Matt Nolan

Bank guarantee “here to stay”

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So says Dr Cullen, and I think his description of why is pretty spot on:

it will be difficult in two years to return to a situation where bank deposits were no longer insured by the government

When financial institution base there decision on the fact that this new framework exists, changing the framework would be problematic and painful – making it harder to remove it. Furthermore, as he says, when every other country has a scheme we sort of get stuck having to have one – or else we have to pay a higher premium on our credit (assuming of course that the private sector can’t provide insurance as efficiently – a debatable assumption).

Dr Cullen also points out a major concern that:

excessive amounts of money that could flow into finance companies to chase the guarantee for two years

In that case, why don’t they let the Reserve Bank adjust insurance premiums based on risk – the companies have to show a credit rating anyway, so the better the rating the lower the premiums. At the moment the larger organisations, which also have better credit ratings, are paying MORE for this insurance – it is ridiculous.

As Dr Cullen has identified the problem, why doesn’t he fix it?

Matt Nolan

Quote 3) Frederic Bastiat: Cause and effects

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Frederic Bastiat:

In the economic sphere an act, a habit, an institution, a law produces not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them

ht Kimble.

I have not read any Bastiat – so I have very little to say.

Matt Nolan

Baltic Dry Index collapses

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So the Baltic Dry Index (an index that implies what the cost of shipping for exporters will be – in as far as it represents the fees of the people running ships) has collapsed by about 79% so far this year.

As the supply of ships is incredibly inelastic in the short term, this is probably the result of collapsing world commodity demand (although it could be that a whole lot of new ships came online at the same time – unlikely though).

What does this imply for NZ?  Well the index mainly represents shipping of “hard commodities” – so it tells us that demand for those has invariably fallen.  This implies:

  1. Soft commodities may have fallen further,
  2. Growth in Australia will slow – harming our exports,
  3. Shipping costs (especially for our logs and aluminium) have fallen markedly.

The first two factors are a concern – but the third factor is a bonus.  One of the reasons forestry has struggled is that prices have been depressed (no construction in the US!) while shipping costs have been high/shipping has been impossible to get.  Now ships will come here – and cheaply, making it possible for forestry to get back on the game.

As log prices are not likely to fall further – forestry will benefit from this.  Other commodity sellers may have some trouble (depending on what happens to soft commodity prices).

Will Taylor

The Greens understand economics

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Or so Russel Norman said when asked by Paul Henry earlier this week what the most common misconception about the Greens is. What do you think? I’m going to try a poll for the first time ever on tvhe, hopefully it works:)

I somehow stumbeled across this article from the greens (don’t ask me how..) which I think illustrates their understanding of economics

http://www.greens.org.nz/node/20081

I’ll be honest and admit I stopped reading the article after the paragraph i’m about to reproduce so I’m open to accusations of trolling, but this was little gem

“Reducing saving by cutting KiwiSaver is the same as increasing debt. It won’t show on the Government’s balance sheet, because Key has swapped Government debt for private debt. Lower savings will show up on households’ balance sheets as increased private debt, which is already too high,” Ms Fitzsimons says.

Two points here:

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Matt Nolan

Does inflation targeting encourage borrowing?

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That is the view put forward on the Rates Blog by Neville Bennett. It is also a view that Berl has enjoyed some airtime with. It is also, in part nonsense from a bunch of very smart people. Lets flesh it out a bit.

The quote that captures the essence of the argument (and the one that I least disagree with):

Its high Interest rates, like NZ’s, encouraged the borrowing of foreign currency.

In part this is could be true – if the Reserve Bank can only control the domestic interest rate then the relative “price” of domestic credit is higher, so banks will substitute to foreign credit. Very good. However, although this initially sounds bad or maybe scary, this factor by itself ignores ALOT about how inflation targeting impacts on the economy. It only tells us that banks MAY source a greater proportion of credit overseas – not more credit.

Furthermore, it gives the impression (which appears to have at least been implied here, and has been fully stated by Berl) that higher interest rates lead to more domestic borrowing. This my friends is complete nonsense. Let me wave my economics wand and show you why 😉

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goonix

Optimal tax theory and ACT’s taxation policy

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Yesterday, the ACT party released their tax policy (further discussion also over at Kiwiblog)

Some key points from ACT’s taxation policy include:

  1. restricting future increases in Government expenditure to inflation and population growth
  2. eventual personal tax rates of 12.5% up to $20,000 and 15% above $20,000
  3. eventual company tax rate of 15%
  4. eventual GST rate of 10%

Tax distorts behaviour. The concept of the ‘excess burden of taxation’ is the economic loss that society suffers as the result of a tax, over and above the revenue it collects. Distortions occur because people or firms change their behaviour in order to reduce the amount of tax they must pay, which results in deadweight loss from taxation.

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