Thursday, May 12, 2005

Tax cuts are NOT inflationary and super wins!

This is the idea that the tax cuts announced in the current Australian Federal government budget will somehow be inflationary.
This demonstrates a mis-understanding of what inflation is.

Inflation is a monetary thing NOT price thing.

Even the dictionary has it right.

Inflation: A persistent increase in the level of consumer prices or a persistent decline in the purchasing power of money, caused by an increase in available currency and credit beyond the proportion of available goods and services.

The sooner more people in Australia (and elsewhere) realise what inflation is the sooner we realise what is happening and why prices seem to always increase.

How can a tax cut be inflationary if the amount of money doesn't change (increase). The government isn't creating new money to give back, it is just giving back a small portion of the total tax. The amount of money hasn't changed.

The only way the tax cut can be inflationary is if there is new credit (loans) involved.

For example:
Mr 1.2 times-average wage (considered rich by some people, including the leader of the opposition) takes is $100 per month and uses his credit card to buy that $7000 plasma TV. Eventually he will pay the full $7000 back, but at the purchase the amount of money in circulation has increased through his use of credit. As he pays back the $7000 and watches new TV with better features sell for less than half his purchase price, that money disappears from circulation.

Mrs 2.5 times-average wage (got to be a stinkin' rich capitalist sow) puts her extra money $86.58 per week into a high interest term deposit (starting with $1000) earning 6% for her child's future university fund.
In 15 years, junior has a little over $110,000.00.
If she invested that money in a share fund returning 12%, junior walks away with a shade under $195,000.00 in 15 years.

Now the real deal, super.
On $125,000.00 she is getting super payment of $384.62 per fortnight, 8% of the salary is paid as well as super. Normally this would mean she is on a $135,000.00 package.
If she puts the tax cut money into her super fund returning 12% (without the stupid surcharge) with pre-tax dollars ($100?) and works for another 30 years, she is way better off.
Starting with $10,000 in the fund, she walks away with a cool $4.8 million!!!

Does she need a pension when she is 60-65?? She could (will) live for another 30 years and have $161,000 per year to live, assuming she took the whole amount out and put it under the bed.

It gets better...

At 65, she takes out $1 million and buys the dream everything, then she rolls the amount over and continues to get 12%, 12% of $4.8 million is $580,000 per year. Even if she lives it up and spends $200,000 per year, the nest-egg continues to grow and grow (the power of compounding) at aged 95 (who knows how far medical tech will advance in 30 years)
She will have $66 million dollars!!!

I added in inflation, it makes little difference in real term over the longer term. The numbers are smaller but given that apart from capital city housing, everything material tends to get cheaper over time (even food) someone earning $200,000 in 30 years will be better off than someone earning $100,000 now.

Have Fun

Friday, May 06, 2005

Trade deficit and Foreign Debt - 2

The SMH and the Australian still run the same old scare campaigns about trade deficits every month.
The SMH article is clearly a cherry picking exercise. Picking and choosing from the different figures from the ABS report i.e. trend estimates, seasonally adjusted and original (read real).
The article takes the trend estimate number for the headline deficit and uses original figures for fuels and lubricants.

From the SMH

"Australia has recorded its second largest trade deficit ever, casting further doubt on the health of the economy ahead of next week's budget."

This is a fallacy. Countries have run trade deficits in the past and have had booming economies. This fallacy assumes that the health of the economy is purely determined by its international trade position. Plus given the economy grows over time, in the future we will probably have a largest deficit on record. yawn

If you read the ABS report, the original (real) numbers tell a different story.

Like I mentioned last month. The imports are the good stuff. Capital and intermediate goods to make companies (and employees) more productive. The consumerables dropped off after the Christmas splurge.
An example of why investing in capital goods and intermediate goods makes sense for Australian companies.
March 2005: Buy $100 million of mining equipment which enables expansion of production of mine. Mine production expands from $20 million to $25 million per month.
Assume an equipment life of 3 years (36 months) and the company is now $80 million better off at the end of 3 years.
Calculation: 36 x $5 million (extra) - (cost of new equipment $100 million) = $80 million.

Before people do the culture cringe and say Australia is just a mine and a farm. There is good reasons, we have a big comparative advantage in both those areas.

For all the worry about rural exports, resources are the biggest export area for Australia.


Goods Services

Rural Resources Manufactures Other
Dec-04 6340 14704 7298 2362 8479

Rural exports only made up 16% of the total exports in Dec2004, less than services. The source is ABS but the Reserve Bank has a nice downloadable spreadsheet on this page.

The last laugh was that because rural exports are down that means drought. Sorry, no rain means drought.

"These falls suggest that the emerging debate about whether Australia is heading into drought is largely academic, with rural exports already behaving as if one is under way."

There is always the Australian dollar mentioned as well, it is too high, it is too low. A good exchange rate works both ways, yes exports seem dearer to our customers overseas, but imports are cheaper. Customers will want to pay lesser price... but we can pay less as well.

My guess the foreign debt issue will be another sore point. These companies and consumers just don't know what they are doing, maybe the Government should step in and regulate. Damn sovereign individuals.

Have Fun

Previous articles:
Trade Deficit and Foreign Debt -1
Next articles:
Trade Deficit and Foreign Debt -3
Trade Deficit and Foreign Debt -4
Trade Deficit and Foreign Debt -5
Related Articles:
Australian Trade Partners

Tuesday, May 03, 2005

Database design - 1

There are plenty of good books and websites on database design. A keyword search for "database design" is sure to return plenty of hits.

The unfortunate fact is that design is overlooked for many applications which decide they need a database to store their data. So most databases become little more than data repositories or glorified text files (with a SQL wrapper).
Mention the word constraint and most developers throw their hands in the air and think immediately of the "constraint violated" errors. Even dedicated database developers try to get out of using constraints. The excuses are varied, here are some examples:

1) Constraints are slow.
2) Constraint errors are database specific.
3) What is a constraint? (common response from free database land)
4) The application implements the business logic not the database.

Good database design is determining what tables are required and relationships between those tables are required to implement business rules.
eg. If you have a sales app, a simple database would have a sales table and customer table. It makes little business sense to have a sale without an customer. An enabled constraint would stop a user or application adding sales without customers.

The main reason developers try to code the business logic in the application is so the application can be database generic.
If a designer designs the business logic into the database, the database becomes application generic.
Making the database application generic does not mean that there is no need for a specific app. It means that the database can be accessed by more than one specific application.

There seems to be a flow from everything runs on the server, to everything runs on client, with the potential of grid and clustering, once again running most of the stuff on a server becomes the best idea from a performance and recoverable viewpoint.

From a DBA perspective, performance is determined by design. No amount of indexing or parameter changes, memory, disk etc will fix flawed application logic and poor database design.

More on the markers of good and poor design later

Have Fun