this. It means fundscan buy bigger assets, such asproperty, at zero interest and paytax on investment income at amaximum of 15 per cent, ratherthan the members’ marginal taxrate.

SMSF trustees could take ad-vantage of the loophole by doingthe following: � Ensuring interest rates are notmore favourable to the lenderthan the fund. If the interest rateis at a commercial rate, or evenlower, the arrangement satisfiesthe law. � Structure the loan correctly.Loan documents need to be in thename of the SMSF trustee. Titledocuments need to be in the nameof a separate holding trustee. � Be careful of having a relatedparty act as a guarantor for theloan. If the fund defaults on theloan and the lender approachesthe guarantor before making aclaim on the fund’s asset theguarantor’s loan repaymentwould be viewed as a contribu-tion and could incur more tax. Monica Rule is the author of The SelfManaged Super Handbook —Superannuation Law for Self ManagedSuperannuation Funds in Plain Englishwww.monicarule.com.au

Here’s aloopholeworthacting on

super■ Monica Rule

The effects of the US Governmentshutdown were cascading into thebusiness sector and into vital collectionof economic data, the country’s Com-merce Secretary Penny Pritzkerwarned yesterday.

The first shutdown in 17 years had di-rectly affected hundreds of thousandsof government employees but MsPritzker said companies were alsostarting to hurt.

“The shutdown is not good for busi-ness. It’s not good for the economy,”Ms Pritzker said at the Asia-Pacific Eco-nomic Cooperation forum in Bali,which President Barack Obama has

been forced to skip. Ms Pritzker saidone big problem was businesses couldno longer access vital data about theeconomy that is usually posted on theCommerce Department’s website.

Ms Pritzker recounted the story ofher son, an analyst in New York, whocould not access retail sales data that isnormally accessible online.

“He said: ‘I need retail sales numbersand your website is not functioningright now’,” Ms Pritzker said.

Nevertheless, Ms Pritzker said shewas an optimist and believed a solutionwould be achieved soon.AFP

US business feels squeeze

THE COALITION EFFECT