Matt Nolan

Is credit card availability falling?

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In the US it appears that this may be the case.  American express is offering some clients a $300 gift card to close their accounts and pay off credit card debt in the next few months (ht Marginal Revolution).  This is interesting, given that a few months ago (in the middle of the explosion of the credit crisis) there still appeared to be plenty of available credit for consumers.

Will we see the same sort of deals in New Zealand?  According to RBNZ figures (here) credit card limits are still growing at a reasonable clip (4.3%pa).  Furthermore, we know that credit card rates have fallen – implying to me that banks/credit card companies are still willing to provide credit to consumers.

However, interest bearing debt has also risen quite sharply – as “interest bearing debt” is generally debt that is in some way overdue this way be a concern.  In the US it was concern about overdue payments that has lead to a pull back in credit card availability – implying that there is scope for it to happen here. When looking for a new credit card which you will sure get approved, visit this review of the surge mastercard.

Personally, I think a sharp decline in peoples willingness to use credit cards will be the primary factor behind growth in credit debt going forward – as a result, I would expect the interest rate on credit cards to fall further as well.  I don’t think we will have to worry about credit card companies trying to restrict lending amounts …

Matt Nolan

The spectre of unemployment

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For me, there are two categories where the costs of rising unemployment fall (ignoring any indirect costs through taxes and benefits):

  1. The costs of an unemployed person/resource (so their pain, and the fact that we have a market that isn’t clearing),
  2. The costs to those who become scared that they are going to become unemployed.

Often when we think of recessions we think about people who become unemployed – as it is hard for them. If you are an economist you probably also think about how much the under-utilisation of resources vexes you (I know I do).

However, the cost of fear, and the uncertainty that comes with it, can be just as devestating – just ask 1 in 5 New Zealander’s.

As we have mentioned before – the costs of a recession fall disproportionately on those that lose their jobs. However, the very human attribute of fear ensures that some of the psychological cost is indeed spread around.

Update:  Although this does mean that 4 out of 5 people aren’t scared of losing their jobs at present.  Are we that safe, or is their more fear to come.  I think that the economic situation could be much stronger than some economists are stating (stronger than the NZI 11% UR call, or ANZ’s 8%) AND we could still have more households becoming fearful.

Matt Nolan

NZX at a five year low

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So the New Zealand stock exchange is at its lowest level in five years.  So what’s going on?

  1. Has the market been over-valued this whole time?
  2. Has the value of our capital (the implied future earnings of that capital) really fallen levels unseen in five years?
  3. Is the market over-reacting?
  4. Or finally, is the NZX-50 just massively unrepresentative of the actual performance of New Zealand capital?

However, to put our fall in perspective, the US S&P has just hit a 12 year low – and that is a much broader index.  I find it hard to believe that the value of capital in the US is down to its 1997 level …

Will Taylor

The financial crisis explained in simple terms

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This email was passed on to me by my office manager. It makes what happened seam absurd:)

Heidi is the proprietor of a bar in Berlin. In order to increase sales, she decides to allow her
loyal customers - most of whom are unemployed alcoholics - to drink now but pay later. She keeps
track of the drinks consumed on a ledger thereby granting the customers loans just like this hard money lender Atlanta Georgia service.

Read more

Matt Nolan

Unemployment over 11%?

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NZI has suggested that unemployment may go over 11%.  Now although it sounds like this estimate is no more than random conjecture (the countries in the Rogoff study are not comparable to the New Zealand case), it is still worth putting what this means in some historical context.

unemploySource (Infoshare)

The time axis above gives us the “number of quarters”.

So during the recession of the late 80’s in NZ, when we suffered a massive shock to wealth (falling stocks), bank failures, threats of a credit downgrade, tightening fiscal policy (because of our high sovereign debt), tight monetary policy, a falling terms of trade, structural adjustments in the economy (as we dumped tariffs etc), and we had relatively inflexible labour and goods markets – unemployment peaked at 10.9%.

Now even if we believed the situation in NZ is as dire now (I think it is in some places overseas – but not here) it is important to note that it took five years for unemployment to get from 4% to 10.9%.  Even in a worst case scenario I think we can expect the adjustment to be similarly elongated this time.

Matt Nolan

Refusing bailouts: Sweden

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The raging capitalist nation of Sweden has stated that they are against government bailouts for manufacturers (ht Econlog):

“Voters picked me because they wanted nursery schools, police and nurses, and not to buy loss-making car factories,” Enterprise and Energy Minister Maud Olofsson told Swedish public radio.

Very cool.

In other news I caught wind of a World Bank paper that said New Zealand was more protectionist than Europe – these are crazy times we live in 😛