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Opinion: RBNZ's more modest rates outlook shows how debt deleveraging has changed the world

Opinion: RBNZ's more modest rates outlook shows how debt deleveraging has changed the world

US Presidential candidate Bill Clinton was told in the early 1990s that politics was “all about the economy, stupid.

Today Alan Bollard essentially told us that the economy is all about the debt. Politics may also soon become all about the debt too.

Underpinning his decision to leave the OCR on hold, Bollard detailed how cautious consumers and businesses now seemed keener on debt reduction than spending more and investing more. Banks were also more cautious, which meant he could keep the OCR lower for longer.

That’s because the low interest rates he had engineered were not having the same stimulatory effect. Essentially, Bollard was a tad impotent on the way up through 2004 to 2007 because New Zealanders went on a debt-fuelled spending spree.

Now he is similarly a tad impotent because New Zealanders are going on a debt-reduction diet.

This means the debt weighing the New Zealand economy down is now starting to drag on the economy over the longer term.

“Over the past year, despite high and rising export commodity prices, increased employment and economic recovery more generally, household and corporate spending has risen only modesty,” the RBNZ said in its September quarter Monetary Policy Statement (MPS).

“As a result, credit growth has been very weak, with household and agricultural credit increasing only slightly, and business credit actually contracting. While borrowers have been quite cautious through this time, lenders have also been quite risk averse,” it said. “A key implication of this caution is that the interest rates faced by households and firms have been providing less support than history would suggest. Furthermore, elevated bank funding costs have caused these interest rates to be quite high relative to the OCR,” it said.

“This all suggest that the current level of the OCR is providing much less support than has historically been the case.”

This is all about de-leveraging.

We should expect this for years to come.

It means lower growth for longer, lower interest rates for longer and lower asset prices for longer.

This is the new normal.

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42 Comments

I could go the rest of my life without hearing someone say "the new normal".  Everyone says it. So cliche.

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Keyser. New Normal is a wall st. sedative.

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The new normal? Hmmm, is that the metrosexuals?

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Keep an eye on the Reserve Bank's household claims series. Housing debt saw record low increases of $100m in June and July - increases of over $1000m a month were previously common. Total household debt (ie housing + consumer) showed increases of only $79m in June and $49m in July having been $567m as recently as March.

Therefore, keep a watch on the August figures due out in a couple of weeks. They may well show a decrease which would be a minor historic event as this series has never shown a decrease in any month since records began in 1990. Could be a press release there.

(Now if only student loan debt would start to deleverage as well...)

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the OCR is absolutely of no use to regulate  the housing market anymore and big Al.Bollard knows that !

where it does have an effect is in the carry trade and our export dollar..it's that simple!

anyway, res. housing is so yesterday...the new normal is to not know what the hells going on?

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10 - 4 Rubber ducky

where's the picture BH, with AB feet off both pedals (i think quietly behind the scenes he is using both the exhaust brakes and cruise control function)

Thank goodness not everyone is out to destroy the last bastion of hope and dreams - even if it's not quite the full quarter acre any more

long live NZ, long live the kiwi dream........ Go Property Go.... you beauty!!!!

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actually Pres of Prop i've just been sent a very interesting video here of alan bollard and the treasury boys mulling over the OCR last night...quite amazing!

http://fc01.deviantart.com/fs13/f/2007/077/2/e/Animator_vs__Animation_by_alanbecker.swf

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How cool was that..!

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that's the new normal, Christ-ov !

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Donald MacRonald at 10.13 is right to point to the role of "housing" in this debacle. Actually, "housing" is the wrong word, it is "land" that is the problem. Disaggregate the land values from the rest of the property, and what we have is a 400 to 800% bubble in  land values - which is much more stark than a 100% bubble in "house prices".

The SUPPLY side, the urban planners, is the problem.  This is what renders monetary policy impotent. Even the OECD has started saying so. A reserve bank interest rate that would contain the land price bubble, would kill off the entire productive part of the economy. In fact, that is partly what has happened in NZ during the 2000's. Because of the land supply interference, it has become possible for the first time (again, the OECD has pointed this out) to have a "down" phase in the business sector, yet an inflating housing bubble at the same time. What is the reserve bank supposed to do?

Owen McShane and Don Brash warned us way back in 1996 that this was going to happen.

If we don't change the urban planning, we'd better introduce separate money markets for business and property, with a different base interest rate for each. But I bet there would be economic unintended consequences to that as well.

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Just tax the daylights out of the land component, Phil, especially if it's undeveloped.

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PhilBest -

I've stopped being polite - in my opinion,you're an idiot.

If ever there was an indicator of the physical limits, it's been Canty this last week.

And what is it about exponential growth and doubling times (or areas) you don't understand?

You're not alone - Bernard today still thinking that 'Govt and Local Govt' spending is a problem - particularly when it's spending he doesn't approve of.

It's still society as a whole spending energy from a finite source, to spread itself out over a finite topography.

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Population growth is for?

We all choose to live in NZ because it's a nice uncrowded place to be. That's why I returned with my family. Here we're talking about the land bubble being caused by not enough land, but how about we just stop growing our population?

We can stop importing folk from all over the world and keep our population more or less as is.  "Oh but we must grow!", say the growth junkies. Why? When is enough, enough? Perhaps when we have 60 million like the UK or 127 million like Japan? (Both similar size countries. Or maybe just 4 million like we are!?

Then people who particularly want a new home can pay for a home to be pulled down for their flash new one. No need for more land. No more cities encroaching on the farm land, just stability and peace...   I'm NOT a Winston Peters fan, but perhaps I now understand why the wise old greys vote for him. Hopefully not 'cause they're largely xenophobic, but because they care about the future of NZ. 

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Well said. The PB person thinks we'd be better with 40 million, or maybe it was 400, I forget now.

You gotta wonder!

The best appraisal I've seen suggests that we were/are genetically predisposed to thinking linearly. Maybe we need to identify the gene, and sterilise it out.

Would solve the population problem...

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You know whenever I touch on the topic of "The numbers have to come down" you'd think it was heresy......... but inevitably ..irrevocably that is  the unavoidable truth.

It is the Elephant in the room.

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In the interests of an efficient market I think we should start with Hugh P and his Phil B.

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Fiat Money... Under Priced energy...We are all on Drugs!

Coming down is such a Bummer!

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Sleep tight Mouse...tomorrow is...eh

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Who's the idiot, when NZ is 1.5% urbanised?

I just had the encouragement of finding someone else who hasn't succumbed to the invasion of the common sense snatchers: Read this, this guy has more brains in his little finger than you have all up:

http://andrewatkin.blogspot.com/2009/06/smart-growth.html

http://andrewatkin.blogspot.com/2009/10/explaining-new-zealands-propert…

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PhillB it's unfortunate that Powder lost patience.........and your numbers on urbanisation are probably correct.......

This is about the big picture Phill ....human global overpopulation to demands on resource.

It's  real....it's what we do.... and inevitably the demands will exceed the supply.......your source of encouragement may indeed have more brains than I do.......but I'd suggest his thinking is short term and profit driven.

It's our mortality Phill it get's in the way.....and we can't see beyond it.

Don't worry too much about the personal jibe....I been called worse and managed reasonable dialogue afterward. 

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Christov, thanks for the encouragement. I think Powerdownkiwi and I pretty comprehensively covered our ends of the debate on THIS thread:

http://www.interest.co.nz/opinion/opinion-how-us-sub-prime-financiers-created-so-much-mayhem

I stand by what I said there, and I presume he stands by what he said. Anyone with the time and interest can read our argument at their leisure and make up their own mind who is right.

It is perfectly simple to understand, that at the point at which we WERE "running out of land" for humanity, food would be expensive enough, that it would be just as economically viable to farm a piece of land, as to have a factory, warehouse, office block, or apartment block on it. We are nowhere NEAR that point. The average disparity internationally between the "raw" price of agricultural land and urban land is in the order of 50-100 times or more, and agricultural land everywhere (allegedly) requires legislative and regulatory mandates to "protect" it from urban sprawl.

NZ and other primary produce exporters have been helpless "price takers" on international markets for decades, terms of trade have moved against us by a factor in the tens - and idiots like Powerdownkiwi witter on about mankind "running out of land".

Population growth has ceased to be exponential, and looks likely to reduce exponentially in the decadent, post-reason "first" world at least. (First into the enlightenment, first out of it, it seems). What still IS exponential, is technology and progress, which is what Mr Malthus and Mr Ehrlich and their ilk have LEFT OUT OF THE PICTURE. Idiots. Julian Simon and George Reisman are wise men and their opponents are numbskulls.

I think, Christov, that you are intelligent enough to be firmly on my side on this.

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Wrong.

Land also includes the concept of usable land. Try reading up on the Sumerians, for instance. And salinity. And aquifers - the Ogalla and others, all depleting. In the case of China. fast.

We've bee in overshoot since 1980  - the only idiots are those who can't see it.

One of the reasons for failure, is the clinging to fiscal 'values' and talk. Ma Nature doesn't give a cuss about $.

Population won't get to the 2050 projection - we throttle ourselves well before that.

Before you claim it to be exponential, you better define 'progress'.

Note that Simon writes an essay, starting from a mindset, whereas I gave you figures and graphs, from folk like me who came to our mindset via them.

If you've 10 years left in you, you'll see the morph through, can't not. I sense that you might be a little vulnerable though - long-term leveraged perchance?

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Thank you for you kind words PhillB....but sad to say I am firmly in the camp of a reduction in global numbers........I do hope you take the time to digest that little phrase I popped in for you......."it's our mortality that gets in the way of our thinking"

It's not just about here and now...Phill.

If you could go back 100years and change one thing that did not involve you.......what would it be...?

If I suspect right ...you would need foresight to circumvent what has already taken place....?yes..?

This is about ...us ...all of us....we have over-run our environment and place unsustainable demands upon it to the detriment of the preservation of the species.

By way of Christian and other teachings we have this perverse notion that all we see is at ....OUR...disposal to exploit for our what..?  benefit...gain...comfort...power......adulation...?......

Money...Phill....and that is the guts of it......money is about as good as we get.........it is our yardstick to measure our worth.......and will be our undoing ..when we get what is coming to us.

Having said that I wish you well on your chosen path.....and will cheer up before my next post....!

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Christians - yep, they started the rot.

Go forth and multiply, they said.

for ever and ever.

Ah.......... men.

There it went, in a nutshell.

Stupidity by Scripture.

 

 

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Amen PowerD......and damn it to hell.

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Agree, 'the new normal' is becoming a horrible little phrase. hate it, but it's here to stay.

Very good point Bernard is making about Alan 'impotent' Bollard. The big change in NZ is that your average Jo is finally realising property debt to generate profit no longer works.

Not so long ago it seemed every kiwi wasn't concerned about paying off their mortgage, but instead how much profit they were gonna make through capital gains when they flicked it. The bigger the debt the bigger the profit......it all sounds so stupid now, but it worked for a while and everyone wanted a piece.

How quickly attitudes change when it dawns on people that debt might have to be repaid. All of a sudden small mortgages ain't just for losers!

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T.C.L. "The bigger the debt the bigger the profit......it all sounds so stupid now, but it worked for a while and everyone wanted a piece"

That's what happened alright. A chap named Minsky had it all figured out decades ago.

 

"Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers.

The "hedge borrower" can make debt payments (covering interest and principal) from current cash flows from investments. For the "speculative borrower", the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The "Ponzi borrower"  borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat. Because of the unlikelihood of most investments' capital gains being enough to pay interest and principal, much of this type of finance is fraudulent.

If the use of Ponzi finance is general enough in the financial system, then the inevitable disillusionment of the Ponzi borrower can cause the system to seize up: when the bubble pops, i.e., when the asset prices stop increasing, the speculative borrower can no longer refinance (roll over) the principal even if able to cover interest payments. As with a line of dominoes, collapse of the speculative borrowers can then bring down even hedge borrowers, who are unable to find loans despite the apparent soundness of the underlying investments."

 

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This ( your Misky note) is the potential problem with assets that are currenlty funded with borrowings of any maturity length. It's all very well to say " I'm going to borrow 2 years, or 30 moths, fixed when my current borrowings mature". But if there's no money to lend ( and the banks are tightening up; and 'But I've been a good and loyal customer" may not cut it!) then whatever you 'want to do' it trumped by what 'you have to do' ie: sell he asset, if you can't get refinancing, for whatever you can get.

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What a Thursday – the atmospheric pressure is falling fast– very bad weather is coming – I’m like the economy tired, cloudy and grumpy.

Mr. Weather give NZ a good wash over the weekend - all the dust has to go.

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Kiwidave... a damed good read.When it all plays out.. What it says is the Banks wouldn't get their money back if they even sold the asset...By selling it, they would end up insolvent as everyone else...Their only option then is to rent it out, to the hordes of homeless that they caused because of the foreclosure.This has many interesting ramifications. As they will be forced to be PI's.and under the present rules loose even more.

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"No no no I just don't believe you...a whole nation too stupid to realise they were setting themselves up for decades of misery....it's not possible....people are not that stupid....oh yes a few idiots can always be found but not a whole bloody nation....and they did this thing?...you're serious?...they really did chase each other round the country in a contest to see who could pay the most for the same bloody properties...with borrowed money?....my goodness what fatheads! 

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... and all while Labour looked on with glee, and .... did nothing to stop it, even encouraged it - to the detriment of us all.

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...Just as Labour fanboys can point to examples of National bashing Labour for things National itself did quite merrily while in power.

This is the problem with idiotic partisan hacks: they are idiotic partisan hacks who don't actually care about anything beyond finding excuses to write crap about the other political team, even though the political team they cheerlead for is no better than the political team they boo.

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Point taken. However, the fact is the property bubble happened on Labour's watch and they did nothing about it. When Michael Cullen raised the idea of a mortgage levy, Helen Clark shut him down in short order.

To be even handed, the complaint against NACT is they are doing little to remove conditions that will cause the same problem some time in the future. For example, when well qualified economic advisers raise the idea of capital gains tax, or land tax, John Key behaves the same as Helen Clark did.

I wonder why?

Cheers, Les.

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"Well I guess it is at least rather funny....the peasants chased each other for munny...the banks imagined up the credit and a rush of blood to the head mistaken for happiness flowed through the land...and then it all came to an abrupt end........just as the Tulip owners woke one day to ask themselves "did I just swap my chateau and all the land for these bloody bulbs"!

Now the game is on to sell off the price bloated shite to any dam fool still suffering the dementia of the bubble....the media will carry on with the bullshit about prices never falling and Noddy being different...carry on so long as they can milk the idiots for advertising munny...the parasites that lived on the "rush of blood" will trot out the same verbal effluent about "now" being the time to buy...but the grand tour of property sprookers and flimflam merchants out to sell glossy crap to fools nationwide...all over....gone away like the wind.

Left behind...it's like the morning after the greatest party ever...fag ends and spew...empty bottles and bust glasses...wrecked furniture and comotose bodies litter the filthy thing that was a carpet in the lounge of hell.

But hey...Bollard thinks we will see growth and lots of it...this burst of enthusiam for another party the very next night...will wonders never cease! The booze has been ordered and the cartons of fags laid out...the bins of chippies and "diary" dip...entertainment as well....it's all set up to go...now where have all the fools gone to I wonder!

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A nice passage for the Memoirs Wally..............?You are going to have to name names to sell it .....you know that don't you...?

If some are living ....it will only increase potential for sales.....

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The survivors are leaving the morning after the party Christov.... http://www.abc.net.au/news/stories/2010/09/16/3013589.htm?section=justin

and they aint coming back mate.

Bolly will be the only one at the party...drinking all the booze!

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I dare say they would have been the migrant of choice for Joe in his day...hmmmmm.

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     Once again Wally i find my life has been wasted staggering around the Paradox that is New Zealand.I really should have buggered off to Queensland years ago...but hang on! I did.... a few times ..thinking if I could get a job.. the Visa said I could stay if i wanted?? Sure the excursions were protracted holidays...but its the mindset that counts.The only problem was I found that they liked you to be Australianised...Which meant gazing across the Godforsaken Outback and swearing that the  dangerous oven of That Sun seared Plain was a new Eden. Which was strange as every toilet i visited had used syringes littered about, as the occupants of this land tried to escape it, curtesy of their generous welfare payments....Jobs? forget that as well.. if theirs an Aussie wanting a job, he will get it ahead of any Refugee from NZ. If you do get employment it will only last as long as the firm has the work coming in...and you will have to decide where to spend your smokos..With the Aussies..the Refos..or chew the vegemite sarny on your own.Its more full of Bullshit than America.

  As soon as their economy takes a dive they will exit in droves.Just as I'm hearing more American accents around the place..we'll be hearing more Aussie ones.

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The only cure for irrational exuberance with debt is a Depression.

America is likely to experience a Great Depression, we should be saved from this extreme fate by our farmers, farmers heavily in debt may not survive but the farmers in a healthy financial position will be able to purchase farms at bargain prices to maintain overall production.

People who don't have debt will be fine and if you have a surplus of funds, will be in an excellent position to pick up assets at bargain prices when the depression has run its course. 

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Touquoy, its been a long time coming but its just around the corner now. 27 years ago a bloke I knew bought 1000 acres of hillcountry for 1 mllion. 22 years ago I knew a couple who bought 1000 acres of easy hillcountry for $170,000.  We are on course for a similar result.

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Didn't the subsidies some off in that 5 year period? Oh! I see what you mean....

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