Matt Nolan

Why does the target rate matter?

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WIth inflation heading far outside the Reserve Bank’s target band both Kiwiblog and Kiwiblogblog have had a little to say about inflation targeting.

David Farrar at Kiwiblog states that inflation outside the range is bad, and in fact our relevant target band should be 0-2%. He also states that we can act like the target is truly the point at the middle of the band – ergo we currently have a target of 2% (in the 1%-3% band). David then finishes by saying that current interest rates will have to stay high – something that will be a concern to people.

Wat Tyler (a good historical reference of a left wing blog may I add) disagrees with this way of looking at the target, states that interest rates were higher in the 90’s and so should not be such a concern, and says that a little breakout from the inflation target doesn’t matter – as long as we keep inflation in single digits.

Both sides have points – lets try to dig a little deeper and figure out what my opinion is 😉

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Will Taylor

AIAL: Access Denied!

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The government has blocked the sale of 40% of Auckland International Airport (AIAL) to the Canada Pension plan as it does not pass the test of “benefiting New Zealand”.

it’s a good thing those money hungry Canadians aren’t going to bleed the economy dry by taking control of a “strategic” asset.

On a serious note, I still don’t see what the issue is. We’ve discussed this previously here and I don’t feel the need to repeat the arguments we made. It’s not like they can take they airport and move it somewhere else. If they run the airport down like everyone is worried about then travelers can bypass New Zealand and go to Australia. If this happens the airport loses money so why would they do it?  People will point to the railways and the our phone infrastructure as examples of strategic assets that were run down and use this as an argument that the same thing will happen to AIAL. They key thing that people ignore here is that back in the day there weren’t many close substitutes for the railway and phone communications. Therefore a firm could profitably cut expenditure and reduce quality since there weren’t many credible substitutes (i.e they wouldn’t lose customers).

Ultimately I can’t help but feel this is the political decision of a government that is scared of being associated with “asset sales” coming into an election year, rather than a decision that has been based on any sound economic reasoning.

It’s been a while since I’ve posted,have you missed my sarcasm?

Agnitio

jamesz

Beer prices rise with the tides

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In the spirit of talking about big issues that affect the little people, NIWA says ordinary NZers should be very worried about climate change:

Jim Salinger, a climate scientist at New Zealand’s National Institute of Water and Atmospheric Research, said climate change likely will cause a decline in the production of malting barley in parts of New Zealand and Australia. Malting barley is a key ingredient of beer.

“It will mean either there will be pubs without beer or the cost of beer will go up,” Mr. Salinger told the Institute of Brewing and Distilling convention.

I don’t know whether to believe the doom merchants, but it certainly has me worried! Maybe this is the incentive people need to actually do something. Having to trade off between big cars and beer might spur ‘mum and dad New Zealanders’ into action! Or we could just have a carbon tax…

(HT:Slashdot)

goonix

The curse of human capital

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Consider the ‘traditional’ capitalist (envisage the Monopoly™ man). This capitalist owns the means of production, such as a factory, or piece of machinery, a building, or piece of land. The capitalist uses their means of production to extract economic profit.

Times are changing. As we move towards a service based economy, like all other developed countries, increasingly the means of production take the form of human capital. Human capital is the capital that is built up within an individual, for example through education, on the job training and everyday work. The holder of human capital is herein referred to as the ‘modern’ capitalist (envisage a slimmer, more refined Monopoly™ person, possible black, possibly Asian, possibly a woman, possibly trans-gender – we don’t discriminate).

Human capital is the foundation of professional service firms, ranging from the glamorous, such as private sector economic consulting firms, to the pedestrian, such as lawyers and accountants.
But this trend towards human capital accumulation brings us to what I term the curse of human capital. Read more

Matt Nolan

March QSBO and PMI: What’s happening to New Zealand confidence?

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Two days ago the NZIER Quarterly survey of business opinion (QSBO) told us that firm confidence is low – but pricing intentions are high. Today the Business New Zealand performance of manufacturing index (PMI) told us that manufacturing activity was contracting for the first time since January 2006.

Both of these results are poor, so lets have a slightly closer look at them.

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Matt Nolan

Would a fixed exchange rate save NZ?

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According to the Standard, having a free floating exchange rate puts New Zealand at the mercy of speculators – I take this to mean that the author would prefer New Zealand having a fixed (or at least semi-fixed) exchange rate.

What does having a fixed exchange rate mean? Well, if we have a fixed exchange rate we are setting the value of our dollar compared to the value of other countries currencies. In this case, we have certainty about the future export and import price of goods – which is a good thing.

However, in this case our currency is just as open to currency speculation (if not more so, as the price of the currency is fixed, making yield focused attacks more of a “sure thing”), implying that this perceived benefit does not exist – it merely moves on to influence another economic variables. In fact what it does (as long as we don’t close the country off to all capital markets) is removes New Zealand’s ability to control its interest rate (as the government has to print money at a level required to keep the exchange rate fixed) . In economics this is termed the impossible trinity.

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