There's an old saying that nothing is certain in life except death and taxes. I would, however, add a third thing. Change.
Therefore I welcome the acknowledgement of this from central banks on both sides of the Tasman Sea this week.
Admittedly it's a bit of a roundabout acknowledgment from the Reserve Bank of New Zealand (RBNZ) in its latest Financial Stability Report (FSR), issued on Wednesday.
"The combination of high interest rates and low unemployment makes the current economic environment unique in recent history, and as a result the pattern of lending stress may differ from what is projected. In addition, lending stress may not rise smoothly as unemployment rises and may accelerate when unemployment rises above some threshold, although this relationship has changed over time," the RBNZ FSR says.
Taken in its entirety a cynic could suggest this paragraph is the RBNZ admitting it has no idea what's going on. I admit that thought crossed my mind. However, the "unique in recent history" bit also really caught my eye. Thus my ultimate takeaway is the RBNZ is out of its comfort zone. It's data, modelling and analysis is struggling to keep up in an evolving world.
Comments from the Reserve Bank of Australia (RBA) about change were more direct. They came in a speech by RBA Assistant Governor Brad Jones on Tuesday.
"The nature of the emerging risks we are likely to confront over the next decade have a different complexion to those of recent decades. Some of these risks could originate from within the financial system, such as the risk of rapid-fire deposit runs in the digital age, spillovers from entities that (individually) are not systemically important and higher interest rate volatility. Importantly, other emerging risks are emanating from outside the system – geopolitics, operational risk and climate change – and for which there is no historical precedent to guide us," Jones says.
There it's the "no historical precedent" bit, in particular, that jumps out at me in a really interesting and timely speech.
Of challenges and resilience
The financial system, our species and planet, face major challenges. Whilst focused on financial stability, speaking from the perspective of a central banker and financial regulator, Jones highlights some key challenges.
"If we are entering a decade laden with new types of risks, some of which could interact, the second main message is that we need to rethink the concept of resilience," he says.
Here are some of the key issues Jones highlights.
On social media:
"Herding effects associated with social media present a new challenge for financial regulators. And it is clearly easier to withdraw deposits at the stroke of a keyboard than it is to stand for hours in the rain outside a bank branch and bury cash in the yard."
"Money can now flow out of institutions and markets with unprecedented speed in response to the rapid spread of information and misinformation, including that amplified through social media."
"The ubiquity of social media, combined with 24/7 access to banking and payment services and more globally connected trading platforms, raises the possibility that a shock somewhere in the financial system metastasizes into a broader self-fulfilling crisis of confidence."
The social media comments relate to US bank runs earlier this year, where Jones notes the speed of deposit runs was unprecedented - that word again - in affected banks.
"As a case in point, Silicon Valley Bank lost 30% of its deposit base in a matter of hours, with a further 50% poised to be withdrawn the following day. In our current system, any bank would struggle to survive a run of this magnitude. It was far beyond the provisioning required under Basel III [banking regulations], and more severe than the fastest runs experienced during the Global Financial Crisis."
More interest rate volatility
Jones also suggests a period of structurally higher interest rate volatility than what we have become used to is ahead. His reasoning for this is outlined below.
"The great moderation is behind us. The global economy now appears more vulnerable to stagflationary supply shocks, including from the rewiring of globalisation, geopolitical and political economy tensions, and energy shocks from climate change (and related policies). This contrasts with recent decades, where developments on the supply side of the economy were typically favourable for growth and inflation and so dampened financial market volatility."
"A higher and more volatile bond term premium. For the better part of three decades, the term premium on bonds declined relentlessly. This reflected factors that are unlikely to continue, including declining uncertainty over future inflation outcomes and real policy rates, coupled with structural supply-demand imbalances in bonds that meant governments were able to issue debt with little or even negative term premia."
"Reduced smoothing from price-insensitive buyers. To varying degrees over the past two decades, volatility in key bond markets has been suppressed by the bid from foreign exchange (FX) reserve managers and domestic asset purchase programs by central banks. Again, this era now seems behind us. In recent years, reserve managers have become net sellers of US Treasuries and, on current plans at least, central banks will be reducing their domestic bond holdings for years to come. This is occurring against a backdrop where broker-dealers have reduced ability and willingness to bid for bonds during periods of heightened volatility."
Other factors Jones cites include the slow-burn fragmentation underway in the world, noting trade and financial sanctions, including counter-sanctions, were increasing even prior to the Russian invasion of Ukraine in February 2022. Furthermore 'just in time' efficiency is being traded off for strategic resilience in supply chains, new payment messaging systems are emerging, and FX reserves are being shifted to countries and assets viewed as less vulnerable to seizure.
He also says lower levels of foreign direct investment, portfolio investment and bank credit is flowing between countries not closely aligned on foreign policy issues, while "fraying support for international cooperation risks hampering operation of the global financial safety net."
With increased tensions between the US and China, for example, Jones cites "risk tensions escalate into conflict among countries critical to the global economy." And the potential for, and consequences of, cyber-attacks is increasing.
"Events over the past two years give a sense as to the underlying stress transmission channels. Global shipping could become prohibitively costly or uninsurable along certain routes. Global financial conditions could tighten abruptly, with key funding markets, risk asset prices and cross-border lending severely affected. Cross-border assets could be frozen or seized. Payment systems and financial market infrastructures could be affected by sanctions and counter-sanctions. Cyber-attacks on key institutions could become more prominent. Disruptions to global commodity markets would be most significant where global production is concentrated in a small number of countries and where key trade routes are affected."
On top of all this there's the increasing impact of extreme weather events.
"Risks to financial stability resulting from climate change and related policies will be with us for years to come. Physical risks from more extreme weather patterns and higher average temperatures can reduce the value of assets and income streams in sectors and parts of the country. Transition risks, including unexpected changes to regulations and consumer preferences, can also lower the value of assets or businesses in emissions-intensive industries. These risks can result in unexpected losses for lenders, increased claims on insurers and write-downs for investors – as we are now observing. Internationally, direct exposures to emissions-intensive businesses are largest for investment funds, followed by insurers, and then banks."
He adds that our understanding of climate-related risks to the financial system is still developing, highlighting rising insurance premiums and the potential for private insurers to withdraw coverage from high-risk regions.
A time for open minds and out-of-the-box thinking
Sometimes it's easy to get the impression central banks are all powerful. Certainly RBNZ interest rate decisions and use of financial stability tools such as loan-to-value ratio restrictions on low equity mortgages have major impact. And the US Federal Reserve, the big kahuna of central banking, has significant global impact, sometimes even when one of its senior figures merely opens their mouth and something comes out.
But many things remain outside their control, and they have no crystal ball with which to look into the future. The RBNZ can't do anything about international oil prices, for example, which have a major impact on the NZ economy. Nor can it ease tensions between the US and China or prevent Vladimir Putin from invading Ukraine with the subsequent impact on energy and food prices.
In terms of predicting the future, as Covid-19 swept the globe in March 2020 the RBNZ, and economists elsewhere, predicted dire levels of unemployment, falling house prices and recession. Looking at events at that time, such as the Federal Reserve needing to bail out the US Treasury market and extreme stress in health systems in the UK and Italy, this was understandable.
But, as I discussed with then-RBNZ Deputy Governor Geoff Bascand in May 2020, they really didn't know what was coming. The RBNZ's stress testing of banks and the financial system hadn't modelled a pandemic. The dire forecasts at the onset of Covid were reasonable, but they didn't account for a response that threw the kitchen sink at the pandemic. As 2020 evolved it became obvious the forecasts from earlier in the year would be way off thanks to the success of the actions taken by governments and central banks to keep the economy afloat.
Thus extreme actions, for an extreme scenario, such as record low interest rates, quantitative easing, lockdowns, closed borders, wage subsidies and a mortgage deferral scheme, became contributors to the highest inflation in three decades and central banks' subsequent response, which has been very rapid and sharp increases to interest rates as they attempt to increase unemployment and slow economies down.
Jones cites a number of emerging risks that look quite different to those of recent decades. Some, he says, have no historical precedent, and could interact. Building resilience to these will be crucial, he adds.
As already noted Jones is talking about financial stability. But his message has implications well beyond that. The world is changing around us and what we've done in the past to tackle problems, including inflation, job security, high interest rates, environmental challenges, resource limitations, conflict etc, may not be the best ways to address these challenges in the future.
Thus it's a time for open minds and out-of-the-box, rather than dogmatic, thinking. The question is are we as a society, our central bankers and other policy makers, politicians and business leaders, up for it?
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49 Comments
Gareth says ".....Thus it's a time for open minds and out-of-the-box, rather than dogmatic, thinking....."
So maybe
a..... Be very dollar conservative - own our stuff rather than borrow. (that's out of box compared with the current practise)
b......Think 'business' rather than 'finance'. Thus think of how our farms operate, where the food comes from and goes to. What is the energy source and how to secure it. Basic efficiency etc.
That's not a fair comment. And I didn't write 'a'. My comment was re business per se; profit and usury expect growth, and we are heading into an era of degrowth.
Those in business aren't 'ferrets', they were born into a System, and became part of it. Easier to fit in, than to forge a different pathway.
"profit and usury expect growth" No PDK. this is one of your consistent failings Human greed expects growth. Business must make a profit, but that profit need only be $1. Human greed requires it to be more. The "growth' thing is a myth propounded by economists and accountants. Growth is required otherwise you become vulnerable to take over (personally I never swallowed that little bit as a take over can always happen if the aggressor is big enough). But what if you're a one man business, not interested in selling with a secure client base?
Greed may well be the driver, but the token-trading structure was set up to accommodate/encourage growth, and the mechanisms were profit and usury. Either that is changed, or the trend to wealth-stratification will continue - until unrest does what unrest every now and then does.
In an unfettered 'market', the trend is to a few large players, and eventual monopoly(ies). Monopolies force others to be 'price takers' - farms therefore amalgamate to remain viable - and thus become fewer/bigger/more monopolistic themselves. Joe's corner hardware store cannot compete with the buying power of a big-box chain, and hasn't. His 'secure client base' went for 'cheaper'. Magnified, that meant we de-skilled, de-manufactured.
Smaller Systems are always at the mercy of bigger Systems; your 'one man business' has the same compliance-costs as a 1,000 man business; the latter can therefore undercut the former. That only leaves niche and premium arenas for little operators.
You've pretty much encapsulated business greed, and the ideological mantra.
Compliance costs might be the same but other overheads are vastly different.
In the end thought it all comes down to increasing competition for a finite resource box. It's gonna get ugly.
Changing the subject just a little, have you seen this article?
https://edition.cnn.com/2023/11/02/climate/the-planet-is-heating-up-fas…
We are pretty much cooked!
Interesting that industry used many of the same funded publicists, researchers and tactics to try to spread climate change denialism as they earlier did for tobacco: https://www.scientificamerican.com/article/tobacco-and-oil-industries-u…
Pretty sad if well-meaning people have been duped by such tactics, at the ultimate expense of their children and grandchildren who they no doubt want the best for.
One constant, whether in climate, tobacco, pollution, leaded fuel, etc: Status Quo Bias - "what we're doing right now is fine and there's no need to change anything". That should cause folk to wonder.
What I found as interesting was that he states the 1.5 degree limit, even though we haven't reached it yet, is done. Not achievable now. But we might still be able to avoid the 2 degree one.
And still the real conversations are still not happening.
In Stuff the other day they reported that Gloriavale were teaching their children that they don't need to plan for the future because God is coming and he will save us all. Well probably not you and me because we're sinners (nothing personal), but them. But while that line of thought is at the surface of a fundamentalist Christian sect, and likely other fundamentalist religious groups irrespective of creed, the sum of our current actions seems to suggest it is not too far beneath the surface for the masses either, and especially the leadership. But that thought has existed for millennia and I would suggest all those people are still waiting for god to save them!
probably not you and me because we're sinners (nothing personal)
Guilty as charged. And though I used to believe in the same number of gods as them I now believe in just one fewer.
What is sad is that the Christian concept of stewardship of creation seems to have fallen by the way (perhaps following the political right's capture of much of Christianity in the USA, and export of that overseas), much like Jesus' rage against the money changers in the temple for their financial machinations to transfer wealth off the poor seems to now completely escape much of Christianity's notice. In its place we have Supply Side Jesus: https://www.beliefnet.com/news/2003/09/the-gospel-of-supply-side-jesus…
Agree with what you say - on social media it's very evident that folk desperately want the comfort of the status quo, to be told that everything is okay and there's no reason they should be inconvenienced.
Perhaps it's a sign that the world needs more aspirational presentation of how challenges should be tackled. New moonshots, for the kids and grandkids.
Great comment PDK.
Having owned a small business I have a crystal clear view how this business culture operates. When we bought our business, it had a long trading history and loyal client base. It had the advantage of vertical integration, in that we produced 70% of what we sold. It had the disadvantage of an enormous workload in a declining industry. Our best trading year was 2009 I think. It was the year Mitre 10 closed and Mega was being built.
Subsequent to that, the power of advertising increasingly affected our business. We sold our product cheaper than Mega, but our loyal customers were getting older and downsizing, while younger ones had less interest in gardens and better training by advertisers.
A few trends we noticed. Staff costs increased rapidly, making us less competitive. The big suppliers were automated.
Small wholesalers disappeared, as independent nurseries disappeared, meaning choice also disappeared.
South Island veg and bedding supply is now a virtual monopoly, with Evandale nurseries bought out by Zealandia.
The Timaru old boys network decided they'd pocket some cash by developing a site for Bunnings. Promises of 600 new jobs, more like 200, most short hours.
We couldn't be bothered competing with yet another predatory corporate so Timaru lost our six jobs.
Thing is, we recycled everything, except seed of course. The chains bin unsold product for landfill. Now that's efficiency.
What's interesting is the origin of "business", originally pronounced busyness. It meant anxiety or anxious occupation. It very much highlights how our language and words have been corrupted over time, and in many ways given a false power, false meanings. Some would say it's a form of spellcasting, leading people into false worship, idolising false gods.
Many teachings would suggest this is what traps humanity from evolving, individually and collectively - our busyness. The philosophies of the Tao Te Ching and Buddhism are great teachings.
Same goes for "wealth", originally correlated with an abundance of Nature, of fertility, well being and health.
Agree and disagree. Our money is broken in that it works against certain sectors of society: low to middle income, young, ethnic minorities. Those are broad demogs but I think you'll get the point.
But the monetary system has worked well for a large swath of the boomers. And the closer you are to the money / credit creation spigot, it has worked wonders -- the Cantillon Effect in action.
Now that the boomers are ready to pass the baton to the next generation of ruling elite, one of the biggest issues is what to do with the monetary system. It appears the BRICS have taken the bull by the horns to some extent. And it's understandable. Why should they have to bow down to the hegemony that largely benefits the Anglosphere?
These are the pieces that my woke mates at the water cooler have little interest. They tend to ignore the issues surrounding monetary power: it's either too complicated, not interesting for them, or they simply don't want to know their privileged position on the totem pole.
There are over 160 different currencies in the world, each with a local monopoly over its own jurisdiction. But aside from the top handful of them, most currencies rapidly devalue over time and have little acceptance outside of their own borders. With various cross-border frictions, bottlenecks, and currency conversions, the global financial system is practically a barter system in this regard. Being born in the “wrong” country makes saving money harder than it needs to be.
Agree...being part of the commonwealth has its advantages when it comes to currency.
Strongly recommend Lynns book...Lyn manages to give a good overview of the monetary system and its history in an accessible way, she writes about where we stand today and then goes into what the future might hold. She captures their gist well, whether she agrees or not, and then adds her own thoughts and conclusions. Lyn presents arguments and counter arguments in a clear and concise way. .
"Money can now flow out of institutions and markets with unprecedented speed in response to the rapid spread of information and misinformation, including that amplified through social media."
And arguably that is an indicator of change. They don't like losing power and control as their livelihoods depend on it. That the monetary status quo exists to protect the boomers is understandable. But what the institutions don't understand about technology is that it can decentralize power over monetary and financial paradigms. We've seen it with the likes of Gamestop, ol' ratty, and the whole crypto ecosystem.
That's what really spooks them.
Great piece Gareth. A little humility from our central bankers is to be welcomed. Although obviously I would prefer it if they simply admitted that they are trying to drive a remote control helicopter (our economy) with a bidirectional joystick (the OCR) in a gale force wind (climate change, war, global capital etc).
I don't read it that way at all. I detect a Systems thinker - whether he's always been one, or had an epiphany, who knows - but he's capable of meshing multiple factors; always a good sign.
Goes with Macron, a year ago: https://www.france24.com/en/france/20220824-macron-warns-french-of-toug…
"I believe that we are in the process of living through a tipping point or great upheaval. Firstly because we are living through... what could seem like the end of abundance," said Macron, 44.
Reportage in the NZ media, within the following brackets: ( )
ABSURD.
We throw people on the unemployment scrap heap and screw up their lives and families just to manage the cost of money and financial stability.
There are better much ways:
a) guaranteed govt jobs
b) guaranteed universal income
c) the tax system taxing capital gains and death/inheritance tax to fund it.
d) changing the measure of the CPI to include direct house+land prices - houses are the biggest consumer item. This would reduce the volatility in interest rates.
I have no problem with a move towards egalitarianism; it would solve a lot of other issues en passant.
But well before you go for UBIs etc, you have to ascertain the sustainable energy and resource through-put rate (which is orders of magnitude less than current) and divvy that up. Demanding a UBI in an unlimited arena, merely shifts who gets how much of what is still unsustainable.
I guess we have energy, resources, skills/education, and expectations of society.
We have to decide what we want our experience of society to be like when we walk down the street, when we need medical care, and when we interact with our neighbours.
Our current approach of transferring wealth upward and debt downward/to following generations is not resulting in great societal outcomes. I have lived in societies that are further down this road...people hide in gated subdivisions from the problems, and have glass shards embedded in the top of the walls around their house and bars on their windows. The societies are tough on crime but the crimes don't stop at all - at the top or bottom.
I have no desire to keep pushing NZ toward that sort of society for our kids and grandkids - or even in our own dotage; we could perhaps look to the 1950s to 1970s for a better example of how to live with more family lifestyle stability and less consumption. (As Vaclav Smil suggests we'll be forced to from a consumption point of view, but I suggest we'd need to look at the societal point of view if we want living to be enjoyable.)
we could perhaps look to the 1950s to 1970s for a better example of how to live with more family lifestyle stability and less consumption
This was a post war time of peace with greater need for community engagement and interaction, living in a world with vastly more resources than we have now which allowed for human expansion,innovation and great increases in living standards. Currently we are in a stage pre-war with a possibly faltering global reserve currency in what could be called the greatest period of peace and expansion of global trade and international relations in modern history.
Sadly we don't have many lovely native forest to rip down for cheaper state housing less we purge the national parks and the west coast of the south island, we have a multigenerational gap now and the pain and lessons of of war will soon be forgotten as they become less and less tangible. I agree it would be a good way to look at it, however reality is a fickle mistress.
The wonders of tech society. Mechanisation using powerful energy sources was always going to upend the value of human labour, as AI is about to upend those shining their bottoms at a desk. This was always going to concentrate wealth among the owners.
Combine these tools with the growth imperative and an increasing section of society is cast adrift. UBI is basically the poverty end game.
As long as techno utopian growthists control the world, the future looks bleak, both environmentally and in quality of human existence. Somehow the proletariat has to demand enough!
Amazing how many of these AI-leading companies are tax headquartered in Bermuda or the likes, too. Who knew it was such a bastion of innovation... just kidding, of course, it's important these companies are able to avoid contributing a fairer share to the societies that are benefiting them.
Pretty much most of the dogmatic thinking is bought about through ideologically driven nonsense. The crowd votes for the ideologue who claims that they are the answer to their apparent injustice. This is played out again and again, there is always a new sublime object of ideology (stolen from Zizek).
The current environment of social media fueled rage culture turns this problem up to 11, until we get away from this, democracies have zero chance of progressing beyond a flip flopping ideological lens.
Interestingly, the further the narrative diverges from reality, the more we seem to vote for believers - ever more fervent ones.
Bush Minor, Morrison across the ditch, Luxon here, Blair - seems we end up with 'Fundies' heading the chant. Interesting ramifications for democracy....
People act in their own interests more often than not, and behavioural change on a large scale is no easy feat as already demonstrated. Luckily there are still some who give back as best they can such as this chap in Nelson who has created a way to compost food waste on a medium scale and team with a local landscaping business:
Excellent article Gareth
I had a chuckle when RBNZ talked about high interest rates
When I took out my first loan the interest on first mortgages was about well above 12% but I was fortunate to work for a financial institution and my staff mortgage was at a very generous 6%.
When staff loans disappeared and we paid market rate my interest rate rate was about 11% but it tracked as high as 20.5%
So most of my working life I was paying a first mortgage rate of over 6%.
When interest rates reduced down to the recent lows , When I was asked by family if they should fix their
loans I suggested that they fix for 5 years
Thats far too long they responded our mortgage broker has said interest rates will remain low for decades, in fact that is exactly what Tony Alexander said at that time although he did qualify with the (no guarantee)
So we never know what’s ahead , especially when you look at the debt of America and Japan, at some stage something is going to break so plan for the worst
Maybe they've had an epiphany, maybe not. Maybe it's just virtue signaling to appease the growing societal backlash. Maybe it's more fearmongering to assert more institutional control and power. They know at the root it's all psychological. There's been enough historical evidence to learn from and they've chosen not to, instead further embedding their dogmatic models and thinking.
They've failed in having a vision of what financial stability is, failed to see the consequences that financially speculative products have on stability, failed to recognise the imbalance of power held by financial institutions and mega corporations, failed to recognise that governments, and thereby regulators are bought puppets.
Case in point - the Panic of 1907. All the factors there to see, market manipulation, natural disasters and insurance repercussions, power and influence of the bankers, the psychological effect. All that's happened since is an increase in scale making voluntary changes much harder. https://en.wikipedia.org/wiki/Panic_of_1907
Anyone remember back in 2014 some wealthy were openly warning their counterparts of the coming of the pitchforks? Nothing changed and it's still only being discussed. https://www.theguardian.com/news/2023/jun/30/uk-super-rich-beware-pitch…
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