This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
‘There is little doubt we face a fully-fledged economic crisis, beyond the current cost of living crisis.’ (Matthew Hooton, New Zealand Herald , 30 September 2022)
It is unwise to be certain about the state of the economy. Experience and research has long taught us that the only certainty about commentariat pronouncements is that the more certain they are, the more likely they are to be wrong. If you 'know' what is happening in the New Zealand economy, you are not following closely enough.
Hooton’s analysis is really Econ101. He jumps to the conclusion that because there is much liquidity in the New Zealand economy there will be inflation (unrelated to a cost of living crisis).
His argument includes misquoting Milton Friedman, who did not write that 'inflation is always and everywhere a monetary phenomenon'. In fact he wrote that 'substantial inflation is always and everywhere a monetary phenomenon'. (Milton & Rose Friedman, Free to Choose, p.254.) Omitting the ‘substantial’ is a common mistake, and reduces Friedman to as crude a thinker as most members of the commentariat. In fact Friedman the economist, as distinct from the ideologist, is a subtle thinker; otherwise his contribution to economics would have been long forgotten.
For economics is a lot more subtle than it is often portrayed. For instance, one of the recipients of this year’s Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel was Ben Bernanke. It was not for his sterling work guiding the US Federal Reserve (and hence the world monetary system) through the Global Financial Crisis, but for his scholarly work on the Great Depression which, among other things, showed that Friedman’s account was misleading. That does not mean that there is a move to revoke Friedman’s 1976 award. Good scientists make mistakes which are corrected by their successors.
To be clear, the liquidity in the New Zealand economy is a concern but it is difficult to deal with quickly without causing great economic stress. No doubt even Hooton was relieved to learn, less than a week after his confident prediction, that the fiscal deficit for last year was only half that which had been anticipated, because the deficit is a major source of the liquidity. (The forecasting error may lead one to doubts; the deficit is the difference between two very large numbers so small forecasting errors in them can lead to large swings in the difference between.) The just-announced consumer inflation figure is, however, in line with Hooton’s expectation.
Thus far, the excess liquidity in our money markets has not fuelled the inflationary forces in the economy. Certainly there are pressures arising from the ongoing struggle with supply chains, with the impact of the Ukrainian invasion, and with some unusual weather effects. I am puzzled why, given the state of the labour market, with low unemployment and employers screaming for workers, there is not more upward wage pressure. I suppose it may break out, especially if the government and the Reserve Bank cannot reduce the excess liquidity (higher interest rates are a means of doing this).
Note that we tend to equate inflation with consumer price inflation. In fact much of the liquidity enabled the house price bubble, a different form of inflation. Now that the housing bubble is deflating, there is one in the art and collectable markets. There is less booming in the New Zealand share market than one might expect, but that may reflect that their overseas equivalents are currently soggy.
Which reminds us to always begin an analysis of the state of the New Zealand economy with a review of the world economy. It is not looking too happy.
The Chinese property market appears to be a crash waiting to happen. Were China a capitalist economy, such a crash would cause havoc in financial markets but there is so much public ownership and intervention in China’s there may be a different outcome. The government managers of China’s financial system have never really been tested. Let’s hope they are up to it, although I doubt they have anyone of Bernanke’s historic knowledge, skills and judgement.
The story of the US economy is that it appears to be going into a downturn, precipitated in part by the US Fed raising interest rates. Those hikes are going to put pressure on interest rates throughout the world economy.
Britain is not so important in the world economy today. Its economy is struggling to adjust to withdrawal from the European Union, but those difficulties have been compounded by mismanagement by the short-lived Truss Government which seems to be economically naive. Its failure is well illustrated by Bill Clinton’s political adviser, James Carville, who said that ‘I used to think that if there was reincarnation, I wanted to come back as the president or the pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody.’ Hopefully, Truss’s misjudgements will not lead to ongoing difficulties in London’s financial markets which will impact on the rest of the world. She has almost certainly weakened London’s role as a financial centre (reinforcing Brexit’s effect).
The European economy is also struggling from the cutoff of gas and oil supplies from Russia. Fingers crossed that they have a warm winter.
The Russian invasion of Ukraine is causing difficulties to the world economy. One cannot have a war of that size without some impact. Wars do not come for free (even if the human costs of death and mobilisation are being avoided by most countries), most notably in rising prices which flow into the New Zealand economy, and supply shortages which restrict goods inflows. That is the origin of our ‘cost of living crisis’; we are helping to fund the defence of Ukraine.
Minister of Finance, Grant Robertson, says the New Zealand economy is well placed to deal with such shocks. I am more cautious, unless he means that we may not be damaged as much as some other economies. It is extremely difficult to avoid international impacts.
Domestically, we face the usual trying uncertainties. The probability of great difficulties is not high but it is not zero. You will observe that economists tend not to project ‘crises’, although they will talk about past economic and financial ones and look for parallels.
Unfortunately, the term ‘crisis’ is usually used pejoratively, typically without any clear analysis of what is going on, by those with political agendas wanting to justify a major change in direction which is really underpinned by ideology rather than analysis. The cliché, ‘never waste a good crisis’, is not an excuse for trying to manufacture one.
*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.
27 Comments
I see overkill in much of what we do... the transport authority for instance ... yes you can build better roads but sad fact is it only takes one lunatic and zero becomes unachievable. How many consultations are required before any mental activity is converted physical effort? How many designs does one need to efficiently construct a road and how much furniture do you throw on the side or in the middle of it. Here in TGA we have a project to tidy up Cameron rd and in many ways its an example of more money than brains...yes its a fancy project but at days end it wont improve traffic flows as all the extra space is given to footpaths cyclists and buses . Millions of dollars going into fixing something thats not really broken, whilst up on the Kaimai rd (sh29) folk are falling into potholes that bend car rims lined up like lemmings...So you might have a nice new mainstreet but can folk from out of town actually get to it... Another example is Health and Safety, this same authority overhauled its STMS system and has now burdened this industry with extra costs that have flowed onto employers and employees alike ,its made compliance a priority but my guess is its also made it harder to find someone that can stand on the side of the road and pick up a road cone thats fallen over because if you dont have the correct qualification you risk violating an overcooked code. Until the big players put the horse before the cart...it will be much of the same in lil ole NZ... if the rest of the economy runs along similar ideals its no small wonder we are headed for trouble....When you make simple things too hard, costly or complex....you have a small problem that snowballs into not financially viable ....
"Carnage for drivers as huge pothole takes out multiple vehicles' tyres in Bay of Plenty" (1.10.22 RNZ)
Cameron Road is more about replacing piping infrastructure than fixing the road? The Road, is being done as a consequence of other much neglected works.
around 3km of sewer pipes, some of which are over 100 years-old will be upgraded underneath Cameron Road as well as connections to properties and side streets.
https://www.tauranga.govt.nz/council/council-news-and-updates/latest-ne…
Says 11million to upgrade the 3km of sewer...nekminit...
11/03/2021 — Details of a $45 million government-funded project to futureproof Cameron Road are being shared with the community, so they can help ... (tauranga.govt.nz)
nekminit...
1/09/2021 — Another $13 million will be pumped into redeveloping Cameron Rd, but a transport lobby group has raised concerns that the now $60.5 million ... (bop times)
nekminit...
11/02/2022 — “Cameron Road has blown out from $45m to $74.5m on the commission's watch,” she says. Williams is also concerned that the spending will continue ...(stuff)
At that rate we will be lucky if they get done burning 100 Million on what was initially an 11 Million dollar job....OVERKILL
And lets talk about how well we install water/sewage and other services in NZ ...we tend to put it right in the middle of the road so if something goes wrong we have to divert traffic and cause chaos to fix any problem..When are these designers gonna start with designs that are servicable without getting an army of folk in to close off a section of road to fix a leak . Hows this for a stupid idea...put the services under the footpath in channels whereby the pavement sections can be lifted to quickly sort any issues...all that overkill and they still cant come up with an efficient design...too much time spent with road furniture...its not rocket science...keep it simple 'prefabricate off site' and go with what least impacts the majority.... I feel sorry for the retailers they must be tearing their hair out.... not hard too see why the economy is the way it is....Anyone got a pencil sharpener?.. my opinion....lol
Hooten is a pretty reasonable political commentator who at least admits to his bias.
It's a real demonstration of how shallow our pool is that he's able to stick his fingers into so many pies. In a normal world a PR professional wouldn't have this much reach.
I personally doubt that too many people with an interest in economics pays that much attention to him - apart from a view of the mind of a highly partisan Act supporter prone to hyperbolic critiques.
Remember the mafia never declare themselves as criminals. There are no investigative journalists in NZ,,,, and whoever is in power gets to decide whether they are inept or not. Sure we have opposition politicians.. who critique with the sole objective, of getting their own turn at the feeding trough. Sure we have opposition journalists who drive the narrative of the party they support. But in NZ we have noone who is objective, , the sacred cows have exterminated such people.
We have NZ first politicians with family members trying to get grant money while in power. We have national politicians with unholy alliances and friendships with the CCP leaders. We have labour politicians who have presided over mass donations to the property lobby,, to keep the ponzi afloat at the expense of all new Zealanders, and turned a blind eye to the fate of the uighurs. We have a green party who has largely sat idly by, if not promoted an energy disaster through the view that we should all drive electric cars, live in flats and ride bikes to work.. because that is 'sustainable'. We are a country with no real local banks and no refinery. The people of NZ borrow 2 year money on internaional markets at 4.7% and give money to foreign banks at 3.5%. Foreign banks with ex NZ PMs as board chairman. If this is the product of NZ democracy,, can we have another system please?
No feelings completely intact,, as is the analysis and it is my own. I don't believe anything here is an untruth. I don't believe anything constitutes an insult. The behaviour in our ruling class leaves a lot to be desired. It is poor. Now that is an insult, of the ruling class.
Note that we tend to equate inflation with consumer price inflation. In fact much of the liquidity enabled the house price bubble, a different form of inflation.
Yes, but it all stems from conversion of base to broad money. The govt / central bank responsible for the former and the retail banks responsible for the latter. Still represents flooding the mkt with money. And has been going on since the 90s.
The Chinese property market appears to be a crash waiting to happen.
Depends who you listen to. Some would say (Pettis for ex) it's already happened.
Minister of Finance, Grant Robertson, says the New Zealand economy is well placed to deal with such shocks
That is perhaps cold comfort to millions of Kiwis suddenly paying through the nose for food and transport.
Frankly the last person I'd trust for an objective assessment of anything is Robertson. Admitting everything isn't sunshine and rainbows would probably require some degree of introspection, and given his comments on housing, inflation and the performance of RBNZ, I don't think he's capable of it at this point.
In the short run, borrowing off low public debt levels can help prop up demand in a faltering economy, not shore up new supply. That does not work well for our economy given our dire current account situation.
For example, the government spent millions of borrowed monies on shovel-ready projects during Covid lockdowns. Much of it went straight to designers and consultants but did not result in new infrastructure due to lack of skilled workers holding shovels on site.
If inflation is the price we're paying for the Ukraine war, why did it start rising before the war began?
How could we have had a 40% rise in property prices - and thus a huge boost to the (nominal) wealth of the nation - coinciding with a global stock boom - without causing massive inflation, especially given real-world productivity did not rise? At this point I can't take anyone who insists it's a temporary supply-side problem at all seriously.
Well said Brian. It feels like National will do anything to come to power, even damage the country and its economy. Or are they projecting their own crises onto us all. They seem to be getting more desperate by the day. No new ideas, only recycling old ones and hoping that the myth of best economic manager continues. Keep on dreaming.
What connection is there between the article & National ?
... I'd have thought , between the current government & the reserve bank , the damage has already been done ...
Only time will let us know how bad the fall out will be from their excessive juicing of the system ...
When you're done shouting at shadows, you might want to check out the damage being done to our economy presently.
But of course, that doesn't count because red team good, blue team bad.
God save me from the insufferable tribalistic aversion to basic accountability.
''I am more cautious, unless he means that we may not be damaged as much as some other economies.''
Right Brian. That is it exactly. The FMs positive spin is just that. Spin. The reality is that we panicked when we should have been braver, thereby, creating the first half of the disaster, from which now we are now reaping the second half - of the same disaster.
Buggar!
.. and , if you listen to Micheal Baker or Souxsie Wildes you should still be very fearful , cowering in your Hobbit warren , masked up 24/7 ... because another Canolavirus could be upon us at any moment ... worser ... horribler ... than Oh Micron ..
Panic now ... get ahead of the crowd , start panicking early ... arrrrrrrggggghhhhh ...
“Thus far, the excess liquidity in our money markets has not fuelled the inflationary forces in the economy.”
It is hard to believe you can make this statement without providing some supporting evidence of why excess liquidity has not fuelled inflationary forces in the economy.
It is certainly not a view supported by the vast majority of economists.
Roger Kerr made the following comment in another interest.co.nz article “Sure, the RBNZ (in hindsight) went too far with money printing and cheap loans to the banks in 2020 and 2021 and we are now paying the price with tight monetary policy to contain the resultant inflation.”
I wonder who is right?
I suggest you do a poll of all the economists & see how many of them would be prepared to put their name down to support your view.
Why poll economists? What do they know about the real world?
Tony, cast off your assumptions, find 10 free minutes, and read this:
https://ourfiniteworld.com/2022/10/18/why-financial-approaches-wont-fix…
Brian, you too.
The High Priests are being found wanting, the creed - like many before it - likewise. Time we addressed the truth, eh? All life, and all infrastructure including clusters thereof, are energy-dissipative. We can't solve energy reduction with money. Fact.
Read article - slide 15 says;
“Governments find it easy to increase money supply, but they can't increase energy supplies in the same way. Inflation becomes a problem, if added funds get back to the consumer.”
Seems like they are saying increasing money supply does create inflation problems, something that Brian doesn’t think has been a problem at this point.
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