By Bernard Hickey
Watching the Reserve Bank and news about interest rates from overseas this week I kept asking myself the question: how is this all going to end?
How long can central banks keep pumping cheap and often printed cash into markets before something goes bang?
I have that uncomfortable feeling I get when blowing up a small balloon beyond its normal size at a children's party.
Every time I puff, I close my eyes tighter and wince harder.
That's how central bankers are beginning to feel all around the world.
How much air in the balloon is too much air?
It's a question Labour Finance Spokesman also asked Governor Graeme Wheeler in a select committee hearing after the central bank announced the big four banks would have to hold around NZ$500 million extra capital to back riskier mortgage loans.
What happens if New Zealanders keep borrowing more than they can afford to inflate their house prices?
When will international markets finally call time on New Zealand's foreign debt and punish us with a sharply lower currency and higher interest rates?
Wheeler had no definitive answer, but he shared Parker's sense of unease.
The Reserve Bank faces the same problem most central banks face.
Consumer price inflation is so low they can afford to keep stimulating with low to nearly 0% interest rates.
Inflation is so low in some countries they are worried about deflation and are now printing money.
All that cheap money is blowing up bubbles in bond markets, stock markets and property markets.
Central banks are nervous they could create another bubble the size of the one pumped up in housing markets in North America and Europe by 2008. That went bang and almost destroyed the global financial system.
New Zealand has a particularly tricky version of the problem.
Our lack of capital controls, our faster growing economy and relatively high interest rates mean foreign investors are pumping that freshly minted money into our economy, pushing up the New Zealand dollar to record highs.
This high currency is in turn pushing inflation down below the Reserve Bank's inflation target band of 1-3%.
Wheeler could cut the Official Cash Rate to try to stimulate the economy and drag the New Zealand dollar down, but that in turn would only blow more air into the Auckland property bubble.
Conversely, the bank could try to take some of the air out of that bubble by putting up interest rates. But that would just push up the New Zealand dollar even more. So central banks are stuck between a rock and a hard place.
They need to stimulate, but doing so is blowing up the very bubbles that caused the Global Financial Crisis to begin with.
In theory, this puffing and wincing and hoping the balloon won't go bang could go on for a very long time. For some reason, the rubber in the balloon seems very resilient this time around.
One reason is markets believe central banks and governments cannot afford for it to go bang and will print and stimulate and bail out banks to make sure it doesn't.
This week the Reserve Bank of Australia and the Bank of (South) Korea cut interest rates unexpectedly. Last week the European Central Bank cut rates and suggested it may do more. Central banks in America, Japan and Britain have printed US$6 trillion in the last three years.
This week stock markets in America hit record highs.
The hope is that eventually all this hot air will leak out of the balloon and warm up the room, creating some real economic growth with real jobs and wages growth.
This week's employment figures in New Zealand were promising, but were at least partly due to the biggest earthquake rebuild anywhere in the world in the last century, relative to the size of our economy.
Luckily, or not, we're the only ones doing that.
Yet fresh house price figures here also showed prices rising at double digit rates in Auckland and beginning to spread elsewhere. At current rates of growth, Auckland's average house price will hit NZ$1 million in 3 years.
Less than half the necessary houses are being built to keep up with population growth.
A house price equivalent to 20 times median income can only be sustainable if interest rates stay low forever.
This suggests the answer to the question: how long before the bubble goes bang? When interest rates start rising.
---------------------------------------------------
This article first appeared in the Herald on Sunday. It is used here with permission.
We welcome your comments below. If you are not already registered, please register to comment
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.