Opinion: Learning from past mistakes

Completely disagree,

The only inflationary pressures in the developed World right now are from rising commodity prices which an OCR hike will do sod all to change.  We also have a natural cushion against commodity price swings anyway since they are strongly correlated to our dollar’s value which minimises the impact of price rises. 

Bollard is correctly looking through events which OCR hikes can't influence like the GST rise and commodity price rises

Roger, is it possible the RBNZ used a faulty input over the years? 

It seems they systematically underestimated inflationary pressures over a decade or more. One way this could happen would be if the CPI systematically underestimated inflation. Steve Netwriter taks about this here

http://neuralnetwriter.cylo42.com/node/129

Perhaps the CPI just doesn't measure the right things.

The symptoms seem to be the RBNZ sets itself a 1-3% target but consistently achieves a 2-6% result as measured by the CPI.

If the measurement sytem is broken you would expect a poor result.

The argument for a 1-3% target seems to be "oh well, that's what the US seem to run at so we had better fall in line".

More rubbish from Rog!

The graph is totally misleading, Rog talks up the blue line (showing annual growth) as if he's expecting it to continue pointing upwards.  In reality we know GDP in the Dec quarter was likely between -0.2% and +0.2% hence annual growth would be just 0.3% to 0.7% in the Dec year, hence there is no question that annual GDP growth has already been through a turning (stationary) point.  Assuming a good result for Dec say 0% and what feels like a 0% March too then annual GDP to March 2011 may well be below 0%.

So it's a given the next two points on Rog's blue line will be sharply lower.  So what on earth is this guy talking about!

These articles are just embarrassing.

 "... how farmers spend their much increased incomes form the record high beef, lamb and diary prices."(sic)

Pie in the sky stuff Roger.....the income will not be blown but saved instead. Farmers will not be hiring staff and if you expect to see a jump in regional job openings then you must also see flying pigs.

Inflation is on its way thanks to several factors. Bollard has no option but to raise rates and he is late already. Rising interest rates will slam the property sector and the rural debt bubble. Then NZ will slide deeper into the shite.

At some stage soon the lying will give way to the truth. The govt will have to come clean with the public about the economy being in a permanent recession level of activity until the 180 billion in household debt and the expanding govt debt bubble , are paid down.

BTW Has anyone thought about the fact that with CPI 2.3% in the December quarter, there is going to need to have been some bumper nominal GDP growth to make real GDP non-negative for the quarter?

The way the economy "feels", GDP could have been seriously negative in the December quarter!

Roger, the RBNZ will have a very good handle on what the cockies are doing with their extra dosh, the figures are also there for all to see on their website. Latest figures (Dec) do indeed show a substantial reduction in agricultural debt - $800,000,000 from Nov '10 to Dec. Sure, there is deferred maintenance going on but one thing farmers know for sure - the good times never last forever. They don't want to be going into the next downturn with big debt and a run down farm.

I think that the RBNZ will be looking for significant debt growth across all sectors before we see any meaningful rise in the OCR, as of December the numbers are flat or declining. Also I think they have learned from past mistakes - in a more Globalized world they are paying more attention to the credit volumes than to the (suspect) inflation numbers.  

Mates with National/ANZ just had a %1 increase in rates, thats where the extra is going straight to the banks.

 I the mean time the low cost USA milk machine is uping production fast. 

 Im finding it hard to believe that farmers paid that much back. I suspect its sales to equity partners and overseas buyers making up the figures along with some debt destruction.

But at 200 million a month its going to take forever.  I think the huge increases coming through in US production is a genuine concern, along with energy and high costs etc.

 Its interesting how people react. Ive a friend who winters 800+ steers a year he normaly pays about $800 a head this year he is having to look at $1400. 1.1 million to buy is more than his  nerve so his looking at keeping lambs back and trying to get them on winter  contracts. Other friends caught with low stock numbers have given up.  

 Im trying to take a longer term view and Im still thinking its a good time to keep away from farming especially dairy. The fact that many are piling in confirms my belief.

The Jan 2010 OECD Paper "Bird's Eye View of OECD Housing Markets" put its finger on the problem:   Para 55. "Another concern is about the ability of monetary policy to thwart the development of a housing bubble without causing widespread damage to the rest of the economy. In a house price boom, prices increase strongly – often at double digit rates – and expectations of future prices are similarly upbeat.

Under these conditions, large policy rate hikes would be necessary to cool housing markets. High interest rates would crowd out sound and socially useful investments. An additional difficulty for large countries and monetary unions is that housing market developments usually differ across regions or member countries. For example, during the latest housing boom, while prices were soaring in States like Florida or California, they were stagnating in many other parts of the United States. In the euro area, prices were skyrocketing in Spain and Ireland, but declining in Germany. Devising an appropriate monetary policy response to asset price developments under these conditions is not easy."

 The whole paper is worth reading.

 http://www.oecd-ilibrary.org/docserver/download/fulltext/5kmlh5qvz1s4.pdf?expires=1297809424&id=0000&accname=guest&checksum=86E05F059215584C63CD93EA5B38DEA0

I think a lot of its tentative discussions of multiple angles, is overly cautious. They DO indentify the reasons for the problems we face today, but bury it in a lot of bureaucratese backside-covering.

It is the height of central banking hubris, to assume that the base interest rate is the appropriate tool with which to address a housing bubble that is caused at root by serious supply inelasticities. As the OECD mildly puts it above, "High interest rates would crowd out sound and socially useful investments".

I remember Don Brash when he was Governor of the RBNZ, complaining that urban planning that forced land prices up, was going to make his job more difficult. The OECD report also discusses the way that inflating house prices feeds credit-based consumer demand via equity withdrawals. Owen McShane actually correctly predicted this in a paper done for the RBNZ in 1996. He deserves a medal today.

It is possible that 50% of the "economic growth" in NZ 2000-2006 was the result of housing-equity-withdrawal consumer spending. It is well known now that our "tradables sector" was shrinking through this period of "economic growth". The Labour Government enjoyed "bubble tax revenue" and found ways to spend it all AND to commit to future spending at the increased level. Now the party is over and no-one at the top level is talking about the return to econ reality.

A dollar of debt is a dollar of debt. Cutting interest rates cannot continue to have the same stimulus effect indefinitely if the public gets nearer and nearer to a maximum conceivable level of debt in dollar terms. The "housing bubble" cycle is a new game altogether, that central bankers cannot win. Had the RBNZ kept interest rates lower, it is highly likely that our housing bubble as expressed in median multiple terms, would have inflated even further than it did; as Australia's has. 

As it is, Australia especially, is a case study in favour of Alan Greenspan's protest that his low interest rates did NOT cause "The US Housing Bubble". (NZ is a similar case study). Firstly, Mr Greenspan is quite right to say that "The USA" as a whole, did NOT have a housing bubble, but a number of localised bubbles, especially in California. Australia's housing bubble has gone as big as California's at its peak, with interest rates that bear NO RESEMBLANCE to the Greenspan looseness.

The obvious explanation is "supply"; and regulations regarding development. Hugh Pavletich is right.

Rodney Dickens might be another one who is about to be proved right, with his recent analyses that "housing" drives the economic cycle, not the other way around. That is his explanation for his now correct prediction that NZ would not in fact recover from this recession.

I think that the currently falling "money supply" is a symptom of something else that must be addressed, rather than a cause that itself must be addressed. I think that the land market and the housing market is simply too big a part of the economy to "distort", and expect monetary policy to be able to cope with the consequences.

Interestingly, Britain has had urban containment policies since 1947, and recent papers by Paul Cheshire and his colleagues at the LSE make VERY interesting reading regarding the way we might be headed yet. But this phenomenon has gone "global" now; as the OECD Report points out; they have never recorded so many simultaneous house price bubbles around the world before, let alone so many with that level of volatility. I believe this is because "urban containment" has gone global as popular planning policy.

This recession is a perfectly natural consequence of inflicting the economy with a popular media-driven social democratic consensus that we must cease to actually use resources, especially land. This would be bad enough of itself, but bubbles in the prices of the newly restricted major resource is inevitable as well.

I also wonder just how fiendishly clever a certain Mr George Soros might be, lavishly funding environmentalist and conservation groups, raking in capital gains from his property holdings, and making a killing "shorting" everything when the crash comes. Does that "figure" to anyone else too?