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US economy shrinks in Q2 despite tight labour markets; China meets to assess stumbling economy; German inflation stays high; Aussie retail staggers; UST 10yr 2.68%; gold up and oil flat; NZ$1 = 62.8 USc; TWI-5 = 71.2

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US economy shrinks in Q2 despite tight labour markets; China meets to assess stumbling economy; German inflation stays high; Aussie retail staggers; UST 10yr 2.68%; gold up and oil flat; NZ$1 = 62.8 USc; TWI-5 = 71.2

Here's our summary of key economic events overnight that affect New Zealand, with news both China and the US seem to be facing economic questions at the same time.

There are mounting concerns about the giant American economy’s resilience. Inflation is at 40-year highs, home sales are weakening but their red hot labour market has yet to show any sign of weakness.

New American jobless claims fell marginally last week, and there are now 1.44 mln people on these benefits which is still close to an all-time low.

But the initial 'flash' reading for real economic activity fell in the June-2022 quarter by -0.9%, on top of the -1.6% recorded fall for Q1-2022. If that is confirmed over the subsequent revisions, it will show the US economy has been in a shallow recession. In nominal terms it grew at an annual rate of +1.9% in Q2 but that was less than inflation. Over the past year it grew to US$24.85 tln and up +9.3% in nominal terms, up 7.8% at an annual rate in the second quarter alone. But that was less than price increases which for the household sector was a 9.1% inflation rate. The second estimate of this data will come in about four weeks.

The puzzle in all of this is their labour market - growing fast with widespread labour shortages. If a recession is in fact declared for this 2022 period it will be the strangest one in memory, one with a record low jobless rate. Today, the bond markets 'believes' the recession story, but equity investors don't. History shows though it is unwise to ignore bond market signals.

To confuse matters, the official arbiter of whether the US is in recession, the NBER, has always rejected the "two quarters down" rule. So the 'recession' designation is still up for grabs.

Meanwhile, the Kansas City Fed's factory survey came in more positive for July than for June, back expanding at a strong pace and a much better level than was expected.

And Mastercard reported stunning revenue growth, up more than +20% and far more than can be account for by inflation. This is not the sort of data that suggests recession.

But the latest US Treasury bond tender reflects the risk-off mood sweeping bond markets. Their 7-year tender was well supported but the median yield fell to 2.65% from 3.20% at the prior event a month ago.

In China, their top leadership has been meeting to address, the "complex and severe international environment and the arduous domestic reform" situation, a clear indication that their economy is not performing as it would like. The problems run deep, as they seem to acknowledge. But their "persistence is victory" mantra seems to indicate they will keep doing the same things that got them into this current trouble.

In Europe, German inflation is staying very high, up 7.5% year-on-year with the month-on-month rises running at an even faster pace. This July data was higher than analysts were expecting.

In Australia, retail sales activity disappointed in June. They rose a mere +0.2% from May after the May change was revised lower. This latest data was the softest rise in retail trade since a retreat in December 2021, and signals that retail volumes are shrinking as inflation bites harder. June's retail trade may be up +12% from year-ago levels, but the tepid May-to-June rise is the one catching the eye of analysts (up at an annualised rate of only +2.5%).

The decline in global container shipping rates continued last week. Bulk cargo rates fell too.

The UST 10yr yield starts today at 2.68% and down -5 bps from this time yesterday. The UST 2-10 rate curve is less inverted today, now at -21 bps and their 1-5 curve is also less inverted, also at -21 bps. Their 30 day-10yr curve is now at +55 bps and flatter than this time yesterday. The Australian ten year bond is down -9 bps at 3.10%. The China Govt ten year bond is little-changed at 2.80%. And the New Zealand Govt ten year will start today lower by -3 bps at 3.52%.

Wall Street has opened its Thursday session unruffled by the US GDP data and up another +1.1% to be a strong +3.8% over the past two days. Overnight, European markets all closed up more than +1% except London, which fell against the trend. Yesterday Tokyo ended its Thursday session up +0.4%, Hong Kong fell -0.2% but Shanghai rose +0.2%. The ASX200 ended up a strong +1.0% while the NZX50 was up even more, up +1.7% at the end.

The price of gold will open today at US$1753/oz in New York which is up +US$32 from this time yesterday.

And oil prices are little-changed today at just on US$96/bbl in the US, while the international Brent price is still at US$101.50/bbl.

The Kiwi dollar opened today up from this time yesterday to 62.8 USc. Against the Australian dollar we are up +½c to 90.1 AUc. Against the euro we are also +½c higher at 61.8 euro cents. That all means our TWI-5 starts today at 71.2.

The bitcoin price has risen sharply from this time yesterday, up almost +11% to US$24,010 and most of the gain coming after the US GDP announcement. Volatility over the past 24 hours has been extreme at just over +/-5.7%.

The easiest place to stay up with event risk today is by following our Economic Calendar here ».

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88 Comments

That Atlanta Fed GDP forecasting model is making mugs of a lot of other forecasters.....

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Indeed - I put it down to a lack of professional experience.

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Hahaha, that's good. 

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David - it has been pointed out - often and for a long time - that labour is statistical noise versus fossil energy.

http://theoildrum.com/node/4315  (note the date - 2008!)

'1 barrel equating to 25,000 hours of human labour (12.5 years at 40 hours per week). Ultimately the answer to this question depends highly on assumptions - but we can arrive at a good approximation. 1 barrel equates to 6.1 Gigajoules (5.8 million BTUs). Depending on the 'job', humans use roughly 100-700 Kilocalories per hour (Computer work requires an estimated 119.3 Kcals/hr). 1 kilocalorie (Kcal) = 4,184 joules. So 1 barrel of oil has 6.1 billion/4,184 = 1,454,459 kcals. Using a range of 100-700 kcals per human hour of work then results in a range 2078 and 14544 hours per barrel of oil. At 2000 hours per year (40*50), this is would then be 1.0-7.25 years per barrel. This was discussed in the comment thread here.'

Why are some folk doggedly still choosing to be baffled by 'full employment' not filling the widening energy/entropy gap? Sometimes it feels like challenging true believers, that the planet is indeed round and that there is indeed no home for little children, above the bright blue sky (Midlane).

Ask yourself how much energy is going into the system, how much of that was labour (and how much of the labour was fossil-energy-derived anyway)?

The screws are coming on rapidly now; we need to be clear about trends and ramifications.

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So...

Using the rock solid logical reasoning and math above, in every hour of operation a basic one gigawatt nuclear reactor produces the equivalent of 7.2 million hours of human labour, or 3461 years at 40 hour/week.

Imagine if we put down the glass BBQ for a bit and built a couple of them.

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One of my first thoughts when reading PDKs repeated claims of increasing entropy from fossil fuel depletion, is the forces at play trying to retain this legacy system of energy generation, and how given enough motivation alternatives will inevitably fill the gap.

As if civilisation will blindly cling to being adverse to nuclear when the dino-juice runs out.

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Nuclear cannot replace our current energy use

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Not to mention that you can produce 150MW of power from a square km of photovoltaic panels.

There is boundless energy available to us.

 

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Big difference between energy and reliable energy. 

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Ironic.

 

The answer to Global Warming is the Sun.

As for reliability there are so many ways to "stopre" energy (one very good one being gravity).

Pump water up the hill when its not needed and let it flow back down when you need it.

Water batteries.

 

No Hills.... try Hydrogen, Batteries etc.

Its all too late though this global weather is just the start of whats to come.

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efficient.

to produce NZ's current requirements of energy in solar only would take up 58,520km2 or 21.8% of NZ

 

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lucky solar PV is not the only energy source available to us then!

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Surely there must be some correlation between the business sectors access to cheap/easy money, leading to expansion, right as a demographic pinch is occurring (and COVID accelerated) with boomers leaving the workforce and them being larger than the subsequent generation, at the same time immigration is down, ergo, lots of jobs, right?

On top of, using employment as an indicator of recession seems to be historically accurate given cashflows got pinched faster (unlike now with cheap debt/helicopter) so business expansions were curtailed faster, meaning employment issues came to the fore faster during recessions, where now it seems like it will be a lagging indicator due to the cash on hand and demographic/immigration changes.

Is this making sense, or have I missed something? Seems like if this is near correct, then it will be low consumer demand that will do this cycle in, and in a big way, destroying cash reserves while producer inflation remains high, leading to big layoffs, further demand destruction, and still, mountains of debt (in corp/and retail world).

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US and China faces......what about NZ.

Both China and USA being Big and Diversify Economy will still survive but NZ........where only economy is housing or related business.....

 

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You forget we also ship milk to China.

I suspect the resiliance and sophistication of our advanced and balanced economy is the envy of the world :)

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Carlos told me Bitcoin is going to zero.

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NZTA told me road toll going to zero too.

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I can tell you are making it up. Government agencies are incapable of communication in 100% English.

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Mōrena ki a koutou katoa, especially you Brock - sunny day here 

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Thanks Aaron. I appreciate the extra effort you put in to making it all the way to the comma without switching language.

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tena koe Brook -  who is Aaron? (Hope you're not getting all religious on us)

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Must be something in the water down there.

Carlos suffers from the same illiteracy with your/you're.

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Dang it - you're too clever Brooky!

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Ngā mihi Aaron.

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Jacinda told me that child poverty in NZ is going to zero ....

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Apparently, word on the street is that Kiwibuild is totally on target for zero production later in the year, in line with the same level of Polytechnic CEO satisfaction with Hitman Hopkins performance.

 

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Maybe they got just government productivity and climate change targets muddled up?

Easy mistake to make - and if so  they are nailing it!

 

 

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It is. 

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All fiat currencies eventually go to zero!

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More like - will add a zero.

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Carlos told me Bitcoin is going to zero.

That's the consensus around the water coolers of the country. 

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CMC Markets PLC down 20% today.

The hits are getting bigger.....

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Pivot incoming 

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Not until inflation drops and unemployment rises. Neither of which are currently happening. 

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You underestimate the myopia of politicians and central bankers

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I'm sure the pivot will come - but it won't be until either inflation is back in the target band and/or we have rising unemployment. Neither is the case right now. 

It could happen quickly (thinking what happened in the 1940's and early 1950's). 

But when we already have deeply negative real interest rates..which are in theory stimulatory....so we are currently stimulating an economy that doesn't need stimulus. 

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See my comment above.

I think there will be oscillations, but a downward trend in 'economic activity'. That is because of less energy going into the system, coupled with increasing entropy demands. The disconnect is that forward bets are only found to be stranded, as people default or cannot re-finance. Reading the former through the latter is ' through a glass darkly' at best, made worse by most of the commentary being 'growth forever' trained.

This is the first time we've run the experiment globally, so a skeptical eye should be kept on history - although seeing it through energy eyes helps.

I think Putin is well aware of this; I think the West baffled itself with neoliberal economics101.

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I'm curious - what makes you think Putin understands?

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I've told you (and I though you were one who could hear :)

In '67, the Arabs ran an oil embargo. It failed; the US was self-sufficient. In 1970, US conventional oil peaked (the fracking came later, and is an important part of the story). In '73, the Arabs ran an embargo - and all hell broke loose (as some of us remember). In '75, Kissinger (no mug, by any standards) aligned the USD with oil. He'd realised that energy underwrites money. 

Putin comes from a  chess-playing country, and I'd rate him Kissinger's equal, intellectually (maybe less IQ, maybe more spectrum-memory). Why would you run am embargo while fracking meant invulnerability? So you wait. Fracking (never of good EROEI, always needing subsidised so obviously temporary) is always going to plateau, near-time. You wait until is looks like it has happened - and move.

He knew exactly when, why and how. Too obvious. I was calling EU being in the NH-winter shyte, months ago. Again, too obvious.

I think when you start with a misguided assumption (Putin is an ogre, in your case) the whole process of extrapolation becomes a leaning tower. Yes, he's a ruthless man, possibly - like most who climb to the top - a psychopath, but that's not the problem here, any more than Hitler was the problem in 1920s/30s Germany. Hitler wouldn't have had the leverage, ex-Versailles. Putin wouldn't have had the leverage, until fracking had run it's 'up', out.

Go well (while you still can). There might be hope for you - after he pedalled his way across the Channel, Bryan Allen was reputedly approached by a Swedish lass who suggested that if he was interested in reproducing the engine, she was happy to help.

https://gossamercondor.com/category/bryan-allen/

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I think you give Putin too much credit. His timing is just coincidence. He will not achieve what he is setting out to do, but will ultimately take the whole world down with him. I think it is more likely he believes the biblical prophecy where the West goes to war with the Bear - and the Bear wins.

Bryan Allen would have just had to lie down and recover and let that lass do all the work?

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Interesting - the whole world is taking itself down, via depletion.

You seem very determined to blame the persona, as I tried to parallel with the Hitler example.

Go well

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I think Putin is exploiting the economic conditions for his short term gain - especially the wests stupidity.

Not sure he has the same level of thinking that you have on the topic. 

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The only significant conquest of Russia, and by that I mean mostly the territory of the previous USSR, was Genghis Khan & his descendants. Churchill’s famous enigma quote only just sums the nation up & he was rare in his intelligence and cunning, to change his spots in the 1930s to realise they were soon going to be needed as allies, regardless of the Bolsheviks and on. Of course he changed the spots back post war. Have said so before, but the only power that can effect change in Russia is  the Russian people. Centuries of ruthless totalitarian by the Czars are embedded into the culture, they are completely their own people and they  will go & do as and where their leader says. Presently their leader is Putin.

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People often wonder why Putin didn't make a move while his fanboy was in the White House. Biden, unlike his predecessor, had run his presidential nomination campaign against the American O&G sector and began invoking his executive powers to kill off supply from the get-go.

Even now, Biden would rather negotiate with dictatorial regimes such as Iran and Venezuela to boost supply over lifting the moratorium on new drilling permits on federal lands.

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If FED lower rates when inflation is not below set target the USD is in danger of losing status as reserve currency, who knows maybe that’s the plan, take down system and start again as it is becoming clear chances of paying back debt is very small.

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The scene is set for the election - neither NZ major political parties have credible proposals to address supply side issues:

What was the aim of the 1980s reforms? To cut costs by removing privilege. Yet neither party now wishes to remove the privileges enjoyed by select groups in both the public and private sectors that have again built up in recent decades, stifling productivity.

Link

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Too many in the major parties are part of those privileged groups carried by productive Kiwis.

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This is rubbish. The costs cut were labour costs. The privilege removed was the privilege of lower income groups being able to earn a decent wage.

The aim of the 1980's 'reforms' was to reduce costs for businesses, reduce income taxes for high income groups and transfer those costs to consumption tax payers. 

The social contract was broken and the earning power of future New Zealanders was reduced by selling off state assets at low prices to cronies and foreigners.

 

There is a parallel between that govt and the present one - both govts are of a mindset to take the assets of the taxpayer and ratepayer and give control of those assets to selected friends.

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3

 And Mastercard reported stunning revenue growth, up more than +20% and far more than can be account for by inflation. This is not the sort of data that suggests recession. 

 To cope with record inflation, Americans have opened up a record number of credit cards

 https://www.usatoday.com/story/money/2022/06/29/americans-opening-more-…

 

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When consumers resort to costly short term credit for essentials, isn't that a definite indicator that personal situations are very tight? And , therefore, a leading indicator of recessionary forces?  Even if just " Transitory"?

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Yes, I feel that this could be balance swapping to a market leader, especially if it allows a lower rate in the short term. 

If this is the case the American Credit Ratings will no doubt be straight on to it having learnt lessons from 2008 (sarc)

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The puzzle in all of this is their labour market - growing fast with widespread labour shortages.

Roots Of America’s Labor Shortage - Demographics

https://www.forbes.com/sites/miltonezrati/2022/05/30/roots-of-americas-…

And unemployment is always a lagging indicator

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We've created the perfect storm. Until inflation starts dropping and unemployment rises (no sign of either yet), central banks will continue to raise interest rates. Monkey see, monkey do.

Because of the excess demand pumped into the system the last few years (or even 14 years post GFC), its possible that we have on-going negative growth (which apparently is no longer a 'recession'), low unemployment/tight labour market and persistently high inflation.

The question is...where/when is the breaking point? We're pushing on a string that is getting tighter and tighter.....when will it snap? And what will the consequences be.

 

 

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Slight physics problem there...a pushed string dosnt tighten or snap.

The RBNZ and gov are almost as ineffective as we are....waiting and seeing what happens....it dont look good though.

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I do think its possible that we're at the bottom of a liquidity trap. Central banks are damned if they do one thing, and damned if they do another. 

Liquidity Trap Definition and Example (investopedia.com)

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Liquidity trap agree...bottom?dont think so yet....until we discover what we are going to abandon....if energy is production we are going to produce less, but less or no what?...until that becomes clear liquidity will remain tight. Its obvious what we should drop but unfortunately those with the spending power have different priorities.....so we wait and see.

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They have themselves to blame ... in their hubris , thinking that flooding the financial system with unprecedented credit would have no downside ...

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Unfortunately apportioning blame dosnt mitigate the impact.....though there is a feel good factor and a possible deterrent effect.

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... do you not think that Orr & his cronies ought to be held to account for the biggest blunder by far  that the Reserve Bank has made in its history ?

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The problem was set in motion long before Orr....and we are only a bit player

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Who knows where/when, but my best guess would be:

- OCR increases to a peak of circa 3.5 % by late 2022 / early 2023

- unemployment rises accelerating late 2022/ early 2023, hitting circa 5% (at least) by May 2023

- annual rate of inflation back to somewhere between 3-4% by May 2023

And then I think there’s every chance the OCR will start being cut, through the second half of 2023. If the economy turns to total custard in 2023, then the OCR could be back to circa 1.5% by end of 2023. If it’s only ‘moderately bad’, then perhaps back to circa 2-2.5% by end of 2023.

 

 

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Cutting interest rates dosnt necessarily increase liquidity however....you still need willing lenders and borrowers...and something to invest in.

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"my best guess" maybe should read my best wish. Having no debt and money in the bank I wish it was 8.25% as it was back in 2007 when Labour was trying to cool the property market.

The average OCR since 1999 is 3.9 with the median of 3. Still not neutral.

 

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You are completely wrong on what ‘neutral’ means.

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‘Neutral’ is contextual, not historical.

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With current inflation and employment it should be 10%.

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At the risk of cross promoting  : an excellent article over at " Down to Earth Kiwi " about the depression election of 2023 ... enjoy !

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Now, someone wouldn't be attempting to deflect a discussion, would they?

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Gummy is an expert on deflection and other things.

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I wonder whether he runs on Direct Current

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... still making personal attacks on those whose message you disagree with ... why ?

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Chill out Gummy its Friday ...

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Or they picks on me grammar.

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... why ... what's she been up to ?

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... you can continue to make ad hominem attacks on a fellow blogger ... or , you can take a moment & check out the article ... your choice  ...

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Then provide a link - otherwise you will have Brook to deal with.

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👀

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... hey Brock , like your posts  ... the article I'm referencing is kind of a Matrix moment ... we can continue to take the Blue Pill  , and live in a fake world  ... or swallow the Red , and head deep into the rabbit warren of reality  .... both Labour & the  Gnats are pushing the Blue Pill , sadly ...

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Usually, I find that the most fun is had when you take both pills at once.

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That would explain a few things.

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Marketing yourself as "down to earth" reminds me of highly strung needy types who promote themselves as "laid back and easy going".

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"The puzzle in all of this is their [US] labour market", I don't think it's a puzzle at all. in a inflationary environment, many of those vacancies are for lower-paying positions which pays so little, and never going to find people willing to fill them. 

the measurement of the true employment rates should ignore those invalid vacancies, then you get a more acurate picture. 

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How about counting the homeless, people who have given up looking for work and living in daddy's basement, people who have been unemployed for longer than 6 months (no benefit for you), people fired from your job (no benefit for you), people working 2 or 3 low paying jobs to make ends meet, the retired and injured military vets, college grads looking for their first job, are not counted as 'unemployed'.  The real unemployment figure in America is more like 20 %.  

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Quite right. Onenews had an article last night about the "skills shortage" leading to lack of bus drivers, and vested interests wanting the borders opened. Although they've had a pay rise, people won't do it because it's still low pay, split shifts and you face abuse from the customers.

Another article - the hospitality sector planning to give an award to hospitality businesses who meet their minimum legal employment requirements, so they can display it to their customers. I remember my sister a few years ago threatening to take her restaurant boss to employment court if he didn't pay her owing holiday pay - he paid up but "don't you dare tell the others".

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The one common criticism on this site appears to be Central Banking.  Bankers have the ability to create and control money, but never create the interest required to be repaid.  This keeps us chained to an exponential perpetual chain of debt  that can never be paid off.  

Even our governments (taxpayers) are racking up the debt to keep this Ponzi scheme alive.  It is time for a reset of banking.  Governments shall now create the money by spending it into existence, to be spent on infrastructure.  No interest required.  Even the constitution says 'Congress shall coin all money'.  That shall be the great reset, eliminate private central banking.

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You are right that banking has a terminal problem (although it can stagger on for a while by displacing others).

But: "Governments shall now create the money by spending it into existence, to be spent on infrastructure."

Threrein lies the lie. Governments can neither create mineral deposits, not energy; any more than banks could. So the guaranteed underwrite of their anthropological arrogance is?

Moot.

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Bruh just delete the RBNZ and make one NZD redeemable for a fixed weight of gold. Economy fixed.

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