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Opinion: Credit Crunch makes 50bps OCR cut more likely
September 18th, 2008
By BNZ Currency Strategist Danica Hampton
Reading the headlines in the financial section over the past few days, you’d be forgiven for thinking the world is coming to an end. Lehman Brothers, a corner stone of the US banking industry, has filed for bankruptcy.
Merrill Lynch has been purchased by Bank of America and AIG, the United States’ biggest insurance company, is struggling for survival.
Financial institutions have become very reluctant to lend anything to anyone, in case they have large exposures to Lehmans, AIG, or the next financial disaster that may be lurking around the corner. These counterparty concerns have seen tensions across global money markets escalate and short-term money market rates skyrocket.
Market participants around the world are left struggling to digest what it all means for equities, interest rates and currencies. Fraught with uncertainty, most investors are reacting to every headline and financial markets have become extremely volatile. Expect this volatility to remain, while uncertainty persists.
The credit crisis is not new news. We’ve been talking about the slump in credit markets and the struggles plaguing the banking sector for over a year now.
While there is a lot of uncertainty as to how long it will last and how bad it will be, there are four things we know with certainty.
- There is no quick fix to the credit crisis.
- Central banks around the world will continue to inject liquidity into cash markets in order to keep the financial system functioning. But don’t expect central banks to bail investors out of poor credit decisions.
- There will be less credit available and it will cost more.
- Higher lending rates across the globe will act as a handbrake on the global economy.
What does it all mean for NZ?
When considering the implications of the credit crisis, the biggest mistake to make would be think it will
not impact NZ. As a commodity exporting nation, New Zealand’s economic well-being is highly leveraged to global growth and, because of its large current account deficit; NZ is also dependent on offshore funding.
If everything else was held constant, the credit crisis and melt-down in financial markets would result in higher lending rates for New Zealand consumers and businesses. Luckily, we are not operating in a vacuum and the RBNZ has shown a proactive willingness to ease financial conditions (evidenced by last week’s 50bps rate cut in the OCR).
The latest bout of financial market turmoil simply raises the risk that the RBNZ will have to be more aggressive about cutting interest rates over coming months. As the financial backdrop deteriorates,
the odds off the RBNZ cutting another 50bps in October rise and so too do the chances of the OCR falling further below the projections published in the September Monetary Policy Statement.
Overall, the financial crisis increases the scope for further downside in NZ interest rates, particularly in the front-end of the swap curve. Our central forecasts have the 3-year swap rate troughing around 6.20-6.40%, but a worsening of the global financial crisis increases the chances of the swap rate falling even further. Despite the recent turmoil, we’d caution against getting overly pessimistic on swap rates further out the curve.
The NZ yield curve typically steepens during an RBNZ easing cycle, as longer-term rates tend to be anchored by international rates and dramatic cuts in the OCR tends to inflate longer term inflation expectations.
The backdrop of a global slow-down is, of course, bad news for a commodity exporting nation like NZ,
where economic growth is highly leveraged to both the global economy and the price of NZ’s export
bundle. Overlay the deteriorating global picture with a domestic economy on the brink of recession, and
falling NZ interest rates, and the medium-term risks to the NZD/USD are undeniably to the downside.
Our central track is for NZD/USD to fall to 0.6200 by year-end and to trough around 0.6000 in early 2009.
However, should the credit crisis escalate (prompting more aggressive RBNZ action) or become more
prolonged (raising the risk of a global recession) this simply means the NZD/USD is likely to fall faster and further than our current forecasts.
While the outlook for the financial sector remains fairly bleak, to date, the corporate sector has been relatively untouched by the recent deterioration in capital markets.
But this is unlikely to continue. As bank funding margins continue to widen this will likely affect the borrowing cost of corporates. To date, corporates offshore have been able to borrow in the offshore capital markets at levels not too much higher than a year ago and below those of banks.
Whether this is a case of investors paying up for diversity or a case of investors yet to adjust their pricing expectations for the corporate sector is unknown. The reality is that as the banking sector faces the challenge of meeting its capital funding requirements, we are more likely to see banks ration their lending lines.
This will force some bank borrowers into capital markets, and as this momentum grows investors will
demand wider margins to differentiate between issuers.
The key message for the corporate sector is if you see a good deal now don’t hold off in the hope that a better one may be down the road. It’s likely conditions will worsen before they improve.
Tags: BNZ Economists, Credit Crunch, Danica Hampton, OCR, Reserve Bank
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September 18th, 2008 at 11:50 am
Im interested that you think our dollar will fall relative to the US$. My thinking would be that what is happening is catastrophic to the US$. How many more US organisations will require bailing out. Im thinking GM, Ford,GE WAMU, how long until overseas holders of US$ fold,or at least stop lending anymore. Printing money normally weakens a currency. I take it the USA printing presses are going overtime. I’d have thought gold up, US$ down ,Stock markets down and eventually some sort of lock down in the US to stop hedge funds shorting bank stocks.
Interested in your comments.My knowledge is very limited. These are times to step back and have a good look around. Some Banks are waiting till a good deal pops up like barclays purchasing part of Lehman Bros. After all, it just becomes History, life goes on.
September 18th, 2008 at 12:09 pm
I think it’s time to get real.
How will the collapse of the world reserve currency affect us ?
Come on guys, there is big news out there this morning.
When is someone on this site going to mention what happened to GOLD & SILVER today ?
Writing while Rome burns !
September 18th, 2008 at 12:14 pm
I guess it’s down to me !!!
Gold is now NZ$1,125.70/oz, US$870.20 (UP 11%)
Silver is now NZ$15.6679/oz, $12.1/oz (UP 14%)
The biggest rise in how long ?
Can anyone find a bigger one ?
That didn’t even rate a mention on the TV news this morning !
Incredible.
September 18th, 2008 at 12:18 pm
I think world Govt will get together and slow it down give everyone time. While the USA has major problems with some of its finance firms its important good ones are protected.I expect that legislation will be passed and CDO’s and CDS’s will be history as will lax lending without security and then after some pain business will resume.However GM and ford are uncompetitive and need to change. to bail out? US$ has probably done it dash as a reserve currency but the Euro is still going and all it really means is higher interest rates.
September 18th, 2008 at 12:21 pm
Nice to see someone sensible works at BNZ.
September 18th, 2008 at 12:45 pm
Gold soars as safe haven from Wall Street
http://www.reuters.com/article/newsOne/idUSN1724013520080917
Gold is now $888.72
September 18th, 2008 at 12:57 pm
Steve – I think those who are paying attention to the Gold price are throwing money at the market right now, and hence probably not writing. Unfortunately, I don’t have any money to throw ….
Whats your pick? US$1000 by weekend?
It seems to me the only likely way out of this mess is a rapid period of global inflation (ie US$ denominated) so that debt and earnings ratios around the globe (national and corporate) start to become reconnected. Everybody is in debt (or worried that they might be) so just this once, the number of net creditors likely to get upset about this is fairly small (tough if you’re living off a pension though…).
Incidentally, Silver’s interesting – its bounced around like a ping-pong ball all year (it dropped nearly 35% in August alone). Its so prevalent in modern consumer technology that its almost a manufacturing commodity nowadays. It would appear that last night peoplestarted to remember its dominant historical use – as a store of wealth.
September 18th, 2008 at 1:16 pm
I totally disagree. what is speaking inflation, you expect house prices to rise, cars to cost more ,food etc this is bearish for commodities, demand is falling its deflation ,its why banks are so concerned, otherwise they would be lifting rates instead of cutting. deflation was always a major risk-outcome following a credit expansion. I dont expect to pay more for anything, my expectations are lower prices, everyone I talk to agrees, give it ago ask someone if they expect rising prices. Interest rates may rise but this forces houses down. Someday we have to spend what we earn its getting closer and demand will fall all over the western world. Govt may be able to create credit but it cannot create money. Who wants to borrow in this environment lots want to reduce debt so money gets short credit conditions tighten.
i do have some gold wish Id purchased more.
September 18th, 2008 at 1:46 pm
Gold’s spike overnight is a pure panic reaction from “investors” who don’t know where to turn. Once the panic is over it will tank because we’re in a deflationary environment.
September 18th, 2008 at 1:52 pm
Hi Andrew,
I have possibly been loose in my terminology here (sorry I’m not an economist). heres my line of reasoning with the caveats as I see them.
What I am saying is that globally, the relative worth of money (ie currencies) is going to have to go down compared to the worth of things (gold, wheat, milk(?)) etc.
(not necessarily oil though and it may not be reflected in the CPI basket in NZ- see below).
This is because:
(1) Putting your wealth into a big global bank right at the moment is russian roulette with the market – will the bank still be there in the morning?. Noone knows what happens when every millionaire in the world enters into a stampeding run on the entire banking system, but it might be about to happen (apocalyptic i know but you get the point…)
(2) Lending has stopped . Lending will stay stopped until the central banks free it up by pumping currency into the system and boosting the money supply enough to offset the overhanging debt.
(3) As a result; more money supply (currency of your choice)=higher prices at the same demand level for inelastic goods (food) and commodities with demand rising (gold, silver)
Now commodities which exhibit elastic demand (luxury goods, maybe oil) will probably see a large drop in demand so prices will drop. But people still need to eat so global basic foodstuff commodities (ie not perishables or luxuries) are going to get more expensive.
From a “man on the street” point of view, you’re probably right. NZ makes stuff (Milk, aluminium, wood). Its biggest outflow is interest on overseas debt so if the milk export price goes through the roof and the overseas debt is devalued by inflation it might actually turn out not too bad (I’m coming to the view that inflation will knock off quite a bit of Bernard’s 30% for him, so the real house price drop may only be ~15-20%).
A quick way to sort all this out might be to repeg the US$ to gold at a much higher price (say US$1500). I think a lot of economists would have kittens about that though. (Bretton woods and all that jazz)
September 18th, 2008 at 2:26 pm
Sorry have to disagree again. big global banks are mostly safe. Worst case scenario is wholesale nationalisation by govt. But this problem is centered in The USA where lack of regulation has created fear about the financial state of many institutions. Openness may be good start perestroika US style. Scandinavia will probably will be used as a model to fix this. The market is now viewing investment banks as much riskier than other banks.
You cannot pump money into markets unless someone is prepared to borrow! this is unlikely at this time. Credit conditions will toughen and more security will be required. Hence Wrightson having trouble getting investors to front up for its investment in PPCS.
Also it appears that grains have been massively over produced in the northern hemisphere. also coffee sales are down which affects milk consumption . I can see much of the world becoming protectionist.
I expect unemployment to rise’ govt to find taxes falling away and having to borrow,houses falling to an affordable level what ever that is, the market will decide when houses are a good buy, but real wages may fall significantly.
Look at this National bank study on rural land prices its not happy reading when banks tell that farmers dont even make money in good times.
http://nationalbank.co.nz/rural/information/ruralreport/200809/default.aspx
The Uk Will really hit the fan,its very dependent on its financial sector who provide up to 30% of the Govt revenue and employ more people than construction farming and factories together. Bit like Fontera in NZ
September 18th, 2008 at 2:49 pm
NZ Bank economist opinions are hilarious and follow on from the real estate agents who vocally tried to stem the market demise…reality does not prevail. My comments predicting the yen exchange rates (NZ Herald and this site six weeks ago have proved accurate). The Japanese banks are being deceptively quiet (a centuries old trait) about the US and Western(I was in the UK last week ,,,not rosy there) inflicted damage. Japan does not have housing created hypothetical wealth, they tried that a decade ago and suffered badly. The Western World ignored this and tried creating artificial cyber wealth based on property inflation. The buckets of cash societiy hard yen(including yen Mum billions) invested in overseas ishams will be hauled back into the Japanese Banks by this patrotric monoculture.In scale New Zealand’s economy is like a promisory note for a worthless bling trinket. Sorry, but sadly it is true.
September 18th, 2008 at 2:50 pm
> big global banks are mostly safe.
Really?
Bear Stearns – gone
Lehmann – gone.
Merrill Lynch – disappeared.
Morgan Stanley – going (see http://www.bloomberg.com/apps/news?pid=20601087&sid=aq7MVYNcRHKY&refer=home )
Goldman ?
If Goldman is looking insecure (a firm that has actually MADE money throughout the crunch to date) then something is fundamentally worng. The 1990-2006 investment bank business model is broken. The parrot is dead. As are a truly whopping amount of assets that they held/created/guaranteed/offset or have otherwise compromised on behalf of others.
More importantly, most of these investment banks did a lot of business with commercial banks. Someone on interest.co.nz yesterday noted that Lehmann owed Citibank alone $110billion . God knows how much more of that toxic waste is sloshing about undetected as yet. This mess is going a to be a LOT bigger than the Bear Stearns fall out.
Regarding the success of central banks in pumping money into the system. The banks have been borrowing like crazy at the Fed and BoE discount window all year. They haven’t lent it on becasue they have been using it all to cover pre-existing overhanging debt. Bernanke is going to have to make a big call and make a truly stupendous amount of money available to allow it to start to trickle through. But it will get bad enough that he will be forced to do this. He might even have to start up a brand new nationalised bank with an unimpaired balance book.
Remember this is not 1930. The US$ is NOT tied to the gold standard and the Fed governor is evangelical about avoiding a depression whatever the cost.
I agree entirely about the UK and had deleted a previous line from my post on this note only because it was getting too long. The UK is in VERY BIG DOGGY-DOO-DOO.
September 18th, 2008 at 2:53 pm
Tonz
what about all the bank and govt debt in Japan. I see graphs it looks huge How does this affect Japan?
September 18th, 2008 at 3:32 pm
Andrew, My point exactly. As one example UFJ and has taken a subprime hit but to what extent is not fully revealed. Japan is a paper bureaucracy and it takes time to get from desk to desk ..if it is not lost in a pile. Then is is the problem of losing face. Yen will be hauled home by patriotic Japanese if banks make distress sounds. Having lived here for several years I am slowly undertanding the business culture which pervades the whole of society. NZ economists need to hastily read Demente’s ‘Etiquette and Ethics’ Published Boye La fayette. In Japan there is ‘not ethics just policy’ and it causes huge problems for the Westerner. I suspect the NZ economy and exchange rate will be hit if yen keeps heading into the rising sun.
September 18th, 2008 at 3:58 pm
Tonz
Thanks it had been confusing me. so now with so much yen out there will they take it home and lose the interest or will they buy assets in NZ,AUST,USA etc. also dont forget BOJ caused a lot of this problem with ridiculously low interest rates in the first place. So I guess those days may be behind us.Who replaces Japan ?
September 18th, 2008 at 4:45 pm
Andrew, Check out the Lehman hits on Japanese Banks. web search Asahi Shimbun (English version). The story is opening up.
September 18th, 2008 at 5:11 pm
Andrew, Check the Japan Times. One statement indicates the full disclosure has not yet been admitted.Lehman sold ’samurai bonds’ to rural banks . Many Japanese banks operate regionally. . Also noted is that Japanese banks won’t want to lend overseas……add that to yen mums getting scared. If NZ dollars were purchased at 80—-90+yen, the NZ high interest won’t cover their loss. Once burned they will be shy to return to NZ banking institutions. The news is about Lehman losses what about other foreign banks who are in difficulty with Japanese inverstments? It will be intersting to watch.
September 18th, 2008 at 5:20 pm
Thanks ill check it out. The carry trade has been an amazing thing It will be missed.
I got the feeling something odd was going on when banks here said that the carry trade was moving to countries with higher interest rates namely Brazil and Sth Africa but then I saw these currencies fall by up to 10% it made no sense. why would they be doing that on a falling currency. Some guy in a bank was probably having a guess happens a lot these days. Thanks again for a alternative view . Andrew
September 18th, 2008 at 5:57 pm
Bernard, I would add another option to your poll on what the RBNZ will do on Oct. 23rd – “Bollard won’t wait that long – he should act now”.
September 18th, 2008 at 6:43 pm
Chris B,
I see from your posts that we think in similar ways.
I talk to a lot of people on the internet. I know some who bought as long ago as 2001.
There has been an incredible demand for silver coins recently. All around the world demand has supposedly outstripped the ability of mints to supply.
The US is restricting supply. I think illegally.
The indoctrination against gold and silver and towards unbacked fiat paper currencies is strong and has been going on for decades.
Once most people knew the value of gold & silver. Now you get people who are completely ignorant of it.
————
On this article:
I suggest one possibility is that “the world might end”. It seems the author does not deny that possibility
It’s about time authors started talking about this.
September 18th, 2008 at 6:58 pm
No banks are lending too each other at the moment.
Japan hasn’t been getting much press recently but just wait for the unwinding of real money yen carry trades……Nz$Yen will be below 60 as waves and waves of huge losses come through. The Japanese have been sending lots of cash overseas in recent years. Expect that to reverse as their sharemarket dumps.
September 18th, 2008 at 8:43 pm
Im sorry to disagree I think most banks will be ok. the big financial corporations im not so sure of, a new world of banking regulation probably but at the end of the Day, Goldman lehman ,morgan stanley,etc where the authors of their own destruction. The devil was of their own making and its come back to bite them after years of geed. I see vultures are hanging aroung AIG so somewhere someone smells a bargain it will sort itself out, it is not the end of the world just their little piece of it.
I think most banks barclays ,lloyds ANZ ,rabo,etc will be fine they will get a little bruised and be a little shy who they lend money to but will survive. Borrowing heavily in good times always carries the risk you may have to pay it back in bad times. The Yen gets sucked back to Japan interest rates stabilise.
However over taxing your citizens and wasting money on welfare and govt pet projects,over regulation and poor management can lead to a very low standard of living this should worry us more than what the banks are up to.Also It would be nice if we had saved a little more for the years ahead and its probably time we stopped running deficits.
September 18th, 2008 at 10:19 pm
Add this to the financial demise equation. Japan’s hard cash society(little HP or credit card usage) economy was not headed directly by creating false wealth as has the Western housing speculation enigma. However, reports are emerging in Tokyo that prospective housing is having to offer up to 20% discounts to prompt sales and rentals.Coupled with the shonky mortgage investments sold to Japanese banks by by the West and a slowing internal economy money will still flow. For the first time ever the JRB deciided today to join the international central banks into throwing 40 billion (USA) into he international situation to help liquidity …they may find billions will be needed at home in the short future. Hopefully, the Japanese economy is stable and the coffers are full and patriotic citizens do their bit calling hard yen home!
September 19th, 2008 at 8:57 am
what if? Seeing the UK problems unfolding makes me think deeper. As Japanese business practice largely runs on policy not ethics (De Monte Boye Layfayette) then some interesting financial developments could occur in Japan if things get tight. Freezing of funds is an option that comes to mind (remember the PSIS 20 yrs back?).
The Japanese have a long history of isolation,protection and concealing…not to mention denial (to Westerner it may sound devious but if you study Japanese business culture you find the structures and operation has evolved over time and retain characteristics that are centuries old…not so for Western business practice). It all makes an interesting concoction when you add time embedded character traits that can be traced back to samurai business organisation. Bet the NZ bank economists haven’t got such aspects factored into their predictions!!!! The Japanese society is a tight monoculture that considers outsiders as Aliens! Surprised, then don’t be surprised at what might unfold ……
September 19th, 2008 at 11:17 am
Hi Steve, Andrewj, Tonz,
2 interesting parallel discussions occurring here which both appear to boil down to philosophical questions of how should we measure the value of money – and how good a job does the global freemarket do in reflecting the true value of a currency?
All over the world the impact of the credit crunch is measured in terms of Fiat currencies. Debt is denominated in currency, and as there is a stupendous amount of debt floating around that is now largely worthless (it just cannot be paid back), SteveN and I think that cash is overvalued relative to the production/goods it can buy. Hence something other than cash is going to emerge as a safer store of value whilst we dig ourselves out of this mess. We’ve picked precious metals. There are a few other options but gold has historically been a safe bet.
Tonz, notes that the Yen has been driving a lot of the extreme trends in the forex market over the last 5 years, and he’s dead right. Why the news here insists upon reporting the NZ$/US$ rate as its headline rate rather than the JPY/NZ$ is beyond me. But the japanese economy remains relatively closed, and the japanese environment gives JPY a few policy options to sort things out in their own economy that are not open to economies more exposed to outside global money flows (NZ, US etc.). As Tonz noted, Japan has an amazing ability to ensure that “I’m alright jack” and to hell with the rest of you. Not that they are going to get out of this scot free….
My question is, whilst japanese housewives are crystallising their losses and retrenching in JPY, what the hell is the rest of the world going to do with a bucket-load of cash-denominated “assets” that have vaporised into thin air? Do we succumb to a 1930’s style deflationary periodof restricted money supply (Andrewj), or will the Central banks keep issuing currency to anyone who asks for it in return for whatever shonky asset they put up as collateral? I’m picking the latter, in conjunction with CB activity in the bonds markets and maybe elsewhere too (ie further cash for equity engagemenet with troubled mega-corporates – AIG, Fannie&Freddie ). Even if the banks won’t on-lend money, it will get back into the system via the equity and bonds markets (slowly but it will get there) and the consequent rise in the money supply is going to lead a devaluing of cash debt relative to productive earnings. the net effect will be that central banks will basically be aiming to “inflate away” a decent chunk of everyones net debts (and net savings). In fact this has to happen as the only way to get things moving again is to get the debts to earnings ratios down to levels where people people actually believe they might get paid off.
Of course getting the inflation genie back in the bottle again after all of that, is going to be a hell of a job – which returns us back to gold once more.
Why don’t I think we will see a 1930’s situation? Well mainly because we don’t have a gold standard for any of the major currencies anymore so theres no limit on the amount of money the CBs can issue. The fed in particular has already shown it is just going to keep chucking newly minted money at the problem until it seems some kind of resolution. It will inevitably have to overdo it.
As for the world ending SteveN – i think that unlikely (if i did I wouldn’t be worrying about stores of value, I’d be worrying about how to feed myself and family in the forthcoming years). However I do think its going to look very different in 2 years time, and that those of us who have grown up through the 90’s and 2000’s are about to learn some very hard lessons about financial reality. The world is not always a happy shiny place.
September 19th, 2008 at 12:57 pm
ChrisB, the point you raise about gold has been on my mind as well throughout. Would I be right in thinking that it is presently benefiting from the ‘flight to safety’ syndrome – because it is (and has traditionally been) seen as a good hedge against inflation. But, if it is considered as only one commodity amongst many commodities – I just wonder whether it will be a commodity ‘in demand’ going forward – in other words is there any chance that gold might become an illiquid asset in a ‘much changed’ global monetary landscape?
September 19th, 2008 at 2:39 pm
Hi Kate,
Is gold a commodity or is it a “currency masquerading as a commodity”? Gold is both produced (mining) and consumed (jewellery, electronics) so arguing its a commodity is reasonable and the market seemed to think that for the last few years (its basically moved in lock-step with oil since ~2003).
But come 9am in NY on wednesday, wall street appeared to decide it actually had been a currency all along. Hence the 10% jump in a single day and currently the strongest one on the market. Right now the market wants tangible assets that retain their value and are not tainted by undisclosed, impenetratable, corrosive debt (often intertwined with numerous counterparties – all at risk). Doesn’t matter what it is as long as it meets these 2 provisos:
1) Supply should be close to finite. (ie little new production so a declining economy is not going to chamnge demand/supply ratio in unpredictable ways(e.g. oil property.)
2) you need to be utterly confident that in a years time a counterparty is going to recognise the value you hold. (so stocks, property, corporate debt are all out).
So how do we keep score of value? The value has been corroded by the existence of debt denominated in each of the worlds major currencies (esp. US$ and UKP). The only “currency” that is not true of is gold. flight to quality or not, a lot of (currently)rich people are goign to decide that their wealth is better retained in gold than in anything else.
Which is a long-winded way of saying: “I think” (and it is only my opinion – there are many others better qualified): “yes it is a flight to quality, and no its not temporary”.
September 19th, 2008 at 2:55 pm
Sorry should read:
“The value of money has been corroded by the existence of debt denominated in each of the worlds major currencies”
September 19th, 2008 at 7:19 pm
Good posts Chris.
Compare:
1. History of gold used as money: 3500 years.
2. History of a world wide non-backed fiat money system: 37 years.
The History of Gold
And why it makes a good money
http://www.greenenergyinvestors.com/index.php?showtopic=3963
You may find this useful:
http://www.greenenergyinvestors.com/index.php?showtopic=3784
Steve
September 19th, 2008 at 8:40 pm
chris B
Thanks for your thoughts. Im worried about hyperinflation. Inflation has been used by the government for years to get out of trouble just a bit of inflation and hey debts are not such a problem anymore. However this time is different to the last inflation times in that we have just come through a period of high inflation in assets like houses farms etc anything tax free it just wasn’t on the list the RBNZ uses to judge inflation. So now the western govts want to inflate but we are already indebted up to our eyeballs and have credit card debt at record levels as well. How does the Govt get people to borrow when they already feel uncomfortable with their present debt levels. You would have to convince them that wages where going to rise along with exports but we are largely a consumer society now, manufacturing is mostly Asia.We have become addicted to growth but can we grow forever? Debt had been growing at 17% a year compounding this couldnt go on forever. This is why I think Deflation is going to be so hard to stop. I think savers will be rewarded and we need to save more and spend less. taxes are too high govt spending needs to fall all painful but I dont see anyway out of a deflationary spell.
September 19th, 2008 at 10:24 pm
Yes! Everytime I see that Mitre 10 commercial “big is good” – I have to laugh, .. it’s message being the height of consumerism. Funny thing about how ‘preferable’ our society views/rewards debt. Today we looked at recarpeting the house – a $7,500 job. Because the retailler has a ‘no deposit, no repayment. interest free period’ deal on at the moment – it was explained to us that the law prevents them from giving us a cash price!
Now, is that not stupid, or what?
September 20th, 2008 at 11:46 am
Hey Kate, have you racked up your Mitre 10 credit card to the max ..big debt is good. Japan’s population engages in rampant consumerism that makes the Kiwi look like thrifty paupers (if only the Japanese could look at themselves and the world’s resources they squander). The difference is NZ’s consumerism has largely been based on incurred debt, in Japan (the world”s 2nd largest economy), they use hard available CASH. Hire purchase and credit card use is minimal, simply because they have CASH. We all run around with a bulging pocket of yen and enough in a drawer lat home to see me through a couple of months (not under the matress as I am unlikely to be robbed). I recently paid a large amount in cash to a leading travel agent for international tickets.This was after the No 1 company iattempted to use my credit card online (in their office) to pay the fare into their account via a computer (no card swipe and pin!!). After a third attempt they said my card would not work I had to run to a bank ITM to get cash. Simply, this company did not have adequate facility to debit my card. Next day I had the ordeal of contacting Tokyo to reinstate my crashed card as I fortunately discovered this prior to heading overseas.
What I am saying is that there is a huge amount of cash circulating in Japanese society (imagine stuffed into NZ’s Bank vaults)…and you are unlikely to have your wallet stolen as at street level there is honesty but not in the tall glass towers as all kinds of incredible rorts and bungles take place. Could you imagine a NZ society where the average salaried breadwinner earns enough to suppport the family. Enough is received per month to live on. Then twice yearly a winter and summer bonus is received …about one third of your salary in total. This is how the multiples millions of yen Mums accumulate their buckets of yen… the wife controls the family finance, the husband gets home late ( another interesting story for you to check ..Mizu Shobai …water trade!) However, I suspect the financial system is gradually being eroded as non ethical business adopts Western employment tactics. 20% of the workig population are now contract or part time, earning half as much for the same salary as the salaried co worker. Yes, there are laws but the big business entities appear untouchable…they bow low ,say sorry and carry on as before! Believe me there are aspects in Japanese working life that we would view as serious human rights issues! All this aside, Japan does not appear to have notable citizen debt to the crippling levels we have in the West . Corporations have extracted every dollar Joe Bloggs earns as well as puting him up to his eyeballs in debt in return for fast depreciating consumer goods and the hope of those who “own it” property will inflate. The economy has been strangled and extorted and the vast majority placed in alarming debt in return for leaky houses, chinzy trinkets and promises. In short the NZ Banking system and their credit card associates have scalped you. In real terms . New Zealanders have no CASH as it is exceeded by debt..that is called insolvent… or is it ‘bank corrupt’. Oh, for gold sovereigns that had real value. Who has the real money or doesn’t it really exist as money seems to be debt? What is wealth? In Japan I have the satisfaction of handling real money that has no debt attached to it! Pehaps that is wealth. No wonder Andrew and ChrisB like the shine of gold in place of money. Well, we can all go prospecting as there is some gold left in West Coast Rivers, that is iif the gold in the ground is not claimed as an indigenous a customary right. No cash just debt, failing markets. How do you survive down under..yes, I saw it yesterday, those who can afford the fare are heading to Australia..the rest get deeper in debt.IT is early morning here, I was up early and saw the sun rise big and red.
September 21st, 2008 at 12:32 pm
Tonz – fascinating insight into the Japanese way – and as a population they have really capitalised on the rest of the world’s appetite for credit. I do think NZs problems arising from this correction are likely to be some of the most crippling that might be seen in the OECD – and of course those Japanese houewives will have a big part to play in whether we are in for a short-sharp or slow-deep recession. Personally I’m hoping for short sharp, but no matter how it turns here – I’m likely to hang around as I love this place!
September 21st, 2008 at 2:25 pm
Yes Kate, I love New Zealand’s spectacular scenery too, but what an indigent price to pay for the magnificient views of fonterrarist inspired irrigators and cows !!!!! Funny how worldwide mik has suddenly turned sour !The Japanese would prefer to photograph or financially back the cute sheep,even though eating lamb is not favouired….they prefer whale as it has been on the memu for centuries and they don’t change their habits or culture in a hurry.!The use of the word ‘cute’ is amazing when you analyse it in terms of Japanese perspectrive) PS I ‘coined’ the term ITM in my last article rather than ATM for the bank CASH dispensing machines. In Japan they are limitless in the of Immediate Tangible Money (ITM) you can with withdraw. In terms of acronyms it beats the USA’s CDO’s and MBS’s for real value!!! Incidently, have you ever tried to strip the acronyms and economic jagon from the economist and banks speak? Try running a pen through the articles containing all those Banker/economist domain words,simplify them, and then see what you have got!!!!? About as much reality as a CDO or an MBS!!!! Yes, more NZ OCR cuts may be needed if you can’t sell milk or debt ridden dollars.