Matt Nolan

2008 crisis in history

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Econbrowser has a great post which takes this post by Brad Delong and adds some historical background.

The post mentions that policy action will aim to prevent the mistakes of 1929, the 1970’s, and Japan in the early 1990s – behind the slight humor this is actually a very important comparison.

One thing I would like to add is that the 1970’s crisis involved a huge negative terms of trade shock for a lot of the developed world (oil prices!) which we have already experienced this time around (I believe there was a smaller TOT shock in the early 90’s) – as a result, policy need to take into account this difference.

It isn’t just that policy was too tight in 1929 and the early 1990’s and too loose in the 1970’s – there are fundamental differences in the shocks being faced. Furthermore the structure of the economy is entirely different (unions are weaker, communications and information dissemination is a lot more rapid, prices appear to be more fluid in a lot of cases). As a result, a historical comparison can only take us so far – although we must not discount histories ability to provide an intensely useful benchmark.

Matt Nolan

Lessons from capital inflows

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Capital inflows are the reverse side of the current account deficits that we like to discuss on this blog (most recently here). For some reason a capital account surplus is often seen as a good thing by journalists while a current account deficit is seen as a bad thing (ht Bluematter). This does not make sense to us as economists, as we know they are the same thing.

However, I suspect the difference in attitude stems from some dose of reality – fundamentally there are good and bad elements in a current account deficit/capital account surplus, and when the two attitudes shown by journalists are put together we get a fairly good breakdown of what is really going on 🙂

On that note, Dani Rodrik discusses a paper on capital inflows. As Dr Rodrik states:

They find that capital inflow bonanzas have become more frequent as restrictions on international capital flows have been removed, that these episodes can last for quite some time (lulling policy makers into thinking that they are permanent), that they end with an abrupt reversal “more often than not,” that they are are associated with greater incidence of banking, currency, and inflation crises (except for in the high income countries), and that economic growth tends to be higher in the run-up to a bonanza and then systematically lower

Now New Zealand is a country that has had some capital inflows – so lets discuss what this view of capital inflows means for us:

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Matt Nolan

Quick links for Lehman

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Can be found at this excellent post on Economist’s View.

Lehman is down, Merrill Lynch is sold – this is far bigger than the collapse of Bear Stearns (especially since it appears to be absent a straight bailout).

I suppose we will have a clearer indication of what is going on tomorrow. Expect our dollar to suffer on the back of the higher perceived risk in the world economy – the level of volatility today (without any clearly terrible economic information, although manufacturing was quite average 😉 ) indicates that expectations of increased risk are already feeding into investor movements:

Source (NBNZ)

Just remember there are two main risks to NZ from any foreign crisis:

  1. Cost of credit (as we have a large stock of debt),
  2. Our export prices/volumes.

These aren’t independent – if the second factor stays solid, our ability to fund debt (and people’s willingness to lend) will stay fine. So lets just hope our milk and meat stay popular 😛

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Matt Nolan

Thinking about commodity prices: What do you think the risks are?

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The June terms of trade numbers (due out on Wednesday) are likely to come in lower than they did in March – as a result of the huge lift in petrol prices over the quarter. However, even so, New Zealand’s terms of trade will still be at a historically elevated level.

A higher terms of trade implies that we need to sell less in order to buy the same basket of goods overseas – in other words, it indicates that our country is effectively wealthier. This is ultimately a good thing for the country.

The increase in the terms of trade has been the result of a lift in the price of commodities that New Zealand sells overseas – specifically dairy. More recently beef and lamb meat have joined the party, while other commodities such as coal and aluminum have also performed well. Although import prices have also increased (specifically the cost of inputs such as fertiliser and fuel), the lift in New Zealand commodity prices has been dramatic.

However, risks to commodity prices have appeared, with the dairy component of the September ANZ commodity price index recording a 7.5% slump in August!

Do we think that dairy prices can be sustained near current levels – or is the price going to fall sharply? Even if we don’t have a bubble in dairy prices, Economists View has a good piece on why commodity prices may have a long way to correct – specifically, the potential for a supply response.

This begs the question – is the increase in New Zealand’s income going to last. How much of it is a structural increase? What do you think – I will write on it following the TOT data.

Matt Nolan

Government in perspective: What is the “other”?

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When people look at government they often see a group of people that they feel are responsible for taking care of the country. Looking deeper, some people see a representation of society that is supposed to do what is in the social interest. Looking again we might see an organisation who is dominated by interest groups and competes with other institutions for resources in the national economy.

All these views of government are true. This does not make them evil or virtuous, they are merely a central component of the current social structure.

Now no matter what view you have of government, there is one thing you are likely to believe – that government should do what is in your countries best interest. However, is this right?

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Matt Nolan

Biofuels and food prices

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Why is everyone acting so surprised about the fact that biofuel regulation will (and has) led to higher food prices? We said it would in August (well to be fair, Keith Woodford from Lincoln University said it before us, and other people were saying it before that 😉 ).

However, unlike some commentators, we do not believe that the fact that world food prices are rising should impact our decision on whether to make biofuels mandatory (something I don’t agree with), as NZ’s demand for biofuels will be so small that it won’t have an impact on the world price for food.

Also there are some unintended benefits for NZ from the mandatory regulations in the US and Europe. Corn etc has become more expensive, making it more costly for foreign dairy farmers to produce milk. This is part of the reason that milk spot prices have doubled over the last year – injecting a lot of money into the NZ economy.

On that note, I want to complain about this: (h.t. Kiwiblog)

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