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Bernard's Top 10: Interest rates stuck in the muck?; RBNZ's 2014 hikes compared to Fed's premature 1937 hike; Will Greece's contagion spread east?; John Oliver; Clarke and Dawe

Bernard's Top 10: Interest rates stuck in the muck?; RBNZ's 2014 hikes compared to Fed's premature 1937 hike; Will Greece's contagion spread east?; John Oliver; Clarke and Dawe

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz

See all previous Top 10s here.

My must read is #3-5 from Andrew Haldane on the issue of surprisingly low interest rates.

1. How long can a nation survive on 60 euros a day cash? - That's the question a few people are asking after Greece imposed capital controls that mean locals can only withdraw 60 euros a day cash from ATMs.

They've mostly run out now and logistics of trying to run a (cash-based) economy with just 60 euros a day are now causing some grief.

2. Here's a useful insight via Slate into life on an island with an empty ATM for some American tourists. I saw there's actually 2,000 New Zealanders in or arriving in Greece. Hope they're cashed up.

My wife and I never argued about money until the banks closed here.

First it was about her 3-euro ice cream, then my refusal to contest a possible discrepancy on the bill at a souvlaki joint. We’re worried about our paper euros.

The only ATM on this small, sleepy island an hour’s boat ride from Athens has been dry for days.

“Sorry, temporarily unable to dispense cash,” reads the screen, again and again, hour after hour, as tourists and locals step up to check.

All eyes turn to me because the Greeks think the machine will work for an American.

2.(bonus 2!) Keep an eye on this - Interfax (what a great name for a news agency!) reports Russia is going to review whether the Baltic States, where Nato is madly rushing to locate heavy weapons, have the legal right to remain independent from Russia...

3. One duck stuck in the muck - Anyone with toddlers should experience the wonders of the book 'One Duck Stuck'. - It's also worth reading this Andrew Haldane speech on why interest rates remain stuck at stubbornly low levels.

They are very low and very sticky, and much more than most in New Zealand would believe.

This stickiness in interest rates has surprised both policymakers and financial markets. After they hit their floor, financial markets expected official rates in the US to unstick in 6 months, in the UK in 10 months, in Japan in 13 months and in the euro-area in 14 months. But they have remained stuck: in Japan for over 20 years and in the US, the UK and the euro-area for over 6 years. Indeed, the expected time to lift-off remains as many months away today as when rates first hit their floor: in the US 9 months, in the UK 10 months, in the euro-area 34 months, in Japan 72 months

This chart he uses showing interest rates going back to 3000 BC is a cracker.

3. (bonus 3!) In the naughty chair - Haldane puts the Reserve Bank of New Zealand's policy tightening last year into a table of premature tightenings, alongside the infamous early tightening of the US Federal Reserve's of 1937.

He says some have had to be unwound, and then some?

2% OCR anyone?

The asymmetric risks posed by the effective lower bound have led some to suggest that the optimal strategy is to leave rates “lower for longer” (Evans et al (2014)). The argument here is that it is better to err on the side of over-stimulating, then course-correcting if need be, than risk derailing recovery by tightening and being unable then to course-correct. I have considerable sympathy with this risk-management approach.

Table 3 provides an illustrative list of countries which have pursued the latter strategy - tightening during a post-crisis recovery and then course-correcting. The most celebrated (if that is the right word) was the Fed’s tightening in 1937. This is felt by many to have sent the US economy back into recession (Friedman and Schwartz (1963)). Almost 80 years on, the scars from that experience have yet to fade. The US experience in the 1930s was special, but not unique. In few of the cases in Table 3 did things go well. In each case the tightening was subsequently unwound. In a number of cases it had to be more than unwound due to its contractionary effects on the economy.

4. Dread risk and the shattered glass that was half full - Haldane goes on to explain how 'dread risk', the fear of investing in risk after a depression, and the outsized fear of recession after a depression.

There are plausible reasons why financial markets might currently be over-pricing recession risk, causing an excessive downdraught to the yield curve. Psychological scarring is one such explanation. Nonetheless, historical experience suggests these recessionary fears are not unreasonable. Those fears provide a plausible explanation for why interest rates are, and are expected to remain, resolutely stuck to their floor.

5. The conclusion - Haldane reckons the duck is well and truly stuck in the muck. HT to Michael Reddell at the always stimulating Croaking Cassandra.

Trying too hard to unstick interest rates, or doing so too quickly, also runs the risk of making a difficult situation worse. It runs 1937 risk. That is one reason why the glue holding interest rates to their floor has remained so strong. And it is why I feel no immediate need to loosen that glue.

6. Eastern contagion? - All the talk about Greece's default, it's likely Grexit and any possible contagion has been focused on the West, and in particular Portugal, Spain and Italy.

But this FT piece suggests the contagion could spread in an easterly direction, with Greek banks quite heavily involved in the Bulgarian, Serbian and Romanian economies. Although it also notes they have their own capital structures and capital controls can be imposed if necessary. Brilliant.

 

Serbia’s central bank said it had increased supervision of local units of Greek banks temporarily, limiting transactions they can conduct with their parents. The central bank in Macedonia, meanwhile, has instructed banks under its control to withdraw deposits in Greece and banned the country’s residents from investing in Greek securities for six months.

Greek banking assets account for between 12 and 21 per cent of the sector in southeastern European countries, although exposure has reduced significantly. Greek bank market share in Albania, for instance, has shrunk to 16 per cent from 28 per cent in 2008. Greece’s Alpha bank has operations in Bulgaria, Romania and Serbia while Piraeus Bank operates in Macedonia.

7. Show me the money - There was a famous quip from Nobel winning economist Robert Solow in 1987 that you could see the computer age everywhere except in the productivity statistics.

Now, despite all the 'Second Machine Age' talk of a new productivity boom from amazingly cheap and powerful mobile technology, there's still little to show for it in the productivity statistics.

Here's Morgan Stanley's Stephen Roach, a renowned China bull, also worrying about the lack of productivity growth around. He discounts the talk that under-counting of quality-of-life improvements is the reason, arguing that all the IT also means that lots of work is being done out of normal hours and is not being counted.

Despite another technological revolution, productivity growth is slumping again. And this time the downturn is global in scope, affecting the world’s two largest economies, the US and China, most of all.

Over the past five years, from 2010 to 2014, annual US productivity growth has fallen to an average of 0.9%. It actually fell at a 2.6% annual rate in the two most recent quarters (in late 2014 and early 2015). Barring a major data revision, America’s productivity renaissance seems to have run into serious trouble.

China is witnessing a similar pattern. Although the government does not publish regular productivity statistics, there is no mistaking the problem: Overall urban employment growth has been steady, at around 13.2 million workers per year since 2013 – well in excess of the government’s targeted growth rate of ten million. Moreover, hiring seems to be holding at that brisk pace in early 2015.

8. The real one duck stuck - To give you a smile.

I couldn't resist popping this video in. It's the best fun for reading to toddlers.

9. Last week night from John Oliver on transgender rights.

10. Totally Clarke and Dawe host Tony Abbott to talk about climate change. Sort of.

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10 Comments

#3 "1937"? there is an even better current example, Sweden,

http://larseosvensson.se/2014/04/14/deflation-in-sweden-questions-and-a…

"The deflation has been caused by the Riksbank’s tight monetary policy since the summer of 2010. The majority of the executive board chose in the summer of 2010 to start increasing the policy rate, which was then at 0.25 percent. The policy rate was increased at at steady and fast rate to 2 percent in the summer of 2011. The increases started, in spite of the forecast in the summer of 2010 for inflation the next few years lying below the inflation target and the forecast for unemployment lying far above a long-run sustainable rate. (See figure 2 in this post.) The policy-rate increase caused the real policy rate (measured as the repo rate less HICP inflation, in order to be comparable across countries) to increase from minus 2.5 percent to plus 1 percent. This is a very large increase of 3.5 percentage points and was a very dramatic tightening of monetary policy. (See figure 3 in this post.)

With such a strong tightening of monetary policy, it would be very strange if inflation would not fall far below the target, and even become negative, as it indeed has done. It would also be strange if unemployment would not increase and stay high above a long-run sustainable rate, as it also indeed has done. Without the tightening that started in the summer of 2010, inflation would most likely now have much closer to the target and unemployment might have been about 1.2 percentage points lower. "

sound familiar?

and,

http://krugman.blogs.nytimes.com/?s=sweden&_r=0

"In 2010 Sweden had high unemployment and low inflation; Econ 101 level macro should have said that this was no time to raise rates. Yet the Riksbank went ahead and did so anyway. Why?

It now says that it was all about financial stability, about fears of excessive house prices and borrowing. But that’s not what it was saying at the time! The bank’s governor did a chat in December 2010 in which he declared that it was about inflation:

If the interest rate isn’t raised now, we’ll run the risk of too much inflation further ahead. This wouldn’t be good for the economy. Our most important task is to ensure that we meet our inflation target of 2%.

Strange to say, however, when inflation started coming in well below the target, the Riksbank just kept raising rates, and switched to the financial stability justification."

These very paras could have been uttered by Dr Wheeler here in NZ and not Sweden.

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#2 (bonus #2)

Sounds like a load of Western media anti Russia crap.

Lets wait and see.
My pick is it wont be true and the crap Western media story, haveing done its damage, will quietly make the story vanish untill they come up with more bull#$%

Did you see the journalist who wrote the story about Edward Snowden and how Russia and China broke the encryption.

Watch this tosser of a journalist being interviewed on CNN who broke the story.

Journalism coundnt sink any lower.

https://www.youtube.com/watch?v=rT80Sx2BugA

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Well Latvia with 1,400 active personal and 3 tanks, has every right to be manically paranoid, It's the kind of country Arnold Schwarzenegger could occupy single handed, in fact I'm surprised he hasn't already.

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#2 - I have a relative who has just returned from Greece.

This is what they told me

"i,ve just come back from crete and i asked a few locals with commerces about the crises , they all seem to be fine as none of them put money in banks any more or vey little , not very good for economy but its apparently thier way of dealing with it , they work very hard though between 10 and fifteen hours a day 7/7"

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I think that future generations will look very favourably on Prof. Albert Bartlett. His most famous quotes are:

"The greatest shortcoming of the human race is our inability to understand the exponential function."

"Can you think of any problem in any area of human endeavor on any scale, from microscopic to global, whose long-term solution is in any demonstrable way aided, assisted, or advanced by further increases in population, locally, nationally, or globally?"

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In South Russia near the Mongolian border the area is vary sparcly populated.

The local councils have just signed a contract with a Chineese company to leese, for 49 years an area of land the size of Hong Cong.

China will bring in its own workers from China.

The problem is that in 49 years time the Chineese will be well established in the area and wont move and the area will end up going to China

http://rt.com/business/267442-china-russia-leasehold-land/

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To lease the land in Russia’s Transbaikal region, Huae Sinban has won a competition with several other Chinese companies, as well as companies from South Korea, the US and New Zealand.

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What effect did the RBNZ 4 hikes in 2014 have on the Auckland housing market? None.
How much money earned in NZ was wasted on unnecessary relatively high interest payments?
What has inflation been over the last 12 months? CPI projections for 2015/2016?

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