Matt Nolan

Watch the curve: Thoughts for the RBNZ September MPS

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Tomorrow its more than likely the RBNZ will leave the official cash rate unchanged.  Following that a lot of people are going to say one of the following:

  1. Bah, the world is in crisis they should slash rates
  2. Bah, inflation expectations are elevated and CPI growth is high, they should be increasing rates

Or who knows, some people will probably say both.

Anyway, even if they leave the official cash rate unchanged this does not mean they would have done nothing – in truth even when they leave the OCR unchanged they may loosen monetary policy due to the seizing up in global financial markets.  They do this by changing their forecast for where the official cash rate will go:

Source (RBNZ)

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Matt Nolan

Terms of trade: An Australian perspective

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Institutional Economics has some good points on the boost to Australia’s terms of trade – points we can keep in mind over here.

Relative to what we pay for our imports, Australia now gets higher prices for its exports than at any time since at least 1870. This was illustrated by Reserve Bank Governor Glenn Stevens’ observation that ‘five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. Today it is worth about 22,000 flat-screen TV sets.’

This increased international purchasing power is attributable not only to rising commodity prices, but also lower prices for imports, not least manufactured goods. The flip side of Australia’s terms of trade boom is the collapse in the terms of trade for countries like Japan.

So a higher terms of trade allows us to buy more imports for the same quantity of exports – something that is important to keep in mind when we bang on about “rebalancing” the economy.  Furthermore:

Our best response to the terms of trade boom is to become even more open to inflows of foreign labour and capital and to reduce the government’s command over resources so that the mining industry can expand with less pressure on other sectors. While the non-mining sectors will contract relative to mining, they can still expand in absolute terms if we continue to remove government-imposed resource constraints to overall economic growth.

The industries that aren’t experiencing higher returns should be expected to fail – proping them up is a policy that will just lead to worst outcomes from everyone.

So much of what has happened to New Zealand has been due to massive changes in the terms of trade – both in the 1970’s and in the 2000’s.  Asking for the “balance” of the economy to return to some past point doesn’t make sense – when the “prices/values” that dictate this point have changed … a change in economic structure is what NEEDED to happen.

It is possible some things may have gone a bit far – but it is better for us to try and understand why, where, and how before introducing policy, rather than aiming to meet some magical level of tradable to non-tradable GDP (or real consumption as a share of GDP).  If you want more details on the why, where, and how – look around the blog (pro-tip search imbalance), or contact me directly.

Matt Nolan

Self interested story of the day?

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So an investment bank comes to the conclusion in a report that too few New Zealand firms are listed, especially on New Zealand’s stock exchange.

Aha.

Why do people take all this capital deepening rubbish seriously – we are a small open economy, with open access to financial markets.  As long as price signals are in place, and property rights are protected, people will invest in things given the incentives they face.  Trying to get people to invest, and invest in specific place, just for the sake of it is bad policy.

When the goal is to make sure that “NZ Inc” has the highest reading on the “GDP meter” as possible this might make some sense (I stress might) – but if we are actually interested in achieving the best outcome for society, I haven’t seen a good argument for capital deepening.  Yes, I’ve read papers on it – but I’ve always found that they didn’t cover the underlying concept of allocation and welfare in the context they should be covered.

Matt Nolan

Youth training policy

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I see that Labour has suggested a youth training policy – I like it.  I am not a fan of their tax policy (I’d fund by reproritising spending, or just increasing tax rates if society so desires, or best of all – actually improving the tax system), but that has nothing to do with this.

I’ve long stated that tax, benefit, and training policies should be more highly integrated, and I see this as a step in the right direction.

I am surprised to see National’s reaction.  For one, they suggested a similar thing prior to last election.  Also, they seem to be going on that Labour keeps announcing this and never doing it – but if this is good policy (something National hasn’t disputed) then why does their policy differ?  If its good its good – criticise policy on its merits right.

Matt Nolan

A quick question … and an answer

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From point 3 on this piece on Rates Blog we have the following statement:

It’s good to see the issue of free trade being debated. Frankly, it hasn’t worked for the middle classes of the developed world. They got cheap stuff, but lost their jobs.

How exactly does this make sense when during the “peak” interventions by China (in terms of their devalued currency) our unemployment rate was at record low levels …

I’ll answer, its because the idea of “taking jobs” doesn’t really make sense – they subsidised their exports, and lent the money to buy them at a low rate of interest (driving down real interest rates, and driving up borrowing).  This imbalance creates losers – the solution isn’t to copy it.

“Jobs” aren’t being created now because of uncertainty – that is the key.  We need to talk about ways that we can deal with uncertainty at the moment (if at all) – not start arbitrarily restricting trade.

Protectionism is not the way to go.  There are two types of people who want protectionism:  People like Bernard who want us to do something they believe will improve outcomes, and people like car manufacturers in Aussie who are just self-interested.  I promise you that if we go down the protectionist root route (turns out I’m illiterate, especially when writing these things at 1am), the only people that will be happy will be these car manufacturers – not society, and not many of the people asking for such measures now.

 

 

Matt Nolan

A note on NZ’s debt level

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Over at his blog Roger Kerr shows a graph of net external liabilities for a range of different countries – showing that in March 2009 New Zealand was pretty far out there.

It is true that our net international liability position is pretty big, it is also true that even though it might be exagerrated in the statistics (due to what is counted, and what is missing) it is something that is concerning – and worth keeping an eye on and trying to understand.  However, I’m not going to do either of those things here.

Furthermore remember that “net debt of 90% of income” doesn’t sound quite as scary – even though that is what any ratio of GDP will be.  There could be a number of demographic reasons – reasons that may not really matter (especially if the debt is tied to say, young individuals), there could have been a big temporary negative shock to incomes (which there was), and there could be a number of other reasons why the stock of debt was so large relative to current income.  However, I’m not going to go into this either.

Here is a graph, that shows this position between 1989 and 2011 (although the 2011 figure is estimated, I used the quarterly NIIP data and the current price expenditure GDP data to fill in the gaps for the March 2011 year).

Source (the excellent Stats NZ infoshare site)

To start with, note that the position mentioned in March 2009 was the most extreme on record.

Now, the position looks like it improved a lot – but a bunch of that was earthquake related (given that future claims that haven’t been paid out yet are counted as an “asset” for NZ).  The key thing I want to point out is that this elevated debt position figure is a longer terms phenomenon then is being suggested in some places – it didn’t turn up during the housing boom, it has been sitting around all along.  As a result, if we want to understand it, this is an important point to keep in mind 😉

One thing I will bother to mention – “high” debt is the symptom of an issue, not the cause of a problem.  The difference between those two ways of viewing it is substantial (and less pedantic then you may think).  This is why we need to understand what is going on and  Get Help to deal with the problem directly – rather than just arbitrarily trying to tackle debt.