Matt Nolan

PSA: Just more misleading statistics

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I was interested to see the Standard and No Right Turn link to a PSA advert from the latest Listener. The advert seems like a whole lot of mis-information piled right into a single page.

The criticism of the ad is quite simple – they come up with a sum and then they take away jobs people actually do care about in order to get to that sum, rather than actually describing the jobs that will be cut for any tax cut. Now I think people should know that a tax cut will lead to a cut in government spending – but telling them it will lead to less nurses is just wrong.

Furthermore, by illustrating the individual benefit but focusing on the full cost to society from the change, they exaggerate the size of the cost to the individual. If we have one less policy analyst what will that cost the individual compared to the 10c gain?

Ultimately, I agree that we as a society need to discuss the trade-off between the level of government spending and the size of tax cuts. However, the type of argument provided by the PSA ad (along with their constant stream of news releases) implies that spending by government is “virtuous” while the same spending by the individual is “waste” – I am not comfortable with this line of reasoning.

Anyway, given current policies and polling I suspect the trade-off will look more like this:

Matt Nolan

Currency situation US: One more point

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In an earlier post we mentioned that the US currency appears to appreciate in the face of bad news – a bad sign for economic stabilisation. After saying this, I noticed two articles up on bloomberg:

Dollar Falls on Speculation U.S. Bailout Plan to Increase Debt

Treasuries Prove Irresistible as Deflation Bet Trumps Paulson

Very interesting.

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Matt Nolan

June 2008 GDP preview: Recession!

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The June quarter seems so long ago now, but it will not be until Friday that we find out whether the economy managed to have a technical recession over the first half of the year – following the 0.3% fall in March.

The RBNZ suspects that there was a 0.2% decline in economic activity in the June quarter (seasonally adjusted). When they released this figure this was on the HIGH side of market expectations – and since then market expectations have deteriorated further.

Remember, we can think of GDP this way:

GDP = Consumption (C) + Investment(I) + Government Spending(G) + Exports(E) – Imports(Im).

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Matt Nolan

One thing that worries me about the US economy

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Although the high levels of public and private debt in the US should concern me, and the collapse in asset values should have me shaking in my boots, there is another factor that has me really concerned about the outlook of the US economy: The exchange rate.

Now, the US$ is still weak relative to history, sure, but that isn’t my issue. My concern is the way the US$ moves in the face of new information about the US economy.

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Matt Nolan

June 2008 current account deficit: Cause for concern?

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On Friday, Statistics NZ told us that the current account deficit had spiked to 8.3% of GDP in June, from 8.0% in March.

When I was watching Agenda, some of the commentators appeared to view this increase as a bad thing. Now I have said before that a current account deficit is not a bad thing – but there did appear to be some genuine concern on the show. Fundamentally, people were worried as the economy was slowing, which normally means imports are slowing, which should narrow our current account deficit – but it didn’t happen.

There are two reasons why the deficit didn’t narrow:

  1. One off capital expenditure for the Tui oil field (combined with continued strong plant and machinery imports),
  2. High oil prices.

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Matt Nolan

A 75 basis point cut on the cards?

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Recent credit market uncertainty has seen the funding cost for retail banks rise significantly. It is possible that the impact of the 50 basis point cut in the official cash rate on September 11 could be more than wiped out.

As a result, if credit market uncertainty remains over the next month there will be substantial pressure on the Reserve Bank to cut further – in order to provide the “relief” to households that they have deemed necessary. Given that the market was torn between a 25 basis point cut and a 50 basis point cut in October already, recent uncertainty could well push the Bank to a massive 75 basis point cut!

Now, I’m definitely an inflation hawk. However, I have no issue with the Reserve Bank cutting interest rates in the face of rising financing costs – as they are effectively cutting in order to stand still. However, I would like it if the Bank could state that they are cutting to do this more transparently. For example, if they could create an index which represents total funding costs and forecast it out they could show that they could show that they are keeping financial conditions in restrictive territory.

Not delivering this message effectively put inflation expectations at risk and damages credibility – in this sense I strongly agree with Stephen Toplis from BNZ.