Comments

David Thompson Posted:
So very, very true. It beggars belief that we consider ourselves to be a developed nation when so much of our economy is based on selling milk powder or logs. BTW, I own a Plinius amplifier (my second) that drives a set of Theophany speakers.
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David Thompson Posted:
A robust but sobering report. It concerns me that confidence is rising, yet sales and exports are down and "manufacturers and exporters are still lagging behind other sectors". Surely we should wait until we're earning more money before we start spending more?
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siemens Posted:
Yes true! The only thing that will never die in this world is the nature and its science behind it. Great post.
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Kieran Ormandy Posted:
Thanks for the question Steven, Germany has seen increases in manufacturing employment since 2009, and Switzerland has had stable manufacturing employment between 2006 – 2011, even in the face of ongoing Euro-zone issues. Korea has seen increases in manufacturing employment since 2008 and Israel experienced large increases since 1998, while being stable over the last 4 years. Singapore has had increases in manufacturing employment over the last two years. These countries all value their manufacturing sectors and work to protect them, this is reflected in the above numbers and their performance through the GFC. Note data around the above examples was sourced from OECD labour market stats.
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John Walley Posted:
Point one: you should have no doubt what our Association says publically represent the views of our members. Point two: we don’t knee jerk responses, if you trace back our comments around NZPower you will see them link all the way back to our research in 2004 and 2005. All that material is fully linked from our comments above. Point three: you will note our comments on major users, sadly the same advantage does not accrue to smaller industrial users. The perverse incentives of the LRMC approach in all this are well known. Point four: the NZMEA is not like any other Association in New Zealand we admit only manufacturers and exporters into membership, and our public expressions are the views of that restricted membership.
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5/12/11

Neville Bennett 2006: How Reserve Bank inflates economy


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Neville Bennett writes on the monetary policy problems facing the traded economy in September 2006.  He notes the ever increasing money supply's impact on inflation control, the appearance of a property bubble and the impact on the exporters.  

This insightful piece demonstrates the inevitability of our current economic problems.

Monetary policy creates vicious cycle of debt

Monetary policy over the past couple of years has been a disaster. The latest interest rate policy statement indicates inflation has got away and more interest rate rises are likely.

New Zealand already has the highest interest rates Among the Group of 20 countries. This burdens the productive part of the economy and is a deterrent to investment and employment growth.

The Reserve Bank has warned of inflationary expectations for some time and has raised short term interest rates. It has given the impression of tightening but has not done so.

Money supply has surged, domestic credit has ballooned and overseas debt has appreciated at a hectic rate.

The policy statement was silent on many significant matters. It claims export earnings are growing but ignores a 10% appreciation of the dollar, which eases inflationary pressures. But it also deters exports and encourages imports, thereby contributing to an incredible current account deficit of 9.5% of GDP.

An undesirably high dollar is the predictable consequence of ill-considered monetary policy. The high interest rate policy encourages a flood of uridashi and Eurokiwi issues, the demand for which drives up the dollar.

The cheap money arising from these issues has gone into the housing market whose rise is the target of the bank’s interest rate policy. The more the bank raises rates, the higher the dollar goes and more cheap mortgage money becomes available. It is a self defeating circular process.

Another consequence of this disastrous policy is an alarming increase in private overseas debt. The bank is understandably silent on this issue.

The latest data available indicates corporate overseas debt rose in six months by $20 billion to $159 billion. By way of reference, total exports in the 2005 year are provisionally deemed to total $29 billion.

To put it crudely, debt is growing more than twice as fast as the country’s “earnings.” Private sector debt is now 102% of GDP.

So what should the bank have done?

An article last year argued the bank should be made responsible for keeping the dollar in a price range. The suggestion has not borne fruit and the dollar has appreciated out of that range.

What the bank might have done is to exert control over money supply: M3 has risen in the July year from $151 billion to $170 billion or about 13% annually. That does not indicate a policy designed to dampen down domestic demand.

The bank ought to ask if it could have done more to restrict credit. It is not anomalous that resident domestic credit aggregates have been increasing at 11-14% a year for the past three years?

It is accepted there is usually a lag before tightening takes effect, but the interest rate rises have taken place over a long period and it was assumed the process was complete.

The high dollar also has a disinflationary effect. The market always saw through the rhetoric and perceived the reality of loose monetary control. Foreign investors continued to purchase New Zealand dollar assets because more interest rate rises were seen to be necessary.

The bank has driven rates higher (at the short end) and it has warned house prices could weaken. But credit is booming. New Zealand credit aggregates in July 2004 were $199 billion, increasing to $216 billion in July 2005 and $243 billion in July 2006. This is hardly tightening.

Central banks have two main levers to guide money and credit. The first is interest rates. The Reserve Bank emphasises this. The second is OMO (open market operations), which involves selling or buying bonds, thereby increasing or decreasing the liquid reserves of the trading banks.

The bank has not used OMO leverage to tighten money and credit. It has had minimal effect on mortgage rates, partly because the banks keep offering attractive options to attract new business.

This interest rate policy has inverted the yield curve so more people will be looking at the longer, cheaper end of the curve for their requirements.

Money and credit have got dearer at the short end. This has little effect on house prices. So the wealth effect is high and household spending remains buoyant.

The bank acknowledges this situation but offers no new action beyond the threat of more interest rate rises. This is unlikely to deflate the housing bubble.

On the contrary, the bank’s stimulus to money and credit has helped to confound predictions of a “hard landing.”

One interesting facet is the relationship between credit expansion and GDP. The subject is rarely discussed, but is it not odd that credit growth is booming while economic growth has decelerated?

Why? It appears credit is growing, not to stimulate growth, but to assist credit-financed Asset purchases. Indeed, as the level of domestic saving is low, asset purchases rely on credit and often on an increase in foreign debt.

The trading account is another source of debt. Imports exceed exports. The current account deficit has reached 9.5% of GDP, funded on debt. The deficit owes much to the bank stimulating a high New Zealand dollar.

One useful test of the bank’s effectiveness might be how far the public understands that debts have to be serviced and amortised. Yet every day one encounters anecdotal evidence of people taking out unrealistic mortgages.

There is insufficient space in this article to contemplate further the unrealistic asset allocations arising from ineffective Reserve Bank activities.

The population is not saving or adding to its financial assets. It is dis-saving, consuming and driving up house prices.

Business investment is low. Manufacturing is “hollowing out” because of the high dollar policy. The ratio of overseas debt to GDP is almost the worst in the world.

The current account deficit is perhaps the worst in our history because monetary policy has been so loose.
 



tags: money supply, monetary policy, exchange rate, current account deficit

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