Reserve Bank Governor Adrian Orr has come back from the annual Jackson Hole get-together of top central bankers with a view the world's productive capacity has been reduced by Covid, climate change and war in a way that central banks will have to respond to.
Less productive capacity means central banks will have to bear down on demand with higher interest rates to get inflation back down into their target bands, he says.
Orr was speaking in an interview for When The Facts Change, a weekly podcast I do via The Spinoff just after returning from the Jackson Hole symposium.
"That perspective of just how high inflation is globally is critical. The world is poorer. We've had true economic shocks, where the potential growth rates of countries are very inhibited by higher energy costs, a lack of labor resources, war, trade, all of these things," Orr said.
He noted the change in tone since last year's symposium, when Federal Reserve Chair Jerome Powell talked about inflation being transitory. This time Powell was much less relaxed about inflation.
"Without doubt, the tone changed considerably," Orr said.
"Jerome Powell set two records in his speech the other day, he came in under eight minutes for a monetary policy speech. So that must be amongst the world's shortest. And he took around 3% off global equity markets, so must be around one of the world's most expensive speeches. They say small things are generally more expensive, and he delivered," he said.
"He is reminding people that, first and foremost, their primary concern is maintaining low and stable inflation. And yes, people have underestimated the scale and persistence of the shocks that the globe is going through at the moment, mostly with regard to just once the economy shrinks, and its capacity to produce, once labor is scarce, capital is scarce, energy is more expensive, the inflationary pressures are much higher and more persistent."
Orr said the symposium was focused on how the supply potential of economies had changed.
"So now the US, the rest of Europe are saying, well, this really is a permanent dent in our capability to produce goods and services without generating inflation. And so they're having to tighten policy. They want to win the day on credibility. You cannot have maximum sustainable employment without low and stable inflation. So that's their primary goal," he said.
Central bankers were now having to educate markets that rate cuts may not happen for some time.
"There will be a prolonged period where economic demand has to be reduced to below the potential growth rate of the economy, to take the inflation pressures out," he said.
"Earth is now poorer. We've got a sudden realization around climate change, and so we're seeing for any one investment, the returns are different or less. We've got much higher input costs, energy, much higher consumption costs, food. Whilst employment levels have remained where they are, hours of work are declining so we've got less supply capacity. And war does nothing to long term growth potential for a country."
And obviously you're seeing geopolitical tensions, particularly in the Europe area, but everywhere. So these are areas where the world's capacity to produce has shrunk, in part temporarily, some of these things were resolved themselves supply chains, and in other parts, there is a fundamental change in investment needs for countries.
A lot of academic research released at the symposium was trying to understand "how much of this was going to set us on a lower permanent growth trajectory, versus a back to normal."
"But normal was always much lower than what was being priced in the markets," he said.
"The signals are that long run growth is going to be on a lower trajectory, then say in the beginning of this century. So the lower trajectory is in part around demographics, it's part around the shocks I've just talked about, the climate change shocks, part around the pandemic supply chains."
Changing trade and work patterns
Orr pointed to more permanent changes in global logistics systems and with more people working from home.
"You're seeing a change in your behaviour around regional trade now. Rather than 'just in time stocking, it's just in case stocking', you are seeing quite a lot of general change in economic behaviour that is not conducive to innovation or increasing higher growth. It's constraining it at the moment," he said.
However, productivity may have improved in some areas where working from home allowed more output from less hours worked.
"You can get a significant lift in productivity. People are far more focused. Less hours to achieve the same outcome. Less commuting, less fixed cost to doing business in a lot of ways. But it does challenge other means. Are we losing innovation by not being together and sharing ideas and chatting? Do we have disconnected labor forces. People who have never actually met their colleagues. That is now a real thing," he said.
"In the long run over the next five to 10 years, I would say productivity and per capita growth will be back to a steady state level of what we saw pre-Covid. But we have to remember that level was a low growth level. It was not a boom period. Throwing more resources at the same thing has been a means of growth for some large parts of the world. But that's not productivity enhancing, that's coming to an end."
No new China labour force to find
Orr said some of the 'easy' productive capacity gains of the past may have finished.
"The labour force of China has now been discovered, and it's now being embedded. So we were missing that big, free lunch we had for a while around just more and more people doing the same thing. Now we have to either do the same thing better or better things," he said.
Orr agreed that the Phillips Curve had appeared to have steepened again. The curve measures the trade-off between inflation and unemployment.
"These things are always non-linear. At some point, it bites. And that was the real revelation. That was what Jay Powell in his eight minutes was saying. 'We've hit that limit. There is not much more we can do other than tighten. Demand has to slow. It has to be below potential output. Full stop. And no ambiguity in that," he said.
"The perspective that I think people are missing is: we have had a wealth shock. We are poorer as citizens of planet Earth, because of this Covid, because of the climate change implications, because we keep going back to war. Monetary policy can smooth the pain through time, or shift it between sectors, but it can't avoid pain being met."
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"The perspective that I think people are missing is: we have had a wealth shock. We are poorer as citizens of planet Earth, because of this Covid, because of the climate change implications, because we keep going back to war. Monetary policy can smooth the pain through time, or shift it between sectors, but it can't avoid pain being met."
Or it can make the problem much, much worse. Say by sucking a whole heap of someone's income for decades into an asset that has unwound in value because the central banks left the OCR on the floor and pumped asset prices for something as fundamental as the family home.
Anyone with big mortgage debt at this point is just being crazy blind to not Sell, Sell, Sell and deleverage.
The writing is clearly on the wall...even if an individual can afford to pay off their mortgage in a high-rate, low-growth environment, they should be open-eyed to the fact that many of their neighbors probably cannot.
Putting the burden on individual home-owners to make hugely disruptive changes to their lives (e.g. access to schools/work/stability of living tenure/moving costs) because well-paid central bankers made an absolutely huge error in the timing of emergency rates rises isn't really a satisfactory answer anymore.
People make choices rates were never going to stay low and are still low compared to other periods, 5% 7% rates people would of ripped banks hand off. The trouble is people believe all the crap from investors and B/S mob. The housing market is so overvalued compared to income and nothing is going to stop this crash people with large mortgages are toast if enough people default banks might let them extend time of mortgage or they will just sell them to recover as much as possible. In Uk early 1990,s interest rates went sky and people were just giving keys to banks and the one who could hold on did not see values come back of 10 years this is going to be much worse here as debt is far higher.
Agreed, but they won't because the speculative will not sell unless the banks shoots them. Property leverage in a rising tide is the laziest of speculative investments, and its easy to look like a savant on the way up. It's easier to look like an ostrich with your had in the sand on the way down. Global forces will take away the RBNZs ability to react other than to lift interest rates. As inflation climbs, the RBNZ has no tools but to continue to lead with more rate increases. Buyers will sit on the fence trying to pick the bottom. They will be waiting as the blood certainly has not hit the water yet. As the blood starts to run the buyers will continue to wait.
Who will the banks sacrifice first?
Many of these problems are as a result of "growth" Mr. Orr.
I wish he'd learn some basic physics and realise that ongoing exponential growth of the human economy is not possible in a finite biosphere.
I doubt he, like most conventional economists, will ever understand that unfortunately.
Sure, if you rely on future technology as being all powerful, then you could argue 'basic physics' says we can live on the Sun. But in reality, colonising other planets is just not practical. All the other planets in our solar systems are absolutely terrible places to live, and any other promising planets people spot in the sky are usually at least 100 light years away. Try imagining how far away that is, and then think of how people could travel that far in any kind of vessel. IMO, this planet is all that people have, forever.
I'm the biggest space nerd there is, and I expect colonisation of the moon and Mars to very slowly get underway this century, and that it will make zero impact on Earth's population for centuries. A few thousand or even a few million leaving Earth just disappears in rounding.
So yeah, in any practical sense, to almost all people on Earth, Earth is all there is.
I am not a space nerd at all really, but as I understand it, living on the Moon or Mars would absolutely suck. You would be trapped inside a cramped living quarters all the time, with the real threat of an early death ever present. Completely dependent on complicated life support systems. If there was something worth digging up on the moon, then maybe people could live there temporarily to do mining, otherwise why would you live on the Moon/Mars? What would be better than living on earth? Who would go?
Off planet is a hostile, but empty environment which has virtually limitless resources (enough for millennia). On planet is a benign, but overcrowded environment. 8 billion people on a planet with sustainable resources for 500 million. Off planet is better if it has lethality less than 93%.
Yeah, for the first migrants it will be hard and dangerous and suck a lot after the novelty wears off.
Some will do it anyway - there are 8,000,000,000 of us. 1 in 100,000 of us is a big colony. Then some of them try to go back to Earth's big gravity and they find it sucks just to walk around and can't wait to get home.
A big question I can't wait for us to learn the answer to is whether we can produce viable offspring in low G, and what it will take to adapt us if it doesn't work without some kind of tweak.
I think we end up in a state of having a small population in places like Mars and Moon (and a few cruising to asteroids), who are increasingly better adapted to life in low G rabbit holes that feel cosy and safe and familiar and really don't see Earth as more than an interesting tourist destination with horribly oppressive gravity. Over time, they make life better on their outposts with bigger habitats etc.
I told you I was a space nerd.
Sure we could probably produce offspring, but my guess is the low gravity wouldn't be great for our growth. I think gravity provides a stress vector which is good for stimulating muscle, bone, joints...lower that and would moon kids grow up a bit weak and floppy? I suppose we could build moon suits with resistant joints.
I'm not sure of the biochemistry of the zygote / early cells, but I guess it's plausible that gravity acts on them to differentiate within the womb...maybe by some kind of time factor (i.e. orientation during mother's sleep hours). Plants orient growth by light but also by gravity affecting concentrations of hormones one side of the cell
An understanding of physics, tells us we cannot do it 'off planet'.
As does an understanding of growth. 2 planets, 4,8 16,.......
But the more pragmatic base-line, is that if we can't look after ourselves on this one - the one we evolved to fit before we changed the envelope - what makes you think we're smart enough to survive on one we didn't evolve on?
That's the whole message in the last reel of "Don't Look Up"
Yeah, humankind is the main storyline of the universe, so we will probably invent warp drive in time for everything to stay awesome... :p https://www.sciencealert.com/former-nasa-scientist-demonstrates-why-sta…)%20in%20a%20vacuum.
The recognition that the world's wealth stocks have declined is a first step toward entry into the real world.
It is somewhat surprising to see central bank economists still making reference to the Phillips Curve but the message is clear. It is going to be hard to get out of the current situation without a recession. And the inference is that it may not be just a one or two-quarter recession. That too represents a step towards the real world.
KeithW
Any thoughts on George Monbiot: presenting alternatives to farming | RNZ?
"Organic Pasture fed lamb and beef are the world's most damaging farm products"
Book review from you on this would be interesting.
Monbiot is slipping into techno-optimism, driven by a not-uncommon trait amongst those who care; a cognitive dissonance between refusing to address human overshoot, coupled with a realisation that we're f---ing the planet. So they end up in a unrealistic space.
And no, that isn't the question. Globalisation is over - and probably so too is the fiat-issued debt overhang. If they can't do a 2008, it's all over Rover.
Importing what? It'll be local, eye-ball trust, no FOB.
Monbiot is on the money, even if we Kiwis are the worst offenders and don’t want to hear it. By contrast, the waste matter spouting from the aptly named Jackson Hole: there is a war, an energy crisis, and a raging pandemic smashing supply chains and hiking input costs…so we’re gonna take our stick and inflict more pain on the economy by killing demand, Volcker-style. There aren’t words.
rastus,
I consider Monbiot's perspectives to be flawed and also far too simplistic.
But I do agree with him on some points including that the perspectives of Savory are also flawed.
More broadly, I don't think Monbiot understands very much about grassland ecology.
Of course the situation in the UK where Monbiot resides is very different to NZ in regard to both topography and soil fertility. And that changes many things. I have also not seen evidence of any Monbiot analysis focusing specifically on the NZ context, although I did hear him respond to Kim Hill that he thought all of our pastoral lands should be converted to wild ecosystems.
Monbiot is described by Wikipedia as focusing on environmental and political activism and that seems a reasonable description. One of the challenges of such activism is to keep the message in line with the evidence, rather than choosing evidence to support the message.
KeithW
'Cut the globes productive capacity' appears to be a false statement...
The productive capacity is likely the same as what it was before COVID... what has changed that? The capacity hasn't changed the demand has.... the question is why?
The demand has been directly or indirectly impacted by government and central bank actions...
Lockdowns restricted trade and a halt on immigration and 'the great resignation'/ reassessment of work goals by employees leading to overall labour shortages, COVID payouts lifted debt, sanctions against Russia lifted oil prices, tax law changes curb investment, and the broadest tool interest rate hikes curb anything funded by debt....
What a cop out.... now we pay the price of high inflation caused by others decisions resulting in higher costs for everyone
Lol "Central bankers were now having to educate markets that rate cuts may not happen for some time"
Nope. The CBers, politicians, business, everyone, would have happily facilitated 10% growth - sorry, GROWTH - forever, if they could. (And according to their Samuelson-style diagrams, they can).
Unfortunately, they're up against the Limits of a finite planet. That's the real culprit - blame away, but I suspect it can't hear you....
Who'd'a thought? They all followed a Pied Piper called Nordhaus (ably assisted by Simon)...... promised lands, all that.....
Putting exponential growth aside, at a high level, doesn't the earth receive almost infinite energy from the Sun, forever (as far as human perception goes)?
The Earth is also gaining more mass each year from the accretion of meteoric dust and debris from space than humans send to space.
So at a simple physics level the earth is increasing its mass and energy levels each year?
Wrong again. Amazing.
The earth receives an amount of energy from the sun.
It releases an equivalent amount of energy - as low-grade heat mostly.
If it released less, we'd fry. Release more, we'd freeze.
Yes, we can tap into the energy-flow in between arrival and departure (energy cannot be destroyed, but every 'use' of - to do work/use heat - it degrades its quality. Eventually, it becomes a negative EROEI game, so isn't done. Also, work produces low-grade heat as a thermodynamic byproduct (2nd Law/Carnot) which has to be gotten rid of (as per your car radiator). Do too much work, and we'd fry the planet via that, alone.
:)
So there is no current technology to store the suns energy on the planet (keeping the excess heat energy stored as I don't know, chemical or potential energy?, and put aside the low grade thermal loss), giving the equation for net planet energy to go up.
You haven't answered my question about mass going up.
...
Nope - we'd boil the oceans within 400 years on work-derived energy if we (could have) carried on as we had been.
Silly question. Too slow a scale to be meaningful on a human timescale; same as fossil fuel accrual.
So you ask it for self-advancing reasons; either to push your vested interest, or to cover personal fear.
Good luck with that, whichever.
Curiosity lord PDK, I simply wish to attempt to understand existence on any level nearing your omnipotent mind, which judging by the above comment, also knows what I am thinking and why. You've made your opinion on existential philosophy well known, let the rest of us do the same.
Anyway, to my point at hand, seems like it would take a lot of energy to boil the oceans. Seems to me you agree there is a lot of incoming energy into the system, perhaps more so than we can harness without dire consequences?
Remember Wuhan? They have a level 4 virus laboratory there. They were onto something. It leaked. It happens. F...! Then Xi made his first big mistake - he shut down Wuhan but not China. Deliberate or not(?) it doesn't matter now. It's too late. Then mix in the manic media meltdowns by the ship load, sprinkle in panicked govts right across the spectrum, add a showcasing of how poor state abilities really are, then spice it up with a request by the pollies in power to their big heads in their state apparatus (central banks) ''to get us out of here'' & bingo, here we are. F.........d on the way up & f........d again on the way down as well. Gee thanks guys.
Well, that was dumb, wasn't it?
So here we are. Reading what $600,000 pa plus expenses writes when he returns home from a meeting with his fellow oracles (or a word that sounds like that) about how things must play out from here. More shit from the storm washed up on the beach, a storm of our own creating, as others have posited above.
And so, do they (the oracles) have all the answers looking into the morrow? Yesterday was spring. Today it is winter again. Not even mother nature knows what the ...... is going on, so do you think our state servants do? Going on recent form, not a chance.
Having said that, the opportunities are there in the changes here already & the changes coming. This is not the end of the book, just the end of that chapter.
And many might say ''Thank God for that.''
yes and compounding the problems is the mad cap drive to raise the cost of energy with carbon taxes, phasing out gas, restricting new power plants and globally making it difficult to build new nuclear plants
the height of stupidity
especially when we burn more coal as a result
"Central bankers were now having to educate markets that rate cuts may not happen for some time".
....and there are still wishful thinkers who want to believe that rates will be cut next year, notwithstanding what swap markets are already indicating. If there are risks, they are on the up side rather than the down side, and this applies to interest rates for the whole of 2023 and at least most of 2024.
Drop rates to spruik your elitist / 4th estate mates asset portfolio till they're valued to the moon, give them a quick email or phone call to tell them to cash out at the top, then ratchet up interest rates to take a dump on the economy, then get your cashed up mates to go around hoovering up all the deals after the smoke clears.
Funny he didn't mention misallocation of capital due to a buggered measure of real value. These people are like Gosplan, hard working, intelligent and entirely misguided. Gosplan tried to set the price of everything directly, these people try to set the price of everything indirectly. These manipulative central planners have buggered the world, by titting about with the price of borrowing money and by imposing more and more stupid and unnecessary regulations. The power of fashionable ideas.
This is a brilliant, unusual and thought provoking movie on just how whacky this stuff really gets:
Adam Curtis on Hypernormalisation https://vimeo.com/191817381
As others have noted here I struggle to understand how we are going to maintain our current levels of consumption on a finite planet. Even though it is not precisely their remit what are their views for transitioning the global economy from the current consumption model to living within the means of the planet?
We somehow need less people, buying less, better quality, repairable stuff.
Probably needs an impossible collective change of mindset from doing stuff for 'me, me, me' to doing stuff for 'us, us, us' and thinking about how our decisions affect 'our great, great grandkids...
I am not sure we will ever be able to do that unfortunately.
Remarkable that RBNZ didn’t comprehend that locking people up for months on end - and then sending them home every time they get a runny nose might just result in lower productivity. FFS.
They’re probably quite glad there’s a war as it’s doing a great job of masking the stupidity of their actions in trying to stimulate consumption WHILE production couldn’t physically happen.
But, but, but, that is why there is a war. Gotta distract the masses while their pockets are picked.
The West broke the Belgrade and Minsk treaties, Russia warned they had crossed a red line. How would we like it if the CCP threatened to installed nuclear capable "defensive" missiles in the Chatham Islands?
The Western support of the Ukrainian Nazis in their lust for Russian blood is a really, really, stupid idea and has enabled them to enslave their entire male population as disposable cannonfodder. Slavery is alive and spreading in the world today.
The Western response to the war in Ukraine has destroyed the mechanisms that have held WW3 back for the last 75 years. From the Russian and Chinese point of war, Covid 19 was the first battle of WW3 and Ukraine is the second. The Covid 19 technology was developed in the US and the research moved to Wuhan where it either escaped, or more likely was released.
We have warmongers and fruit cakes for leaders.
Roger W,
"The Western support of the Ukrainian Nazis in their lust for Russian blood is a really, really, stupid idea" So, we are to believe that all-or certainly most -Ukrainians are Nazis. Really? and your evidence for this is? te second part of that sentence is just too ridiculous to respond to.
You believe that the West should have done what? Treated the Russians as liberators by the sound of it. Appeasement is always tempting as it avoids immediate pain, but usually turns out badly in the end.
In your book, Putin, far from being a warmonger, is a peacemaker. Really?
That's because most government jobs just push paper around a desk and are total reactive to the front line economy, who actually have to do physical work for the productive side of the economy. So for them a lock down was awesome, full pay and a holiday, I mean "work from home" period. Many are still milking it.
We should have used the annual Jackson Hole get-together of top central bankers as an opportunity to sack the lot of them. They pumped their economies with piles of printed cash and caused the current problem. They have no idea what the future holds. They are a wrecking ball out of control.
Translate covid to lockdowns and climate change to lack of investment in oil and gas and nuclear before renewables are up to speed. The core of all of this is an energy crisis exacerbated by terrible COVID policy. The Ukraine war is a result of Russia taking advantage of the terrible position the West has put itself in.
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