Matt Nolan

Is this all a rational reaction to falling household wealth

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House prices in New Zealand have fallen 6.8% on a year earlier according toe QVNZ (for November). Given that inflation was running at somewhere around 4% during this time this implies that the real value of houses has fallen by around 11%.

Now, prior to the recent crisis, households based decisions on the (wrong) assumption that house prices would continue to appreciate. As a result, relative to what has happened, household have “over-borrowed”. The sharp pullback in consumption is their rational response to the sharp decline in households expected lifetime wealth.

This is consistent with David Rosenberg’s view of what is happening in the US economy. (here is a version of the report)

If this is the primary factor behind the sharp drop in economic activity then this implies two things:

  1. We can expect further drops in consumption as house prices moderate over 2009,
  2. This household rebalancing process has to occur (unless we expect expectations of household wealth to overshoot on the downside) and so there is nothing that the government can do to help us.

Thoughts?

Matt Nolan

Why New Zealand’s current account deficit will begin to fall

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Two releases today have made it obvious that the New Zealand current account deficit will decline over the coming quarters.

The first was Japan’s reported current account surplus – it is down 66% on a year ago. With a range of structural factors also likely to drive down Japans CA surplus over time (here) and with other Asian nations following in Japan’s footsteps, we are running out of countries that will fund our debt.

Secondly, S&P has given our currency  rating a negative outlook going forward.

As a result, isn’t it good that New Zealand consumers have been slashing back spending and cutting debt in the face of recent mayhem – rather than being forced to adjust even more sharply further down the line 😛 . A CA of deficit of below 5% of GDP may actually be a possibility by the end of 2009 – who knows 😀 .

However, if this is the case a raft of government borrowing to “stimulate” economic activity would only make things worse – something that is worth keeping in mind over the coming months methinks.

Matt Nolan

Branding too big to fail: TBTF

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Too big to fail has to be one of the “catch phrases” of 2008.  Catch phrases often deserve some fan art – however, over 2008 I didn’t see any.

The Minneapolis Fed obviously felt that fan art was necessary – which lead to this banner (ht CPW):

Excellent.  The related post is here.  In it, they discuss how to identify and quantify the issue in the future – so Fed action does not appear so “ad hoc”.

Matt Nolan

December quarter NZIER QSBO

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The NZIER December QSBO is out.  Ohhh dear …

Let’s just say that the domestic economy appears to have cooled rapidly in the December quarter – and businesses are running scared of the March quarter.

It does appear that there is more than a structural correction going on now – confidence, and as a result demand, have given way.

The labour market data will be key for determining whether the RBNZ cuts 100 basis points, or more …

Matt Nolan

Israel-Palestine Conflict: A general model?

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This blog tries to remain relatively apoliticial. I do not intend to break this by illustrating as opinion on the Israel-Palestine conflict, it is a difficult issue which I could do no justice. However, I do like to try to understand the world around me, so a relatively generalised model that describes these types of conflicts and “international policy advice” in the situation would be useful to me.

I aim to sketch out a few thoughts I have based on the study of economics. If there is a political scientist out there (or anyone else for that matter), I would be more than happy to hear about the multitude of logic flaws in my description 😉

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Matt Nolan

Is the US overestimating its “potential”?

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Over in the good old US the Congressional Budget Office has released their forecasts (ht Paul Krugman). It is an ugly sight, as would be expected, with growth falling miles below its “potential” level and a large negative output gap opening up.

As Paul Krugman points out, this type of large output gap would provide massive deflationary pressure – he suggests that we could have a deflation rate of between 3-5%!

Now, I’m sure his logic is spot on given this estimate of potential output – however this raises a question for me, has potential been forecast correctly? Generally, growth in potential output is forecast to be relatively stable – and trends along with historic growth. But this doesn’t feel quite right. There are two reasons why this may fail:

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