By Bernard Hickey
If only New Zealand households and businesses would invest more heavily in building new houses, educating new workers and building up their businesses our economy would be much healthier.
This seems a statement of the obvious, but it’s patently clear in the Reserve Bank’s June Quarter Monetary Policy Statement that New Zealanders are not investing, even though they have plenty of cash and there are shortages of houses and skilled workers.
Why is that? It is the central question of our economic era in New Zealand and overseas.
Why when there are idle resources sitting around (mostly people) are businesses and households refusing to invest?
Instead, they are hoarding their cash in government bonds and bank accounts, or are choosing to repay any debt they have.
The Reserve Bank says this weak investment means the economy is running up against capacity constraints and it’s a factor in a halving in our potential economic growth rate to around 1.5%.
“This reduced capital investment, while having an immediate negative impact on GDP, has also negatively affected the economy’s future capacity to grow,” the Reserve Bank said.
“In addition, economic uncertainty and cautiousness in the willingness to borrow and lend has limited innovation and risk taking, further inhibiting potential growth,” it said.
“Consistent with this, indicators of capacity usage are much tighter than would have previously been expected, given the weakness in GDP growth.”
The Reserve Bank pointed out that, despite higher unemployment, skill shortages were close to their historic norms and wage inflation was close to its average of the last two decades.
This investment drought is reflected in inflation in the most obvious areas of the economy, including rents and house prices in Christchurch and Auckland, where supply shortages are the heaviest.
Why the reluctance to invest? Could it be demographic? Those in charge of the spare money in households and companies are historically older and more inclined to put any savings in lower risk investments, such as government bonds.
We have a hoarding problem.
How do we deploy those savings in low risk assets such as government bonds into higher returning investments that employ extra people, create new skills, create new businesses and build new houses?
Will households and companies do it?
Or will the government have to step in as it did during the 1930s and 1940s?
109 Comments
We have a hoarding problem. - sounds remarkably like Bernanke's claim the Chinese were/are saving too much, without acknowledging the US was/is printing too much.
Not in the central bank sense, but in so much as our Government keeps giving birth to new extra sovereign debt that is monetised by our local banks with the credit wrapping facility of foreign buyers exercising their local NZD credit lines.
Bernard it's called "crowding out" - and until we get rid of the parasitic bums demanding non-productive incomes, that which you lament will remain a reality.
Yes and the success of this phenonema to the direct benefit of the non-productive sector has resulted in an absolute destruction of trust. The average productive sector individual will only take on risk if trust exists between themselves and the non-productive sector (i.e. government and money lenders).
Only once trust is restored will the general public get back on board taking risks and thus providing the stimulation needed in the productive economy.
Put another way - the hosts are starving off the parasites as the relationship is no longer symbiotic.. Put that proposition to Bollard and demand a response.
I think you miss the biggest factor, an individual is only going to invest where he/she sees there is a situation of demand outstripping supply and hence a healthy profit margin, they will then invest. Honstey I dont see trust as material in NZ.
When the private sector doesnt continue to spend then there is lack of demand and so excess production capacity so there is no reason to expand capacity at all...no demand to meet, no reason to create jobs etc etc and in fact pressure to reduce jobs.
In order to create demand a Govn needs to step in and subsitute private spending with its own....once it does that this tends to be self-sustaining the private sector should take over....and of course the opposite is true, reduce spending and spending reduces still further...
The important thing is to not fire up inflation, so where you commit to opex....then thats a permanent spend for ever....there is an expectation of innf;lation generated.
The way to avoid this is to do one off capex spends preferably ones that reduce opex.....this isnt infaltionary....
In a way the Govn wanting to spend on roads is such a plan, except of course roads last 50 years and afford able petrol has 5 years for you and me......so what a waste of effort....of course the rich will enjoy....
Households are presumably saving because they are woried about their debt and or retirement prospects. That is what they have been told to do and what everyone seems to think is a good idea until it actually happens. Called the paradox of thrift.
Businesses must be saving or deleveraging because they dont think they can get a worthwhile return on investment or are woried about the allegedly poor economic outlook. Then becomes a self fulfilling prophecy.
We know that houses are not being built because even with rising house prices they cost more than they can be sold for.
There does seem to be plenty of money sloshing around this little country ( growth in term deposits, oversubscribed bond tenders) just nonone spending it.
The paradox of thrift is wrong because saving money doesn't mean reduced spending, it just changes who does the spending. The money I save with a bank or some other form of deposit-taker doesn't disappear; it is lent by the bank to someone else who is able to spend it on something (a business or, more likely in New Zealand, a house).
The mistake you and others commenting on this thread make is thinking of spending only in terms of consumer spending. In fact, most spending in the economy (about two thirds) takes place between businesses on capital goods. When a company buys a tractor or a new machine for its factory it is spending, every bit as much as when a woman buys a dress.
The more people save (which can better be described as deferred consumption), the more resources that are made available for those involved in the earlier stages of production, allowing more capital and eventually more consumer goods to be produced. In other words, the higher the savings rate, the quicker the economy will grow.
Unfortunately, Reserve Banks around the globe including in New Zealand have done their best to destroy the relationship between the rate of savings and the interest rate by expanding the money supply and keeping interest rates artificially low. This means that while people are saving more, the resources aren't ending up in beneficial productive activity but in the wasteful hands of the state.
Jesus, Bernard, make your mind up. Firstly we have too much debt, and the country is going to hell in a hand basket by the MIDDLE OF NEXT WEEEEEK!, and now, we have too much savings (money) and the country is going to hell in a hand basket by next year. Make your mind up dude, which is it? Too much debt or too much money?
I have always held the view that when looking at the extent of private sector particularly household debt in NZ, just focusing on the liabilities side of the balance sheet gives an entirely false picture of the true situation. You have to look at both the assets and the liabilities. And on that score, New Zealand is solvent. New Zealanders as a whole, have greater financial assets than they do liabilities, just as Japan does even though it is one of the most indebted countries on earth. There is no panic here.
Hey Bernard, I have a great idea. If New Zealanders are not spending their money, let’s put a tax on capital. That’s the answer! TAX, baby, TAX and spend!
David B your dependence on worn idiomatic expressions is more than tiresome and yet the assertions made in the article referenced by Kate deserve much more attention to detail than Treasury is willing to reveal.
Would you have us live in a state where inadequacies of our civil servants and what they may be trying to hide is not revealed for the betterment of society?
The article referred to by Kate has nothing whatsoever to do with my post. I was talking about private sector household debt. Kate's article is about public sector govt debt. I fail to see the relevance. But thanks for your post, even if it was also tiresome to read.
lol, Thanks, gummy! I mean the point, his, and Kates for that matter, alludes! I make a comment that when considering the level of household debt in NZ, a consideration of both assets and liabilities must be taken into account otherwise a false picture can be drawn, and I get this strange unrelated crap! Unbelievable! Don’t worry, Gummy, I will not be silenced or censored or shut down by the Left or the Greens here or by the nutty conspiracy theorists, even though they are now dumping on every post I make. It’s onwards and upwards mate! hehehe
Now now be fair.. there was this wee gem in Kate's posted link....
"government accounts ignore "off-balance sheet exposures""
That they do Gummy and DB....they ignore the serious exposure NZ has to a return of the socialists and indeed any power in the hands of the pinky greens...
So your proposition that "NZ is solvent" is based on a notion that private sector household asset values are in no way linked to the sovereign's position in which these (largely property related) assets reside?
http://www.globalpropertyguide.com/Europe/Ireland/price-change-5-years
"Financial assets" based on what David? real value or pure speculation? The assets are only worth what amount people are willing to INDEBT themselves by in relation to wages, job security, cost of living.........etc etc.
Why would we "shut you down" David when it's actually fun watching you and others dig your own intellectual hole!
The numbers and terms come from the RBNZ. You can take it up with them if you think their descriptors’ of these assets is wrong. Do let me know how you and your fellow travellers get on in telling the Reserve Bank they’ve got it all wrong, won't you?
You mean like The RBNZ has had it wrong now for over a decade, hence they constantly change their own goal posts? lol
David, just for the record Bollard knows me and my business personally, THAT"S how often I correspond with them (RBNZ).
In fact one time they told me " so you think you can do a better job?" to which I replied.........YES . Some people hate being told or reminded of where they went wrong YET were warned in a formal matter
Chuckle. He doesn't need a spade.
Interesting to see Bernard calling 1's and 0's stored electronically, as 'cash'.
Interesting too, to note that Groser is looking a bit exposed, Joyce is looking a bit exposed, and concurrently a certain persona appears multiple times hereabouts.
No connection, of course.
I concur David B Japan private sector has bugger all debt it is all on the state. The interesting thing to look at is GDP growth and when you delve into you see that our reserve bank is very conservative. Even when comparing with our immediate neighbour . Oz factor into the growth rate BS stuff like the black market economy, so on and so fourth. It all adds up. Gpd is a function of how good a nation is at collating data. I'm sure within the western world the discrepancies are enormous, and should not be underestimated.
David - the intention wasn't to provide you with an opinion - rather evidence from a qualified academic.
You are able to make your own judgments on the validity or otherwise of her evidence in detail here;
http://docs.business.auckland.ac.nz/Doc/Newberry-UoA-GAAP-and-Government-March-2012.pdf
and here;
http://docs.business.auckland.ac.nz/Doc/Newberry-FinancialReports-of-NZ-Government.pdf
But the point is David, go right ahead and continue to make judgments based on a particular ideology - I find your entrapment in this way of thinking an amusing oxymoron given the origin of the understandings of your "condition";
.http://en.wikipedia.org/wiki/Ideology#Ideology_as_an_instrument_of_social_reproduction
If I understood it better (and was therefore able to frame the question in the right manner to ensure they had no choice but to answer it directly such that they reveal what we really want to know) - I would pop the question to them here;
http://www.oag.govt.nz/contact-us/comments-questions
I reckon you could be the person for the job, Stephen.
:-)
Tried before over another matter and I was rebuffed due to what the Auditor General's office stated was unsubstantiated claims.
Partly my fault, but the cover of obfuscation provided legally by the accounting profession when annual accounts are presented to the public made it difficult to expose the real wrong doing.
Thus my pleas for transparency in these matters are henceforward tarnished.
It would be better to collar Sue and provide as much assistance as possible - she is personally aware of my views.
...... truth be told , OMG ..... steven has admitting to driving a gas guzzling ozone destroying polluting SUV ! .....
I happily drive a fuel efficient llittle Toyota Corolla ..... which is serviced by professionals ( steven is a DIY'er on his vehicles ) .......
...... and he has the temerity to hurl abusive at mwaaaahhh .... a single tear runs down me Gummy cheek .....
I agree that Loan-to-Value ratios are very important and that prudent ratios have been abandoned somewhat over recent years, particularly in real estate - to the countries cost. Frankly I'd be very comfortable if those ratios were reintroduced and broadly set by the RBNZ. And while you are correct that a period of deflation would put at risk the value of non-monetary deposits, it would however enhance the value of deposit assets in the bank. And I wonder if most New Zealanders know that at the end of Dec 11, that there were actually $111bn of household deposits in registered banks and non-banking institutions in New Zealand? That compares with $186b in household financial liabilities such as bank loans in the same period. All-in-all, New Zealand’s household net financial wealth was $32.5b at the end of Dec 2011.
The $32.5b figure comes from the Reserve bank and it refers to net household financial assets, (financial assets exclude assets like property). I think if you download the pdf in the link it will provide you with a 'little perspective' on the various issues you raise. You can find the link in my post above.
Ok....so I can see you are totally clueless.
I will make it simple....
We have, ideally too much Govn debt (zero is good and actually some money in the "bank" for a rainy day, better"). The debt is increasing because we have to borrow to make up the shortfall as the Govn's tax take / income has collapsed. I will assume even you can understand that.
The take tax has collapsed because ppl are not spending, demand has dropped. People are keeping thier money in the bank, so if demand does not rise, neither will the Govn tax take and we wont be back in surplus in 2014/5. So its a case of money is in the wrong place....
In terms of liabilites v assets, there are two big problems, but then you hold a neo-classical view of the world and that is fatally flawed (one man's debt is anothers asset)....so as long as you wear these blinkers you will never see it.
I will lay it out for you,
1) Liabilities are cash in effect so liquid and real, assets are illiquid and assumed, ie they are only realised if you can sell them for what you think they are worth and in an illiquid market that is not the case, however liabilities remain.
So we may have borrowed $400k to buy a house, but in a depressed illiquid market we may find we only get $200k.....we still owe the full $400k, we are short $200k and quite possibly no means to pay back the balance owing.
2) One man's debt is not anothers asset. That is neo-classical, such believers think they balance so the effect is zero so it is ignored, this isnt the case and Steve Keen explains that so well Im not even going to try.
Funny thing is that seems to put you in the Paul Krugman camp, which is a huge giggle.
regards
"We have, ideally too much Govn debt (zero is good and actually some money in the "bank" for a rainy day, better"). The debt is increasing because we have to borrow to make up the shortfall as the Govn's tax take / income has collapsed"
Agree, but we also have to much govt. spending. There wouldn't be a shortfall to borrow if spending was managed more prudently/responsibly.
To claim after 4 years that we are not prudent or reasonably so, when the three main areas are education, health and WINZ incl OAPs is just not on....Then to throw in we see NZ has one of the smallest Govn spends, and Sweden one of the biggest and yet they are doing pretty well is just not credible.....
What you are saying is National cant find any low hanging fruit yet you clain in effect its there in abundance by the sound of it....
regards
..... at least Kiwis aren't buying gold ----- hoooo , weeeee ,... that bubble is poised to pop ...
One day soon , when the Greeks have had their ouzo , a siesta , and another vote ... investors around the world ( outside of the Eurozone la-la land ) are gonna wake up and say , " so what ... who cares about them " ...
..... and that saved money , the hoards of cash that Bernard calls " lazy money " , will start to go back to work in business equity ...
Until that day , do wotcha do best , ... quietly trade houses amongst yerselves !
... I just wanna keep my money invested in companies that do some good for mankind : Healthcare / Energy / Technology ....... digging up shiny bits of metal , particularly gold , just seems so porpoiseless to moi .
See the latest report out of Adelaide ? .... a medical team using human tooth stem cells have cured rats of induced brain damage ( strokes ) ....
.... you know you live in the ' lucky country " when the healthcare & rehabilitation of rats gets so much public funding .....
....... you're assuming that we all have inherited some psychic DNA from the miser , potrayed in Balzac's novel " Old Goriot " ... who sits in his attic , counting and admiring his hoard of gold .....rubbing his hands with glee , " mine , all mine ! "
In reality most investors just wanna get a reasonable return on their money , and to spend alot of quality time in the sunshine , with their friends & family .......
....... there are other alternatives to investing in houses , or even to living in them , for that matter . You just have to possess enough intestinal fortitude to step away from the crowd .
C'mon Mr snippy , move along , nothing to see here ...... just another auction ......
GBH...ironically your both right on some things here.....
In reality most investors just wanna get a reasonable return on their money , and to spend alot of quality time in the sunshine , with their friends & family .......
A beautiful statement of idealism finding contentment in the things we should value above our insecurities.( I find no fault with the statement for myself.)
However so many many people lose sight of the reasons when they set the bar for what is enough, untill the bar like the goalposts keep moving onward, upward. Inevitabley the obscession with what is enough stems from insecurities brought on by changes in relationships (demographically), changes in thought processes brought about by input from their financial environment...
A bit like the power trap...even those who begin the journey with ultruisic intention can find a few short years later, they cannot properly recall what that was about , largely because they have lost touch with their original environment or influences.
Time to do just what you have portrayed above , can be the most expensive single item for some ...conversly the least expensive for those that can be content.
What New Zealand needs to correct the above senario - is a Free Trade Agreement - with ourselves.
Then we can get on with the real business of Import Substitution. Maybe these stagnated factories can be put to good use - making our own food - or tyres - or whatever else we consume. The job creation could be huge.
Over the past 50 years NZ politicians have requested - no demanded - that Import Substitution is the way to go.
Each time this happened the factories expanded further and exported their surplus. I know this to be true - because I followed this trading cycle three times.
I missed the fantastic growth opportunity after Nordmier's Black Budget in 1958. Huge factory expansion followed that one. Still at school.
I like it Rudderless...I like it a lot......don't ask for a list of those who don't , because anything that resembles a return to protectionism, or puts a dent in our insatiable appetite for cheap crap , or disturbs the trade (balance) ha! ,with our new best freinds will be styfled by enough red tape to ensure home grown industry is not viable.
..... if yer wanna see a ' shoot-yourself-in-the-foot " policy , check out Julia Gizzard's carbon tax in Ozzie ..... not only do most of Australia's trading partners not apply this impost upon their businesses & exporters , the few that do only charge carbon at $ 5 or $ 8 per tonne .......
Julia has to have world's best practice : $ 23 per tonne ....
....... aha ha ha de haaaaaaaaa , cobberdiggermate !
Thanks Christov
Regardless of it ever becoming official policy - Import Substitution in the very end - will happen once again. Nothing more certain. Better sooner than later.
The other option is for more (once proud) NZ exporters to go the same way as that most innovative NZ manufacturer - Fisher and Paykel. Now sadly just a Chinese brand operating out of a rented building.
The best manufacturing export performance happens when your factory standing charges (overheads) are already largely covered from a strong domestic sales base.
Cheers Rudderless.....I think it a worthy concept, further I think you will find the U.S. will probably be doing just that in the not too distant if they can get Walmart onside......
Yes I know it's the consumers that place the demands on powerhouse organisations such as Walmart to keep it "cheap", but I couldn't help but notice there is more and more ranting across American Television about how they have lost their way as producers of quality goods.....right down to even Letterman slaging off an innocuous $5.60 Chinese backscratcher, saying "for Chrisssake! , we can't make a better one of these for a dollar fifty..?"
The backscratcher was, I'm sure, to demonstrate a point.....I think the message is getting across.....just what they'll do about the money owed to China is yet to be realised.
Steven ...I'm not advocating it , I'm pointing out that it is, even if veiled under layered tariffs and so forth a naturally occuring cycle of during these times.
And I think it's great that you buy N.Z. made where possible, but are you paying a premium for it...? As long as we cost of labour wise, remain uncompetitive ( locally) you would have to be paying a premium .
It's a difficult one to bring into the National psyche, usually achieved through the type of Nationalist rhetoric Winnie trots out. I believe the Americans are far more receptive than we to ,having to regain some lost part of their identity or credibility on the Global stage.
Have you never observed some of the greatest manufacturing nations of the past , (and present)have endured lessons in humility prior to pulling together to establish a strong economic position , somehow reducing the loss of (face) on the Global stage.
i could give you a list of twenty items within arms reach of where your sitting, I'd be fairly confident very few are N.Z. made.
Tariffs will come I think, we will go broke if we do not....if you cannot get exports up to exceed imports then you are doomed. Everyone is going for "competitive de-valuations" looks like 155 other countries expect NZ (I think there are 156?) to be the stooge...fat chance. The next stage has to be import tarrifs and teh US is on that track already with blocking tyres? and solar panels...
Well Im not so sure I am paying a premium when you weigh quality. So I try and buy NZ, I dont always succeed, and yes I cant afford to do it exclusively....A new TV will be made in china (or similar)....no choice on availability and price....certianly I wouldnt buy USA made...
What I am noticing last night is some products now dont say " NZ merino wool made in NZ", just "merino wool"....and the shop manager wouldnt say or didnt know......this was a bit more upmarket than Warehouse....so I expect a NZ label at $100+ I also dont like "designed in NZ, made in china" labels....not when Im expected to pay $350 (say) and a totally NZ made item next to it is the same price....screw macpac is my answer....
I now buy NZ olive oil only as well, Ok twice the price but I dont use that much.....
Yes I agree Americans can be a bit more American orientated, in some areas anyway, like their guitars have a huge premium when USA made....and the musicians pay it....
20 items....yes indeed, my lunch box is systema which is NZ made, though the plastic wont be...or certainly the crude...plantronics head set, mexico....computer desk will be NZ made I suspect (I dont recall) I assume we dont include the house or the chidren? ;].......rest looks to be china.....then given our scale that isnt surprising....
regards
Are/would you still be competing with Chinese imports and prices Rudderless?
Are you taking new import tariffs or what?
How will convince the NZ consumer to buy that NZ made (gov subsidized or not) good? That's the problem many NZ businesses have now? Hence they borrow and borrow and run at a loss, and take everything out of the business via Director Drawings until the gravy train of
credit ends
idle is lack of demand....
High assets, yes, ppls are looking to offload their problem to someone else....its a game of musical chairs are PDK and I have been saying for some time....
So there is a real risk of a real impact......unless like me you are in cash and paying down debt as fast as.....Im managing over $1k a month extra....thats a lot of ex-spending....>15% Im not doing....
regards
Where those crusty old buggers have sat on house or property assets that have gone up in value for no real improvement effort, Im afraid I do not.
Now a business man or woman who makes a good and makes more and more and employs more and more ppl through his/her own efforts and ability yes, he/she has my respect.
regards
Just one of the perverse results of low interest rates I suspect. It drives down returns from business and investment generally. With 4% returns at the bank instead of 8% you now need double the nest egg for retirement. Same thing with property and, increasingly, with shares as spending slows and savings increase.
Nothing to get alarmed about though Bernard, it will work it's way out. Unless of course the Central Banks do something really really stupid. Like printing money when there's plenty already. Oh wait, they've already started that. Panic? No patience? Stupid?
Lower interest rates increase the attractiveness of businesses and other productive activities by reducing one of their costs and making the returns from them atractive relative to bank deposits.
Doubt if we would have any investment at all in the current climate if you could still get 9% at the bank.
I don't know - margins would probably be fatter and the prospect of selling a business for cash would be something to look forward to. Not today, given a negative real rate of return on the perennially devaluing store of wealth.
The incentives for hard work are not attractive, especially so, when the prospect of delinquent debtors can push a business into bankruptcy.
Banks are unwilling to extend working captital at low interest rates, as all the assets securing the business are pre-encumbered.
Tell me I am wrong and show me a significant net annual IRD tax payment made by a SME (including farmers).
Only point I was trying to make is that low interest rates are good for business and for productive investment. If interest rates were higher in the current slightly gloomy environment profitability would be worse and the chance of selling a business would also diminish as the alternative much lower risk returns on capital available to a potential purchaser would be higher. If you can get 9% from a bank for doing nothing with a good chance of getting your money back the prospect of working all hours in a business with a good chance of losing the lot will look a lot less attractive.
Your other points are certainly correct. Many business owners view the minimum wage as a dim and distant prospect and banks really dont want to know about lending to small business unless there is property security.
I don't wish to detract from your common, but erroneously held views.
But think of it this way: if I as a bond dealer borrow to finance the purchase of a business's longer term debt in the form of bonds with a coupon of 10%, when short term interest rates are @ say 5%.
My dealer book shows an annual income of 10% financed at a cost of 5%, leaving me a net five percent.
The business has a cost of finance of 10% to reap a return of say (10+X)%
Lets say short term interest rates fall by half to 2.5%.
My dealer book shows a capital gain on the bonds as the initial 10% par yield falls to 7.5% and the net annual income rises to 7.5%.
The business still has a cost of 10% per annum and new competitors can enter the market and undercut it's pricing margins given the now lower finance costs.
More importantly, the business has to make a set aside provision from profit as the debt has risen in value from par $100 dollars to $120 market value, after the interest rate cut.
Now tell me who benefits from lower interest rates. Certainly retired ex- bond dealers.
And it's been this way since 1982.
I dont wish to detract from your apparent in depth knowledge of private sector bond funding but I dont see what it has to do with price of herrings.
There wont be many businesses not listed on the NZX ( and Infratil is about the last one I can think of with a market cap of over 1 Billion )who can arrange bond funding. Most businesses are using property based funding and most of that is now at floating rates, as are their overdrafts if they can get them.
You might have made a capital gain on ten year bonds offered by a trading bank if short term rates fall but you wont on a floating rate mortgage.
If debts are at floating rates the issuer certainly benefits when rates fall.
Waripori, you're right that lower interest rates are good for businesses and productive activity if they result from a large pool of real savings. If they are the result of an expansion in the money supply all they do is sucker businesses into making loss-making investments which eventually need to be liquidated.
Governments around the world have done their best not only to prevent the essential liquidation of these 'malinvestments', but they have also prevented interest rates from rising to reflect the smaller pool of real savings. In other words, the economy will remain stuffed for a long time yet.
Actually I'd say the reverse, a business only borrows to make a profit, if interest rates are low then its worthwhile borrowing to make a good, if borrowing is expensive then its just not worth it. However I'd agree on too low probably being bad in the finance sector anyway. If you can get money for virtualy no cost (no interest) then the cost of speculating/gambling in anything makes sense especially if you dont carry the can....whcih the banksters do not.
Its not the Central banks that are the issue, its the Govns....and printing in the zero bound or liquidity trap isnt inflation its anti-deflationary if you are lucky....
I'd suggest you pray for such a success....deflation and a mega depression otherwise.
regards
Steven, Antal Fakete explains the process in his article "THE MARGINAL PRODUCTIVITY OF DEBT" http://www.professorfekete.com/articles/AEFTheMarginalProductivityOfDebt.pdf "what is happening to the unprecedented tide of new money flooding the economy? Well, it is used to pay off debt by the people who are desperately scrambling to get out of debt. Businessmen in general are lethargic; every cut in the rate of interest hits them by eroding the value of their previous investments." "falling interest rates make the liquidation value of debt rise, which becomes a negative item in the profit/loss statement eating into capital that has to be replenished as a consequence. Worse still, there is no way businessmen can be induced to make new investments as long as further reductions in the rate of interest are in the cards. They are aware that their investments would go up in smoke as the rate of interest fell further in the wake of “quantitative easing”. Self-fulfilling speculation on falling interest rates The only enterprise prospering in this deflationary environment is bond speculation. Speculators use new money, made available by the Fed, to expand their activities further in bidding up bond prices. They pre-empt the Fed: buy the bonds first before the Fed has a chance; then turn around and dump them in the lap of the Fed. This activity is risk-free. Speculators are told in advance that the Fed is going to move its operations from the short to the long end of the yield curve. It will buy $300 billion worth of long dated Treasury issues during the next six months, and probably much more after that. Speculation on falling interest rates becomes self-fulfilling, thanks to the insane idea of open market operations of the Fed making bond speculation risk-free. Deflation is made selfsustaining"
So Ok an "austrian" bad news generally when it comes to political blinkers...also he's into Gold.....pretty much enough said on his outlook.
His theories fall into the school of economic thought led by Carl Menger. His support of the gold standard has similarities to Austrian Economics
This I find strange,
"Businessmen in general are lethargic; every cut in the rate of interest hits them by
eroding the value of their previous investments."
Now if the so called business men are speculators or "investors" ie creditors, I can see that, but my only conclusion is that he means this but these are not real business men, ie they are not manufacturers that produce a good. If they were and had invested in plant then lowered cost of borrowings make the payback even better. Also if you consider the carry trade, a low US rate means banks borrow at next to nothing (0.25%) but invest in say NZ Govn bonds at 5.5%, so they are making 5%. So for him to say its a losing thing its a no but then he's a gold bug and high interest rates imply infaltion where gold does well.
"The only enterprise prospering in this deflationary environment is bond speculation" Yes and no....I certianly agree thats not a untrue position but Im not sure what happens when everyone rushes to exit bonds....at that point the slow ppl will lose a lot....(but im not a bond person).
We are certainly in a deflatioanry environment or heading towards it...then no investment makes sense (except cash and short term Govn bonds) until the bubble price of those asets is removed.....so shares, property just about anything is hugely over-valued....
However I will have a read of the PDF..........
For instance he has a very no-mainstream theory,
"The key to understanding the problem is the marginal productivity of debt, a concept
curiously missing from the vocabulary of mainstream economics."
and then goes on to dis keynes when we have not had Keynes for 40 years....not even moniterest but more like objectivist.
further,
"Keynesians are watching the wrong ratio, that of debt-to-GDP."
From what I can see the ppl he is calling Keynesians are not keynesians and I cant identify who He's talking about. Paul Krugman sort of jumps to mind....yet even he is saying here comes the depression, clearly Steve Keen and Minsky is leading here, I see some similarities in Anatal's pdf
I do agree on the outcome he see's serious deflation.
"Worse still, there is no way businessmen can be induced to make new
investments as long as further reductions in the rate of interest are in the cards. They are
aware that their investments would go up in smoke as the rate of interest fell further in
the wake of “quantitative easing”."
He's saying or not saying demand is an issue but seems to be caliming its interest rates (I think). Yet he implies its demand earlier, instead he says its due to interest rates dropping that business man do not invest ie I suppose that they should go up!!! he's very uh un-conventional....
Yes, I really really do not fathom this line, "Worse still, there is no way businessmen can be induced to make new investments as long as further reductions in the rate of interest are in the cards" Businessman wont invest as long as there is no demand, or increasing demand threatening to absorb spare capacity....no matter what the rate they wont borrow to buy Idle plant....
hmm....my conclusion is, he's a nutter frankly...at best he will be right but for the wrong reasons IMHO. You could listen to Steve Keen and Paul Krugman and hear deflation as well...the former doesnt think it can be fixed without a debt jubilee, the latter by stimulating demand....the latter misses Peak oil ie expensive energy so you cant under-write it...but thats another thread.
Strange that he also critisies Bernake, yet this has been 20~30 years in the making, Greenspan really....most strange.
Its like he's not blaming the GP for doing the right thing early but blaming the A&E for not saving a terminal patient....when the patient turns up in an ambulance.
GTG
regards
So people are reducing debt and saving money. Good thing.
So they are reluctant to put it on the market and into businesses etc. Just shows you they have some brains.
First. People are becoming aware that putting money into the financial services sector is akin to marrying an axe murderer. We are also aware that even government bonds etc are prone to being fiddled with. (like being deliberately inflated out of any value) but what do you do.
Second. Businesses are crushed under a raft of Government and Beneficiary interests that make it almost impossible to function. And hugely risky as a result. Small businesses are crushed under very large businesses that are hugely inefficient, but whom manage to survive by market control.
And apparently us 'people' are doing something wrong by staying in 'cash'
The price signals are strong enough that you would expect housebuilding in Auckland, and certainly Christchurch, will pick up fairly quickly, although constrained more than it should be, by considerable concern for the overall economy.
For everything else I do believe a different focus of the Reserve Bank and government on national competitiveness, primarily through exchange rate and money supply management, is critical. Otherwise any industry in exporting, import substitution, tourism knows that whatever sums they do in planning a business, can easily be shafted by a 20% revaluation in the exchange rate, and so in their relative cost competitiveness. Bollard is on record as saying he wants the exchange rate to be as high as it can sustainably be (where I believe the definition of sustainable is the to the end of his term). That approach is a nice easy sit on your hands solution to keeping inflation under control, but is guaranteed to make industries as a whole uncompetitive with foreign ones, given our open floating exchange.
As the IMF has noted, we are probably 20% overvalued right now. Get the NZ$ down by 20% and then look for movements only in relation to movements in the current account. Some initial inflation would actually be helpful in clearing some over leverage, and help get asset prices (assuming they did not move) at more sensible and affordable levels.
A useful example of a model is the car industry in Britain, which is now booming and the healthiest it has been for decades, despite Europe being a cot case of an economy. There might be some micro reasons, but the overwhelming reason for the UK cars' success, is the 20-30% devaluation of the pound over the last 2-3 years. (caused by massive money printing; another story)
"or are choosing to repay any debt they have"
You complain when people spend more than they earn causing the GFC then you complain when they do the sensible thing and back back debt. What do you want?
You said in an article a few weeks ago, negotiate the mortgage rate and then pay extra principal off. Now you are saying use that cash to risk on a new house or new business?
You split personality amazes me.
are there any companies on the nzx 50 that are directly involved in 2 of our biggest exports'dairy and forestry.
not many if any
plenty of companies who rely on property valuations to make a profit.
any companies on the nzx involved in food production.
once again
not many if any.
Stephen L. By seekiing a government engineered 20% devaluation of the NZ$ you again ignore the other side of that ledger viz. all nzers will pay your manufactuers a giant subsidy in the form of increased price of imports. Imagine the impact on fuel alone.Better that the whole economy competes on quality rather than just price; there the chinee will beat you every time.
Ergophobia
Ergo,
Given we have an annual 4% of GDP current account deficit- and have had for forty years- and with a National government plan to grow this deficit to a staggering 6.7% within 2 years, then the current subsidy going on is by future generations of New Zealanders subsidising overseas suppliers of goods. The IMF estimates that a 20% devaluation is required, given price elasticities of most goods and services, to bridge this gap, and to stop subsidising foreigners. As I would prefer that my now teenage children might possibly decide to stay in New Zealand, I would prefer that this subsidy stop as soon as possible.
A simple expectation of the makeup of the 4% gap could look like this:
Reduction in purchases of overseas goods1.3%.
Increase in local production or provision of such goods and services. 1.3%
Reduction in dividends and interest to foreigners, because of lower debts and increased local ownership. 1.3%.
Nothing massive in their own right, although very positive for employment; and a chance at making the country attractive economically to our children and theirs.
It's the path followed by thge UK, the US, China, Japan, Switzerland and many others. We are the outlier.
How really do you imagine otherwise suddenly being competitive in quality as you put it? What will be the catalyst for that?
Simple really - costs have been driven higher and higher by the state sector. This impost on kiwis leaves liitle disposable income at the end of the day. This burden continues to grow and the average person sees this so refrains from investing. Contagion sets in and we see a downward spiral.. Reducing the bureaucracy, the cost on society, improving human capital, restraining excessive consumption, will lead to improved productivity.
The housing sector is f^^d because the fair value of a home now includes BS costs such as council compliance etc... Etc.. values have become massively skewed. Gst increase has exacerbated thisfurther. Urban areas should adopt simple house plans - standardise thereby reducing costs. House costs and valuations will be easily derived and the capital gain eliminated. Housing should not be a business case for investors to the extent that it is.
The sooner the RBNZ and govt take measures to restore this balance the better. Otherwise I can see 10 years of waffling along the way we are now.
Sorry, S, try the following round pegs in your energy/VS square hole
- Scaffolding for 2.4+ heights. Certified by baboons bearing little pieces of paper. Used ter be ladders.
- Fencing of building sites. Because of all those kiddy deaths from Tools left Laying Aboot
- Certification of all Power Tools. The odd tingle from the classic Desoutter alloy body never hurt a soul. Well maybe fried a few neurons...
- Licensed Building Practitioners. A Cartel a'building, no less.
- And licensed by trade, so if'n yer wanna do Foundations, External Plastering, Roofing (!roofing!) Brick/Block Laying, and Carpentry, that's the five LBP licence classes yer must hold.
- Soon ter be added: Site Supervision (see, a Pamphlet from DBH is a Cruel Weapon in the wrong Hands!)
- Council Development Contribution (built into the Land prices, and if the land price is wrong, everything on top is, too)
- Municipal Urban Limits - guarantees a 2-20 times increment in raw land price (see Productivity Commish on this sad rort).
So, my dear chap (or chappess - on the InterWeb nobody can be Shure...):
without needing to go anywhere near Greedy Bankers or Energy costs, I reckon we have explained perhaps $300K of the average $500K house plus section cost.
Internal waste.
Stoopid bureaucrats.
Mindless regulation.
Unintended Consequences.
Say it ain't so.....
Maybe it has something to do with our cowboy economics.
During those boom years i was expecting Telecom to rip up all the copper wire and hock it off to China, saying bugger the Telecommunications we can make a faster buck this way.
You see Bernard, a fast buck is more important than the economy or the country.
Remember Brierly?
....... ahhhh , Sir Ron Brierley .... we really dish those knighthoods out without any due care or attention , don't we .......
Sir Michael Fay ...... Sir Tom Skinner ......Sir Michael Cullen ...... Sir Robert Mudloon ...
........ at least Richie McCaw won us the Webb Ellis trophy , he's earnt the gong !
The problem is that much easier money can be made by speculating with houses. And that New Zealand doesnt have a lot else to invest in. Agriculture? Been there, done that. Tourism? Well, maybe. But tourism infrastructure is pretty pathetic and the Chinese keep coming anyways, so why bother? Mining? Well, probably that will come next, but as of now too much public resistance.
Manufacturing? No skill base, all too hard. High tec? Forget it. NZ is lightyears behind on that, too. New houses, as in made of proper modern materials, not ridiculously overpriced dog huts? No skill base, horrendous Council charges, horrific land prices.
Bernard, what exactly woudl you want NZers to invest in? As long as there is no convincing answer, do not blam them for gambling on real estate.
"overpriced dog huts"....never a truer word posted PP...only the well off and fools should travel down the housebuilding road to hell.
What a great future awaits young Kiwi....a lifetime of debt to a parasite because you were dumb enough to believe the crap advertising that convinced you that a new Dog Hut was the thing you needed...and the BS that a bank would help you into your new dream Dog Hut..
Now you are freezing your butt off in winter trying to remember when it was stinking hot mid Feb in your new Dog Hut...and the insurance bills and council thieving....and having to work two jobs to feed the bank ....yes young Kiwi have a great future all mapped out for them.
Best thing about the kiwi Dog Hut is the way you get to know what your neighbours are fighting about, without having to leave your own Dog Hut.
SASOL ( est. 1950 , Johannesburg , SA ) listed on NYSE as SSL ....
.... current price $US 43.25 / share ..... market cap $US 26 billion . Annual sales $US 33 billion . Forward PE 7.95 , forward dividend yield 3.9 % . Share equity $US 15 billion ( liabilities total $US 9 billion , assets $US 24 billion ) ...
Not true,
http://www.scoop.co.nz/stories/PA1204/S00350/marsden-point-expansion-to…
I dont recall the Greens blocking the above expansion?....So what they do say they dont want is dodgy fracking, deep sea or ctl.....
regards
Solid Energy has expressed an interest in converting Southland lignite into urea & into synthetic diesel ......
..... and they are constructing a plant at Mataura capable of converting 150 000 tonnes of lignite into briquettes ( 90 000 tonnes ) per annum ..... fuel briquettes for export ....
[ Solid Energy has a proven resource of 1.4 billion tonnes of lignite ]
The ctl process is very in-efficient and co2 emitting. Its really a conversion process to a transport energy source, so an arbitrage. Also note that the efficiency is greatly dependant on the quality of the feed stock. So I would assume in 1940 the Germans were using the highest quality black steaming coal, SI brown coal on the other hand is barely coal.....
The best idea I have seen for efficient conversion is tallow into bio-deisel....though tallow isnt really a waste product but a by-product that has other uses.
regards
Well, for a start Bernard should start promoting private sector job growth as a the key statistic to watch. Muddling up public and private sector "jobs" is a bad idea as you could argue that a percentage of government and local government jobs are in fact a form of welfare. The percentage depends on your political view.
This article sparked the thought - it seems Emperor Obama has been doing ok. His aspiring rival dug up some dirt that actually shows Obama in a good light - apparently Obama is better for private sector jobs.
http://finance.yahoo.com/news/obamas-recovery-worst-modern-times-161337…
Stephen L, I know and agree that NZ Inc. has not paid it's way since 1973 but the solution here is not in joining in the global race to the LCD. The answer lies in getting rid of handbrake government with all it's nepotism and unintended consequences. I realise that this (Austrian) message is very unpopular in this post GFC era of Corporate, Oligarchical Communism but sooner or later (probably by violent ruction) the world will rediscover the simple beauty of Capitalism. I say NZ should spare itself the agony and just go there now.
Regards, Ergophobia
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