Letters of the Week

Stimulating spending, inflation protection, and retail shareholder rights.

Stimulating spending

I agreed with much of what Tom Murphy said in his interview. However I must take issue on one point.

“The trouble is the change occurs in a way that cuts available spending to the upper class, and the upper middle class who are the ones keeping the economy going through their spending, so this is where it gets complicated.”

In this he is implying that if tax cuts are concentrated at lower income levels then there will be a lesser boost to the economy.

Certainly at present the wealthy dominate spending but that is because they are the only ones with any discretionary spending power. However if they get the tax relief and more money they will not spend it all. They will spend some, pay off debt with some but invest most of it. People don’t get rich, or stay rich, spending all their money. And this investment will not necessarily be in America as you point out earlier in your report: “US companies are as much invested in the fast-growing emerging world”.

However if the poor and lower middle classes get the tax relief they will spend it; the vast majority on the necessities of life and consumer durables respectable.

So let’s get it right as Labor did in Australia; if you want to stimulate the economy you give across the board (or better still to the more disadvantaged), if you want to encourage saving and political donations you give to the rich.

K Matheson

Inflation protection?

I was interested to see Westpac release two new products aimed at retirees. The CPI Plus deposit and the Inflation linked deposit. A product that you would expect buffered the interest rate against the impact of inflation. This is what it claims to do but when you look at the details it does not appear very attractive. The CPI plus gives you an interest rate that is 0.85% above the rate of change in the CPI. Unless CPI and interest rates get a long way out of sync it should not be too hard to get better than that. The second product of Inflation linked deposit is a bit misleading. It adjusts the interest rate by the rate of inflation. As I understand it, if the base rate is 3.25% and if inflation was 2%, the interest paid would go up to 3.315%, nice enough, but if inflation went to 10% then the interest rate would be 3.575% and you would be going backwards in a hurry. Do you see any place for these products in a portfolio?

C Salmon

Retail shareholder rights

As a small shareholder it is always disappointing (read: annoying) when developing public company's go to "sophisticated investors" to raise working capital without first seeking for support from current shareholders. The recent capital raising by Image Resources (IMA) is an example of this.

Small shareholders, many like myself, identify local companies with potential, research them and then support them financially while they work to become viable producers. It seems unjust that all-too-frequently we see our equity diluted by capital raisings which we are excluded from.

I am not widely experienced in these matters, but it would seem appropriate for company's seeking additional funds to be required to at least offer a percentage of the capital raising to existing supporting shareholders. Something for the regulators to think about I would suggest.

Perhaps one of your contributors might like to air this view in the Eureka Report.

I Stagles

Editor’s response: While it may be some small comfort, the ASX recently began to address this with a consultation paper on reforming rights issues. Because of the time it takes – 26 days – companies are often discouraged from going down this path because of market risk, even though it’s fairer for small shareholders. A shorter timetable would make rights issues more competitive with other forms of capital raising such as institutional placements, and potentially avoid this in future.

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