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Opinion: Bernard Hickey argues the RBNZ is doing nothing to turn around New Zealand's slide into poverty through foreign borrowing and asset sales. Your view?

Opinion: Bernard Hickey argues the RBNZ is doing nothing to turn around New Zealand's slide into poverty through foreign borrowing and asset sales. Your view?

By Bernard Hickey

The Reserve Bank of New Zealand did nothing today, as expected. See our full report here on the RBNZ's decision to leave the OCR on hold and turn a blind eye to the currency's rise.

It did nothing to stop New Zealand’s slide in relative poverty.

It did nothing to turn around New Zealand’s woeful export performance of the last decade.

It did nothing to improve New Zealand’s savings rate because it left the Official Cash Rate at 2.5%.

It did nothing to turn around our current account deficit, which it forecast would rise to 5% over the next couple of years.

It did nothing to break the New Zealand economy’s addiction to foreign debt and asset sales.

It did nothing to correct the over-valuation of New Zealand’s house prices, which it estimated was still as much as 10%.

It did nothing to control inflationary expectations, which it admitted were at the top of its forecast band of 1-3%.

It did nothing because it thinks underlying inflation is under control and that the recent increase in inflation expectations will be shortlived.

It did nothing to stop the New Zealand dollar’s rise through record highs against the US dollar in recent days, even though it admitted this was constraining the rebalancing of the economy towards production and away from consumption.

It did nothing because it says the Trade Weighted Index is lower now at around 70 than it was in mid 2007 when it last intervened to push it lower. It was around 75 then because the New Zealand dollar was stronger against the Australian dollar.

It did nothing because it believes the much higher number of people with floating mortgages gives it more leverage when it does increase the Official Cash Rate gradually over the next two years.

It did nothing today because it believes the economy will recover with the current level of stimulus.

It did nothing because it is letting the high currency do some of its dirty work of keeping inflation under control.

It said nothing about the government running a budget deficit of 8.3% this year, which it knows is keeping New Zealand’s savings rate low and pushing up the currency.

The Reserve Bank did nothing today even though it knows inaction on its part and the government’s part will mean our gross national income per capita will keep sliding.

It’s time someone did something.

To refresh the memories of those who may have missed why I think we're borrowing and selling our way into poverty, see my article here from April 4 showing how the foreign interest and profit drain has made us poorer since 2003 despite higher GDP.

 

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86 Comments

They did do something , they left more money in peoples pockets

I dont think you would find too many mortgage holders unhappy about todays announcement,,

I wonder what savers think.

Or is this economy run for borrowers and consumers and borrowers rather than savers and exporters producers?

Seems like the former.

So much for transformation.

cheers

Bernard

Financial Repression, B. Didn't you do a piece on this recently?  OCR lower, in that case :)

http://en.wikipedia.org/wiki/Financial_repression

 

Bernard - good article. Some folk might be confused by your apparent sympathy for savers and exporters, given that savers would likely want an OCR increase and exporters a reduction - can you explain?

As for who the economy is "run for" - follow the money - who benefits from inadequately restrained borrowing/credit growth?

Dismal eh. Enjoy:

http://www.johnwalley.co.nz/151-slip_sliding_away.aspx 

"Any current account deficit effectively demonstrates we are likely on a trend to greater pain and more cuts as history shows us unable to increase earnings.  This will not change until the policy framework changes and we effectively control domestic inflation and the value of the New Zealand dollar via capital controls or some form of foreign exchange transaction taxation,"

http://www.johnwalley.co.nz/147-price_or_volume.aspx

"... our annual exports equate to about 12.5 hours’ worth of the currency trading and the annual total of imports and exports equate to the currency trading that takes place in a single day."

Strange, but true.

Cheers, Les.

www.nzmea.org.nz

 

Reduction of imports in the billions is wiser long term - then more exports.

No – no guys – stop the “bricolage” - but develop a comprehensive economic strategy !

As I many times described New Zealand can only improve working on real, sustainable production, taken into consideration limitation of resources, climate change and the current stage of world economies/ politics.

This means strong incentives from the government to support reduction of imports in the billions and building new segments of industries in order to create full employment, skill,. entrepreneurialism and higher wages.

 Youth unemployment - a time bomb.

 Can someone tell me, in which economic production sectors 175’000 new decent, skilful NZjobs are created for the wider NZpopulation, when more stories like that one emerge http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10731186  ?

 Now in extremely difficult times there should be a comprehensive economic government strategy in place with the priority to secure employment, social stability and the reduction of the account deficit..

Kunst

 

Regarding your concern for NZ sourced procurement,here is a piece from the EMA minutes.

 

Note the problems are known but basically swept under the carpet by layer upon layer of comittees,associations,councils.Nothing of the truth ever surfaces. Most of these layers employ scroes of often older people just collecting their slarys and not really adding anything to improving the situation for the next generation/

 

"

In general discussion it was suggested that the current government tender process should be reviewed, with a view to making it less complex and therefore less costly for tenderers which could encourage greater NZ business participation.  It was recognised that there may be some difficulties in that government currently required SOE’s to get quotes prior to obtaining budget approvals and this could influence the tender process.

 

                             Graham Cleghorn commented on the desirability of the government adopting the internationally accepted practice of “collaborative procurement processes” which some NZ based companies already follow.

 

                             Lyn Russell questioned the relevance of NZ standards, when NZ government agencies either disregarded them, or were unwilling to enforce them in respect of government tenders.

 

                             Catherine also commented on a report prepared for ICN (Industry Capability Network, a division with NZTE) on “building opportunities for NZ suppliers in the major supply chain market”.

 

                             Clearly, there were significant opportunities in this space, but participation was challenging for many companies on an individual basis.  It was acknowledged, that involvement at this level was demanding but very rewarding if you were successful.

 

                             The manager undertook to circulate a “summary” of the main findings of the ICN report with the minutes.

 

                             There was further discussion regarding the timeframe for this advocacy programme, which was now covering 3 separate areas:

 

  • Government procurement
  • Supply chain facilitation
  • NZ Standards – compliance etc

 

It was agreed, that there would be widespread concern if the 10 examples quoted in the Government Procurement paper became public knowledge.

 

It was agreed, that the advocacy approach needs to be initially to officials, but in quick time lifted to a higher level, and possibly into the public arena.  It was agreed that any approach should be weighted to the positive, and offer solutions, rather than just provide examples of bad practice.

  

Governmant fails again - no long term plan.

 Listening to Minister Joyce in yesterday’s oral Q&A in parliament  – he’s underperforming again and should be sacked.

NZGoverments in the last 10 years are to blame for the mess we are increasingly experiencing on the NZemployment front. The current government obviously isn’t aware of the severity of the worldwide crises and it’s consequences.

How much longer, until unemployment rises to 10% + and the wider NZpopulation cannot afford daily necessities ?

 Where are the 170’000 decent jobs coming from - PM ?

A reasonable good NZeducation system, providing young Kiwis with the potential to compete internationally in many sectors is constantly abused by the government not supporting the private sector, but allocating well paid work to China and other nations. A government, which is to blame of wasting billions of taxpayer’s money by draining our national “Brain/ Knowledge Capital”.

As a consequence our ministers proudly explain their spending in the billions on infrastructure – HA – including more prisons, boot camps, welfare programs, the extension of the police force,  etc. – what a “Mickey Mouse Economy” !!

 “NZ- Key Culture” - NZconsumerism before NZproduction ?

 It seems for PM Key and his ministers every other business (Auckland Casino/ NZ$/ Re- election/ etc.)  is much more important then full employment in decent jobs of the wider NZpopulation.

Considering his priorities does the PM really recognise the severity of the problems in our economy/ society ?

PM - what are the social consequences and the indirect costs for taxpayers of the Auckland Casino ?

 PM - how many more broken families – how many more prisons – how much more burden for the taxpayer ?

Election campaigns cost a lot money and they get it from the big businesses, not the 'little man in the street'.

Election campaigns cost a lot money and they get it from the big businesses, not the 'little man in the street'.

Election campaigns cost a lot money and they get it from the big businesses, not the 'little man in the street'.

Hi Bernard,

why is all reporting done from a borrowers point of view?

A large percentage of NZ home owners do not have a mortgage on their property and I would argue that there are a much greater percentage of savers than borrowers.  The amount the savers have would be less than the amounts borrowed but drops in interest rates still affects a lot of NZders.  Most of them are retired and each drop hurts.

 

 

And an increasingly large percetnage of kiwis are not homeowners, even though they might like to be, no easier for them to save either!

exactly. A lot of tenants are savers or have some savings. Tenants v landlords would be an equal balance of that part of the saver v borrower equation.

Good point. Most journalists are borrowers.

But I'm no fan of lower rates.

We need higher rates to encourage savings.

We just need to somehow control capital flows to stop those higher rates pushing up the NZ dollar.

cheers

Bernard

If the RB can specify, vary, monitor and police the fraction of funds banks use of greater than 12 month duration (the 'Core Funding Ratio') they could also specify, vary, monitor and police the fraction of offshore funds banks use. 

Banks using low cost funds from offshore imports loose monetary policy from elsewhere; undermines our own monetary policy and displaces domestic savings.

Why can't the RB do as I'm suggesting? They have faced down the cost objections thrown at them regarding implementation of the CFR, so what could stop them doing something like this to stop NZ's savings rate being undermined; to stop NZ's exporters being undermined, what?

What needs to change?

Cheers, Les.

www.nzmea.org.nz

 

Les - honest question "what are these low cost funds from overseas that the banks are obtaining" ?

Grant - am thinking funding via the likes of Covered Bonds, for example. Thought experiment -  suppose at the time just before our banks started to use such bonds in earnest, as they have recently, RB had specified a minimum % of funds to be obtained via retail, to satisfy their funding needs, would banks have had to increase retail rates, or decrease them? I think increase them, and it would not likely have been a linear increment relative to volume of extra funds required. Hence the relative cost thinking. Anyway, increase in retails rates would have been good for savers and if RB had wanted to maintain the same monetary conditions (balance of looseness/tighteness) implied OCR steady for longer, thus what would that have done for the NZD? I think it would have weakened it.

What do you think? Again, honest question, because I recall you said you work in fx and so am keen to know what someone thinks who is at the coalface as it were.

Cheers, Les.

A large percentage of NZ home owners do not have a mortgage on their property...

And yet a large percentage of them still have mammoth debt.

...I would argue that there are a much greater percentage of savers than borrowers.

And others would argue that most of those now without property debt happily traded that property debt for other forms of debt.

Be they property owners or renters, savers are few and far between.

It would be nice if we recruited a few MPs who had a glimmering of an understanding of basic economics.

How about it Bernard?

:)

AH - too late. Economics, at least, growth-based economics, has had it's day.

There's a lot who don't get that.

I'd prefer it if they did a basic paper in physics, and perhaps ones in chemisrty and biology.too.

The real world, in other words. You drown whether you have a million bucks in your pocket, or not. Choke ditto. Die ditto. Why, then, do we evaluate the million as paramount?

I've frequently maintained that a coup and the installation of Bernard, Gareth and Rod to run the country is our only hope.

Hear hear Bernard. "Doing nothing" seems to be de rigueur in NZ these days. Reminds me of a doco I saw on Deutsche Welle last night about Greece. Many Greeks commented that it was obvious to everyone that a fiscal crisis was coming long before it happened. But still, they "did nothing". And that's where we're headed for sure.

What was Bollard supposed to do?  Raise rates and drive the NZD even higher?  Or cut rates and pump up the housing market?  It's their remit that needs doing about.  Rewrite the Reserve Bank Act.

Perhaps a hint  at using his other powers.

LTVs come to mind. So does CFR.

I recall his recent elaboration on some of his thinking.

Actions would speak louder than those words.

 

"What was Bollard supposed to do?  Raise rates and drive the NZD even higher?  Or cut rates and pump up the housing market?  It's their remit that needs doing about.  Rewrite the Reserve Bank Act."

Exactly

Better to remove the RBNZ Act altogether

Perhaps Bollard did nothing because he has the nod from Smiley Wavey that the boat does not want any waves until the Election has passed us.

Even the small ripples at the moment can have an effect for this boat already up to the gunwales.

What a load of rubbish Bernard...really you can do so much better than that drivel!!!

Hopeless...once the high NZD shifts the gear lever for growth into reverse then JK will sell whole parts of the SOE's and not partial sale's,  using the no growth spin..have to sell them Off to meet budget expectations.

 

Short term Pain Bernard ...  Savers had a good for a while now mortgage holders have it good and sometime in the future that will reverse and then further into the future it will reverse again ..  such is life  

So what has the government done to encourage savings? nothing, it's done the opposite, it's encouraged borrowing.

Made a waster of time change to LAQC's that made no difference to almost all propery investors ability to claim huge losses back each year.

Also heavily pressured the RBNZ for record low interest rates.
IF the government had appropriate tax levels to what it was spending, and wasn't borrowing so much pushing up the dollar, the RBNZ would be able to get interest rates up nearer where they should be.

If any work it does is being undermined by government policy the RBNZ is on a hiding to nothing

In fairness to the RBNZ the good doctor does have his hands tied at the moment.

Of course, if he followed my advice he would be buying a tonne of gold a day.

Similarly, Bill English would have done two key things:

1  He would have extended GST to interest (it is a goods and services tax after all) instead of putting the rate up.

2  He would have ended the tax deductability of interest instead of stopping depreciation being claimed.

 

When will they stop being such a bunch of effeminate woossies?

 

If you want to solve a problem it helps to eliminate the cause.

why no Tobin Tax on the table Roger..?...why no discussion on the subject..?...is there such a thing as bad revenue...? here's a link from 2010...

http://www.independent.co.uk/news/business/news/hundreds-of-economists-call-for-tax-on-currency-speculation-1899534.html

One can only conclude it's not just short term currency speculators playing both end games..!

It's an epidemic.!

Probably because my brain is only able to deal with a very small number of issues!

The intent is the same though - to tilt the balance back to production and to reduce the share that finance takes.

Like any doctor Bollard is in pratice and he is practising on you!

Actually poor old Allan knows what the deal is but his orders are from far away...in Europe...

Ask any European human being who they voted for in the EU and you will be meet with silence!

The Hitler Corporation funded by the likes of JPMorgan Chase Manhatten banks had an earlier time table than was sort after... these guys where still banking in Paris through the WWII makin profits with finance guy Martin Boorman. The BIS and IMF are extensions of this fraud...follow the money trail...

 

I don't agree with your logic. How do you figure that interest is a good or service? Interest represents a servicing cost. I think you may need to have a rethink here?

interest deductibility is a key facit of capitalism and the risk return matrix. removing deductibility of interest is fundamental to this.

investment strategy involves assessing return. interest is paramount here, as it represents how well an organisation uses it limited resources, or its productivity to achieve a profit. 

It is hard to argue with removing depreciation however when the reality is that most property sales (commercial) result in a depreciation recovery at the time of disposal. there is a huge timing issue and impost to the Revenue on this. Removing depreciation is essentially a CGT in disguise. 

 

 

I posted this elsewhere, but it is just so important.

http://www.investorsinsight.com/downloads/otb/mwo060611.pdf

John Mauldin link to a most excellent article by Michael Hudson.

Michael Hudson's analysis is brilliant and well worth taking time to understand. He explains how the banking system has distorted our society by favouring finance over production.

This is in essence why I eventually gave up manufacturing and job creation and turned to commercial real estate.- the world is organised against manufacturing and production. As my accountant put it - it was "time to move up the food chain".

This is deadly serious stuff and while I may rant and rave occasionally on this site it is fundamental to understanding the problems this country faces. It is not about us and them, it is about understanding the forces that shape our world and therefore what to do in response.

I don't tend to agree with Michael Hudson's precise recommendations but his analysis of the world economy into two sectors: production and consumption on the one hand, and finance and real estate on the other, is sheer brilliance.

 

I've updated with the links to my '3 charts showing why NZ is getting poorer' article from April 4.

I've included the key chart with it.

http://www.interest.co.nz/opinion/53814/opinion-bernard-hickey-argues-rb...

cheers

Bernard

This was the right call by Bollard.

Cut the OCR and housing would fire up again.

Raise the OCR and exporters would be hurt even further.

By signalling rises later in the year the market can prepare for that.  

Its an unexciting decision but the right one. We are in a zone of stagnation with issues that need to be carefully balanced. 

Single minded simplistic inflation targeting has failed, terms of trade (it is claimed) on significantly less that 50% of our exports set the exchange rate and not the capital flows that exceed our trade flows by nearly 400 times.  That is ignored by the policy settings.

The policy framework if not broken is badly warped and needs a major overhaul - it is staggering that we the "do nothing best practice" response.

As Bernard points out the way things are will result in greater deficits, more borrowing and a sell down in assets that reduces the capacity of this nation to earn and therefore service our collective debt. 

That process has only one outcome.

Dismal.

www.johnwalley.co.nz

terms of trade (it is claimed) on significantly less that 50% of our exports set the exchange rate

I've always wondered about that, which seems to be the flawed logic used by many of our bank economists. It is easy to imagine a scenario where our "terms of trade" (aka commodity prices) improve but our net export prices fall once manufacturing, services and tourism (all impacted by the high NZD) are included. The MPS states "export prices increased by 6% over the last year" -  how do they know that? Furthermore there is no distinction made between the respective profit margins of different export sectors. The loss of profit that FPH now has when selling $100m of respiratory humidifiers at 0.82USD is in no way compensated for by the increased profit coming from Fonterra selling $100m of WMP. Flow on effects to the rest of the economy could therefore quite possibly be very subdued even with record terms of trade. If our dazzling terms of trade really are all they are made out to be, we should be seeing far more impetus in the economy than we are presently.

The term "inflation targeting" is quite amusing really. If these guys were soldiers and returned from the field to report mission complete they'd surely be court-martialled for dereliction of duty. Because other close-at-hand targets, as threatening if not more so than the mission target, had been NEGLECTED - that is, debt growth (money supply inflation) to a degree that undermines this unit's second objective - financial system stability.

They should at least get a DCM. 

The Reserve Bank has mandate to maintain price stability between 1-3% and to maintain the financial stability of the bank system nothing else although it frequently deviates outside this as in dropping the OCR after the quake. The matters raised by BH are in the main contradictory with no solutions offered. The solution’s are almost exclusively the domain of the politicions who will only react in the next full blown crisis. 

It's quite clear EVERY reserve bank is going to 'ignore' real inflationary figures and just allow the real cost of living to go through the roof at the expense of every householders weekly budget. Like I said to you earlier Bernard, they will play this game for a decade or more, Meanwhile wages will go nowhere or backwards, the cost of necessities  will go up and up, banks and money lenders will set even lower ratios to encourage more borrowing to save their own asses, and if that doesn't work? well hey.....there's always the trusty taxpayer to come bail another private entity out!

Bollard should be on the dole along with Bernanke 

Waste of time paying any attention to "official" inflation or CPI or any other govt bloody index of BS...Just look at the transport data....the trucking demand drops as less is bought by consumers...other raw evidence can be seen clearly. Look at the other data to get your guide.

Clearly you misunderstood me Wolly. What you are referring to is EXACTLY what i meant. The CPI most certainly ain't worth a damn, For starters houses have for a while now become 'commodities' of sorts yet this has no bearing on the CPI or general inflation. Is not having a place to live and the cost of that whether owned or rented not relevant to the cost of living?

Regards from Cal

I did?...oh I did !...no worries

  The Ministry of Economic Development has not done any analysis of where the 170,000 new jobs promised in the budget will…come from!....silly bloody media....the new jobs are being created in the Ministry of Economic Development where they need 170ooo new nodding heads to churn out the BS and spin...ok so that's a bit over the top...some of the new jobs are in the Beehive to take the load off the MED and Bolly needs a heap of extras to put a gloss on his race to catch up with inflation...the rest are needed at Treasury to come up with more smoke and mirrors gambits.

 

Oh and they say a farmer in Dipton hired a bloke to do some fencing!

It did nothing to stop New Zealand’s slide in relative poverty.

 

You believe a central bank can do that! Do you believe in the tooth fairy too Bernard?

"Bernard Hickey argues the RBNZ is doing nothing to turn around New Zealand's slide into poverty..."

What a load of nonsense this "artcile" is! The RB can do very little, let alone "turn around" this country's economy. Had they lowered the rate than they would have been accused of hurting the savers even more and driving house prices higher. Had they increased the rate, they would have been accused of hurting the exporters even more. They left the rate unchanged and they are accused by the author of all of that!

What the author does not understand is that innovation and productivity are key to economic strength. The "turn around" won't happen while people "at work" blog on gloomanddoom.co.nz (aka interest.co.nz) instead of working hard and smart...

 

 

Pure un adulterated optimism; never mind bollard well be long gone with a nice fat pay packet by the time reality kicks in. Its all gona have to be paid back sometime aye!

Bernard's dilemma, Iain, is I suspect that he knows that he will only be allowed to 'tell the truth'.... once. I guess he has to shoot what small bullets he can, and hope the sheriff doesn't hear him.

What can the RB do seems to be a question that has come our of the discussion above. Some say it can't do anything, some say it can.

Things the RB can do.

1. Give a decent figure for inflation. NZ has been feed nonsense on our inflation number for a great many years. I recall when Brash changed the rules re how housing was included to massage the numbers down. My best guess is that the NZ dollar is worth half what it was 10 years ago. Through manly labour but also National. Our government has let our currency half in value in ten years. An admission of this by the RB would be a good start as to what they can do.

The next two actually require political will:

2. Put a min deposit requirement on residential mortgages. 20%

3. Introduce transaction tax on foreign exchange transactions. Ask yourself why it is that so much money is traded evry day yet the spreads offered to us by banks etc are so bad. I think the answer is that there are actually very few people making the NZD trades- I am going to put it at under 20 -and 80% by under 10 people. These people are the ones who are actually taxing us by charging far more than the cost of the transaction to move between other currencies and the NZD. They are rent seeking- high barriers to entry, small number of players.

We need to tell the RB what to do. Make a list, make a better list than mine.

John Key the former currency speculator could have helped with such a  list but he didn't did he.

Why not I wonder.

 

 

Hey Bernard,

What has our GDP per capita done since 2003, when expressed in USD?

I only ask, because you seem to want us to be richer, but also have a lower dollar.

 

Hahahahahahahahahahahaha! Excuse me! Sorry! Hahahahahahahaha!

Hickey you genius! You comedian!

Mate if you run out of things to say it doesnt mean you have to make stuff up:

"It did nothing to control inflationary expectations"

OMG! Please stop it! Awesome!

One nanosecond you claim the NZD needs devaluing and is too high! Now you inform us that inflation is at the top of the band at 3% and a problem.   

Mate not only do you look like your on the Muppets you talk like one.

Beaker comes to mind!

Awesome! Just what NZ needs another messiah of disinformation!  

Highly amusing.... Love it!

 

Yep couldn't agree more

Yup , well said Anthony . ........ Beaker Hickey's theories are all over the place ,  just  'like  the Swedish Chef's meat-balls are .

..... you are a funny joker , BH , in lieu of Clarke & Dawe we got yore !....... haw haw haw !!!

Re Anthony and the BH comment:

It did nothing to control inflationary expectations, which it admitted were at the top of its forecast band of 1-3%.

 So what is inflation really?

Many people would say that you know it when you see it.

Did we see it in house prices that doubled in 5 years? The RB didn't. The market didn't They saw only the supposed movement in the value of houses, they failed to see that the value of houses was being measured in something that could also change in value, namely the NZD.

Any monitarist would tell you that increasesing the money supply above the productivity gains in the economy creates  inflation- the debasement of the currency.

So what happened, vast amounts of money flowed into NZ as loans for housing. This is by definition inflationary. Only we did not call it inflation (Brash is partly to blame for this). This money did not just stay there in a quite well behaved way, it went out and infected the rest of the economy, firstly things closely related to the building industry and then further afield. Meanwhile the RB kept on juggling the 'basket' to continue to get the right answer. Turns out for all RB's around the world it was getting easier for a while to do this as they kept including China as if China was part of the ecomony they we suposed to be managing

So we had poor workers and former land owners (peasants) in China keeping our headline inflation in check and vast amounts of cash flowing in as loans for domestic housing/farms.

The RB took credit for something it had nothing at all to do with- China and at the same time ignored something it should have had a lot to do with - The Banks bringing in boat loads of cash as loans for houses etc.

All in all something far more worthy of a laugh than BH's comments I would have thought. But then of course I did.

 

 

 

 

Parky you old coot...it's Friday and you should be away to work to raise the loot to feed the bank on your mortgage....what you earn each week from Friday 2pm on is yours to keep!

Dont worry kunst it will be at 10% fairly soon as Tourism takes the hit from high NZD and exporters start to drop off...there only hope they are now is the CHC rebuild will give them some growth..but with the pace that it is going i doubt it..

'What will it take for a monetary policy shake up?'

See the dismal chart.

http://www.johnwalley.co.nz/155-what_will_it_take_for_a_moneta.aspx

"The other view promoted by the Government and officials is that high commodity prices lifting our terms of trade go some way to justifying a higher currency. This ignores the fact that capital flows speculating on the Kiwi dollar are 100s of times greater than bilateral trade flows – trade in the real economy is simply not material. Furthermore, an economy that barely missed a double-dip recession and has been hit by earthquakes does not justify a high currency. The only reason currency pressures persist is that other countries are taking action to lower their exchange rates, whether through quantitative easing in the United States and the United Kingdom, capital controls in Canada and Brazil or direct currency management in China and Singapore, while our policy makers sit on their hands." 

Why? 

http://www.interest.co.nz/news/53816/rbnzs-bollard-watching-other-central-banks-currency-interventions-although-has-seen-littl#comment-623417

It could be done.

 

Cheers, Les.

www.nzmea.org.nz

 

Hi Bernard,

I agree that there's a problem.

I agree with some of the posters that the way inflation is defined is part of it.  A random economics student once told me that you could have any two of the following three things:

  - consumer price stability

  - capital price (eg housing) stability

  - free foreign exchange

From the point of view of having a livable life, I'd give up free foreign exchange first, and Tobin tax proposals are already floating around, so they seem like a good place to start.  In particular, regulating the supply of anything is horendous, so I'm strongly biassed to regulate the price and then see what happens.

This isn't a Reserve Bank problem; this kind of structural regulatory change is a political problem.  Yes, I think that no government that has to communicate through the media filter will want to be the one to start it.

Someone has said that the reserve bank has an 'LVT' power.  I've failed to find that in Google.  Can you explain what it is, please?

Regards,

James.

I'd be interested to learn why you cant get all three at once....because I cant see why you cannot but, Im happy to be educated otherwise with sound data/reasonging.  What has killed us for sure over the last 20 odd years is Greenspan's "put" ie ever lower and lower OCR to keep the economy "boom" going....so whats stuffed us is his Rand Idelology.   In terms of stopping banks getting hot money from overseas I think the RB can do it, its a queston of incrimentally uping the factor to make banks reduce their dependancy on hot money, however there is to little savings in NZ to do that.

regards

 

 

"In terms of stopping banks getting hot money from overseas I think the RB can do it, its a queston of incrimentally uping the factor to make banks reduce their dependancy on hot money, however there is to little savings in NZ to do that."

The free market will fix NZ's lack of savings quite nicely, if they let it. Banks will need to offer higher interest rates on savings accounts and TD's, then they can raise more money. If they make savings attractive, then the savers will emerge.

The problem is the squeeze...if mortgage holders paying 5.65% and the ideally 1.5% between that and depositors....it isnt happening unless the RB forces the banks off the cheap hot money.

regards

As you pointed out though, the RB can do that by gradually upping the ratio to get them away from the hot money. As that ratio gets upped, the banks have to offer higher interest rates to attract savings, and in turn they have to charge higher rates from mortage borrowers.

However its not just mortgage borrowers, it also means NZ busnesses are hampered by high interest charges their overseas competitiors dont suffer....

I mean whats a fair return  for a depositor bearing in mind its a risk free rate of return?  and bear in mind that a business may only be making 10% profit in an endevor and at risk......so if depositors demand say 9% for no risk a business just wont produce the new good, which means less jobs which badly impacts the economy....so its a balancing act....

regards

I'm not a fan of regulation, but we've all seen once again what happens when sensible regulation is wanting in financial circles. The much-admired Lord of the Fed Greenspan brought the world to its knees and it ain't over yet.

Perhaps in New Zealand we should be looking at methods of controlling credit other than the blunt instrument of interest rate manipulation.

Last weekend we had the disgusting spectacle of Harvey Norman offering 50 months no-interest credit to the financially naive. We need to go back to the days where a substantial deposit was required for HP. We need to stop killing business investment with high interest rates by making it harder to borrow for consumption.

The argument against that has been that it will kill retail. well, the recent  (temporarily alleviated) recession didn't do too much damage to retailers' bottom lines so I think we can live with some stronger medicine.

In recent years we've successfully killed business growth by clobbering owners with high interest rates in order to stem the sale of TVs, BMWs and holiday homes.

It needs a rethink.

How about this one then? Change it so that interest expenses aren't automatically tax deductible. Instead of 100% deductibility, make it a variable percentage and allow the RB to alter this, in the same way they adjust the OCR and CFR. Then as the economy starts to heat up over the business cycle, they can start to decrease this ratio. This will hit highly leveraged speculative investments hardest, and it won't touch owner-occupier mortgage borrowers.

Presumably full of potential issues, but a lever that hits speculative investment most would be useful.

It is a problem that the silliness of banks and mortage borrowers has to hit businesses too. A couple of points though:

1. It's not a risk free rate of return. Not nearly, the way these banks have lending into the property bubble.

2. I think the free market answer involves a painful recession first, then the malinvestments get purged from the system, then the economy can recover on a sound footing. Lots of otherwise sound businesses may not survive.

steven - when you say, "NZ businesses" what do you mean? If you mean exporters and importers for that matter, tighter and better control of non-tradeables inflation related to this idea means reducing overvaluation and volatility (hurts importers too) and therefore increases margins. If you mean property investors/specs. sure, but it leads to increased affordability and is less inflationary on wages.

I don't know much, but isn't the RBNZ main focus to keep price stability?

Is keeping OCR the same the best way to maintain price stability?

 

I thought they change the OCR every 6 weeks?

Just trying to learn about this stuff.

 

Bernard, a successful country is created by good companies who produce a high quality good and/or service.

This also requires good quality employees. This is the essence of everything.

What I find surprising how people often blame the RBNZ or the government for the economic ills of NZ.

Maybe the whole nation should look into the mirror and think  ’It’s me who can be blamed for it’.

The right Interest rates and tax systems are used to provide incentives for businesses and people to act in a certain way so that they create high quality goods. However, in the end, it’s YOU who is responsible for everything.

I give you an example, there is a large window factory close where I live. Nice premises, flash lease cars for their sales staff.  Most likely the boss owns a boat and a bach.

Most people on here would say that this is a good Kiwi business, we need more of them.

As it happened the other day, I got a REALl lesson in economics. I passed their premises and the door was open. I saw many people working there on windows. In successful countries you would see automated manufacturing lines and robots doing 90% of the work.

In this factory there was nothing like that at all.

Bernard this is economics…real economics, what you and most people on here discuss is theoretical textbook stuff. It has it’s place but It does not create wealth. Productive business does. This company I saw is not, simple isn’t it ?!

The rule in economics is that resources have alternative uses, when you have a bach and a boat you can’t have an automated production line, it’so simple!

Only two thing matters as a nation, productivity and production of high quality goods/services and not leaky homes or real estate advertising. A focus on quality and not stupid property prices is needed.

You wrote in the Herald the other day that NZ is the 4thmost prosperous nation.

Maybe one day, but for that, every individual has to change their’s norms and values.

The place we excell the most as a country is on the OECD " structural happiness framework " ...... uh huh ! ........ NZ is well up the rankings there .

...... and the NZ Treasury have bought into this malarky , and plan to introduce it into their " modelling " for a better , more flourishing citizenry .

Forget producing and innovation , we as a people must " flourish " instead .

...... now , only a bunch of lame socialists could dream up this rubbish , and that is why it's such a good fit for the Kiwi mind-set , isn't it , Mr Hickey !

Two points GBH:

First of all you don't even live here anymore. How many times have you skited about living like a king in some Philipines beach paradise? So what do you even care about what goes on back here in the country you turned your back on?

Second, we now have a National govt and they are supposed to be the Anti Socialists, aren't they? So why aren't they tossing this "socialist" rubbish out the window and concentrating on making NZ an employer's paradise (as opposed to Labour's worker's paradise)? Why aren't they pouring resources into educating the workforce and supporting nascent businesses and industries?

Is it because they are too busy looking after only their backers? Is it because the Dairy industry still has dibs on every resource NZ has to offer and bugger everyone else?

Apparently this govt is most definitely not "socialist", yet the country continues to fade away towards nothingness on their watch.

 

 

Two points LOL :

I care very much about what goes on in many countries around the globe , even ones I've never been to . This is one world ...... we're not a bunch of warring tribes anymore , well , not quite ( someone needs to bring nobel Peace Prize winner Obama up to speed on that point )  ........  My back is not turned to any country or people .

Secondly , the current National government are very much socialist in their behaviour . Propping up Labours' old policies paints JK & Wild Bill a shade of light red , pink ?

And thirdly , how come you're not funny today  ? ....  Usually we enjoy a good laugh from you ..... not depressed by Bernard's utterances of impending doom , gloom , and worse ? ...

 Two points Roger – don’t see policies in black and white only. MMP offers so much for voters to make changes – vote for capable politicians and not for parties – in order to vote and keep the many rotten eggs out of politics.

How is it then , Walter , that Darren Hughes , who is basically a good egg , gets run out of politics .........  but that a rotten old Winsome Peters egg is likely to return to parliament ?

...... and thirdly , your MP in Kaikoura ,  Colin King ... ever heard or seen the guy in parliament  ? ..... Just once has he gotten off his National sinecure seat  , and bothered to table a question ?

 We are wasting far too much time playing the "party game" in stead of making individual parliamentarians accountable for their actions/ inactions. The NZmedia fails to grill ministers properly - asking them tough questions.

 Furthermore the public should have more information about our politicians and what they stand for. Weekly forums on TV (primetime) about important national issues should be discussed, so people can form an opinion about representatives.

 

 

 

I agree entirely ...he was a good egg....but he Got It Out...just not done on the first date.....not the sort of chap you say ..."Well come on , out with it man...! "

Hullo Count : Sorry I mist you , bean hob-nobbing with the guy from the Department of Natural Resources .... he's the one to yadda with when you're trying to sort property ownership papers ! ... And the department don't povide a vehicle here , he had to wander back up to the road & take a jeepney home .

...... ah , if only NZ government departments operated with such austerity !

Wow, Christov has his own stalker.

Bernard,

You may also need to do something about the Approved Issuer Levy, the special low tax on overseas people investing in fixed interest in New Zealand.

It's explained amazingly bady (from the point of view of the bank) on the IRD web-site.