Global inflation and interest rates are at an all time low in many developed nations; in some countries interest rates are even negative!
In this Face to Face we talk with Bernard Hickey about the factors behind this, and why it is making the job of the Reserve Bank very difficult.
They need to drop interest rates to stimulate investment and spending, but it isn’t working.
In fact, all it seems to be doing is driving up asset markets – particularly housing.
'A major impediment to getting a rational discussion of the issues is the inability of a large share of the population to deal with what appears to be a potentially dire outcome. Textbook and journal editors recognize this issue, and gear their editorial guidelines accordingly. I was reminded of this again, when the question came up (again) of whether I would consider writing a book for a particular academic book publisher. The main thing I would need to do to make the book acceptable would be find a way of sidestepping any unpleasant outcome–or, better yet, I should come up with a “happily ever after” ending.'
https://ourfiniteworld.com/2016/07/06/energy-limits-why-we-see-rising-w…
Time to build a new model and implement economic reforms. A zero or low growth model may be the only way forward.
They do have another possibly very effective tool in heavily raising the NZ banks capital adequacy ratio (I think that is what we call it in NZ). This was mentioned in the latest statement and I think it could be good because:
1 Raise the bank margins substantially. Thus increasing mortgage rates without raising deposit interest rates and thereby our currency. (it may even lower deposit rates and thereby the currency.
2 Force the banks to accumulate a fund to buffer the effects of a bubble crash and put the cost of that where it belongs, i.e. out of the pockets of the over exuberant borrowers instead of the poor old savers in the event of an OBR event.
3 Stop the flow of funds pouring out of NZ to Australia. In the event of a crash it this money will be used to prop up the Australian banks while their NZ subsidiaries and depositors will never see a penny of it.
Having said all that it does nothing but make it easier for foreign buyers and as we all know the real responsibility lies with the government to address the issues that we all know and have discussed before.
Enjoyed the video and looking forward to more.
Yes excellent video interview, would be good to see more of them. It's interesting that a lot of the comments you made, I'm seeing reflected here in Auckland especially in regard to our ageing population and lack of high street spending.
I was in Parnell yesterday and couldn't believe just how many shops and restaurants had closed down or recently changed hands. So yes it certainly looks that our population just isn't spending on expendable items. Though saying that the Art Auction houses were still there and seem to be doing well. Or at least the International Art Centre has been able to move into new premises. Seems that our older Boomer generation is now investing in the fine things in life, which is much easier to do when you've paid off your mortgage.
Same thing happened in Europe after the GFC; the art scene took off and is still doing a roaring trade for investments. So after the property markets collapsed, people switched to investing in SSWAG (Science, Silver, Wine, Art & Gold).
Though I agree, we need to generate more employment through investing in new tech and businesses, though for that we need more Government support via reduced taxes. The UK is looking to do this through reducing it's Business rate tax from 20% to 15% to help support new business growth and attract investment in to these areas and away from property investment.
Brash hit it on the nail...It is not RBNZ's job to control house prices, it is the Central and Local Govts'. One controls migration and the other the availability of land. And both seem to be unwilling to budge from their current policies, so there is no hope at all.
Economics is fundamentally the mathematical workings of picking or deciding winners and losers based on their own efforts. At no time should 'HOMES' be made part of that equation. we ALL NEED homes just as we all need water and oxygen. Affordable warmth and shelter are paramount to us all to function and live healthy lives. These things alone are why I would crush speculation and property hoarding via every possible solution and tool I had available. The RBNZ are like robots without a conscience or moral compass. That is their mandate being made by a government that also is lacking such things. THIS is why they fail.
My best understanding of the Current economic landscape is that the "new normal" of very low growth is a direct consquence of an over indebted world.... After the GFC the private sector started to deleverage.
The Global response of Central Banks was ultra low interest rates and massive buying of financial assets...
ie. money printing thru the purchase of financial assets. ( Because financial institutions were falling into the abyss )
Art prices soaring...diamond prices.... rare collectable cars.... Real Estate.. ( This reminds me of the inflationary 70s' )
Don't you think we need to revist the idea that the CPI is the end all .... that the CPI is the only valid way to measure inflation...??.. AND ...do we even understand why Central Banks have mandates to keep "inflation" in a range..??? Is it for monetary reasons...??? Have we forgotten the underlying first principles..??
If the Private sector is maxed out on debt ...what is the point of massive new business investment...??
If the world is yet to properly go thru a deleveraging ...what is the point of business committing lots of Capital to more capacity... more manufacturing..??
With China approaching madness with its commitment to growth via business investment... is it any wonder most Companies are wary of doing the same...???
An analogy, might be, that of a household that lives beyond its means and hsa a high level of GDP growth ( spends more and more on toys ).
They get maxed out and begin to struggle to pay even the interest on their borrowings... Their GDP starts to contract... ( ie. they are forced to spend less )
A budgeter comes in and says... wow... we need top get that growth happening again...
Sorting out your debt and then using productive hard work is not the answer..thats tooo hard.... We dont want any pain.
Lets see if I can get you some really cheap money and then you can start spending more again.... we need to get that GDP growing...
This analogy is off the cuff ...so may not be the best..
Japan ran into this scenario back in 1990.... If they had allowed..."creative destruction".... the mess may have been cleared out by now.... and their economy may have adjusted to a sustainable viable level.
I've had an interest in economics for many yrs..... As much as we would love endless growth and prosperity their are periods when an economy needs to "cleanse and renew"....
In my view we should allow these cycles to happen and just manage them in an intelligent way...
Not doing so.... endlessly "bailing out" an economy moves us towards , what is a new economic term, a "Zombie economy".... which just struggles to survive and compete.. a Zombie economy is an "entrenchment" of things as they are.... Basically dinosaur institutions who can buy influence and favor and who probably could not survive without pseudo govt life support... ( In an over indebted world ..financial institutions are the biggie monolithic dinosaurs ...European Banking system comes to mind ). ( 30 yrs ago any loans that a Central Bank had to make to bail out a private bank were made at punitive rates... to give the "right message" ..in line with "natural justice"..etc)
The best descriptions of the current economic landscape, which I've read, is by Ray Dalio and also Richard Koo ( on Japan ).... and Gary Shilling.
Ray Dalio is my favorite.
The reality is... if anyone talks about " Growth"... they are talking about credit growth,...debt...Borrowing more..spending more..... thats the economic reality of what we have been doing for 40 yrs..
Lower and lower interest rates are a symptom of the economic malaise..
Yes I agree that banks and economists really should factor in the inevitable 'Bust' cycle, that always happens after a boom cycle. This is part and parcel of the capitalist model and to a certain extent human nature, we're always trying to push the limits of any system even if it means chancing our luck through speculation.
I strongly recommend that everyone should watch this film: Boom, Bust, Boom. (Available on most streaming services).
Here's the film trailer: https://vimeo.com/119939446
Thankfully it's quite a funny film (Not a dark and depressing documentary), It really highlights how speculative bubbles work and their consequences when they go bust. The problem is that we tend to focus on Booms and forget how things went bust!
We really need to learn from our past mistakes and how to accept them and move on.
The consequences of allowing creative destruction cycles to ‘just happen’ would be catastrophic. Even if we succeeded in ‘managing them in a creative way’ the pain would still be immense. The modern western world has been largely insulated from the consequences of its self-gratifying consuming behavior for so long, that political and social turmoil would be inevitable and very likely usher in a worse scenario than propping up the zombie in the hope that we will muddle through. We would not see again a great depression style acceptance of economic rigour and individual fate. Forcing Japan in the 1930’s to do economic cold turkey entrenched one of the more barbarous regimes of modern times.
Chinas saving rate can teach NZers a lot. They then lend it to NZers to buy over inflated tin shacks, which we already own. Very clever.
As always, Bernard talks a lot of sense. Sadly, I think the picture may well be even bleaker, as China is now engaging in a currency war. It has very recently devalued the Renmimbi, which has fallen by almost 10% against the US$ in recent months. According to Morgan Stanley's Head of Currency; "They seem to be overriding their own model and letting the Renmimbi fall to improve their competitiveness. They are in the same deflationary syndrome as Japan in the early 90s, but on a vastly greater scale. The Global Economy is in no shape to absorb this". The steel industry is a good example, as the export of cheaper steel is driving down prices in Europe.
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