This is why exports from Asia are falling in a hole …

Calculated Risk illustrates growth in US retail sales over the past 15 odd years:

retaildec2008

Source: Calculated Risk.

Now we know that exports from Japan are plummeting. We suspect exports from China are falling. This decline in spending in the world’s largest economy would be the reason why. Very interesting …

Update: Don’t forget about trade, ick!

  • What would Hayek say

    That graph leaves me very worried. I keep hoping that maybe just maybe NZ will slide through the current turmoil and be able to get back up again in 12 months after some residential property revaluations. But the stories of factories closing in China before christmas suggested orders have just stopped. Flow on impacts – initially US stores won’t have much to sell, unemployment rising in China, declining Chinese/Japanese expenditure, increased debt default in China/Japan due to no cash flow… – This is just off the top of my head without proper analysis.

    Ok snapping out of the doom cycle – What is the way out of this?
    First we need to determine what is the problem (public policy 101) – Is it inflation? stagflation or asset bubble and related credit crunch? Or combination of all three and/or something else.

    Quick off the top of the head thoughts(I think I’m now straying into your Broken Windows thread):

    Asset bubble – possibly you cuold look at a Keynesian stimulus, a straight out international debt write off (Niall Ferguson has suggested this – as an aside I recommend his book the Ascent of Money) as short term solutions being aware you may have a medium/long term inflation/stagflation problem to fix as a result. If Keynesian stimulus is this best achieved via bank bail outs and debt write offs, or would stimulus be better by government investment in buying shares in publically traded companies thereby helping to provide a floor to asset prices? An impact of Nationals 40% target of 40 NZ equities for the superannuation fund could achieve this and then provide a better vehicle to eventually re-sell back to the public. But an important question for NZ is do we need to reinflate the NZ domestic market or is it more important to reinflate US or Chinese markets instead – which is more likely to generate the cash flow needed to pay for NZ exporters.

    What about Non keynesian solutions – looking at Freidman as an alternative. Freidmans work on what he called the great contraction (the depression)is important if his argument that the epression was the result of a financial shock, encouraging savings and balancing the books and in time reducing governments role in the wider economy to something like 20% GDP. The importance of allowing prices to provide information to guide investment decisions should not be underestimated – I think tvhe has already mentioned this in prior threads.

    In chosing style of intervention it shold not be forgotten that NZ already has a large stimulus coming through via tax cuts, lower petrol prices and reduced OCR. I know that regardless of tax cuts, the lower petrol prices and OCR already is benefiting the Hayek household enough to continue justifying my coffee addiction.

    Overall thoughts – what the NZ government does at the moment is really not going to make much of a difference – why? Well looking at NZ economy in silo, we still have a relatively healthy financial sector – there will be some house price decrease, but we don’t have the same walk away incentives that exist in the US that exposes NZ banks to the same level of credit risk. Export prices for lamb and beef are holding up and whilst dairy prices may drop to $5kg milk solids, this is still a good price compared to 3 years ago. But it is a concern for those farmers that do not have debt under control. Essentially this mean most NZ provinces have the potential to slide through the crisis. Metros like Auckland, Chch and Wellington may hurt due to impact on service sector. I don’t know enough about manufacturing sector to add an comment on impact. Probably depends on product and particular export market.

    On this basis what then is the problem definition? One take on it could be that NZ metros facing the impact of an asset repricing resulting in lower household wealth and consequent expenditure. Debt is not likely to be a problem due to impact of low OCR (most households at the moment are able to cover monthly mortgage payments).

    The questions I’m starting to think that the big policy issues that really matter for NZ are: how do we enable access to scarce capital and then allocate that capital to productive investments, whilst at the same time providing some smoothing to the transition path for people in unproductive activity and at risk. Capital investment could be done by the government or private sector depending on your on political philosophy. But if done by the government you need to be really careful about the way investment is done. Potentially the best of a bad situation is to run it through something like the Super Fund into publicly listed companies and similar investments (could be a debt or equity investment) as a type of silent partner, noting private sector is more likely to then allocate that capital to productive investment and you would still have some price information.

    Internationally – we can just hope that policy prescriptions from EU,US, Japan and China don’t go protectionist which includes not just blocking export goods but more importantly the hoarding of scarce capital from productive returns. Maybe role for government, MFAT, Treasury and MED to go all out at trying to keep doors open.

    Other NZ inc prescibtions – if we are going to continue with a sizeable role of government in the economy, we need to go all out in improving public sector productivity and be willing to consider all options for doing this regardless of political spectrum. This should include whether in some cases privatisation or competition against a government is better. And in some cases whether the government should invest, but under no circumstances lock yourself into an ideological straight jacket so that you make decision you know are wrong.

    Sorry for the long stream of consciousness (rant). I’ll try and do pen to paper in future and produce some concise thinking.

  • Hi What would Hayek say,

    Sure the data is concerning – but to start with we have to ask “why”, why is the US consumer cutting back on consumption.

    If it is a rational response to new information (eg we are a hell of a lot poorer than we expected) it is cool – however, if it has moved past that to sheer “fear” (or credit rationing) then there could be some scope for the government to move in and “spend what we won’t”.

    I am not a fan or writing off debt to any great degree – if we write off debt we are transferring resources from savers to borrowers. How is that really fair? Do we truly need to help borrowers to improve outcomes.

    Ultimately, any stimulus should be based on perceived “market failure” – and it should take into account the fairness of actions. Printing a whole lot of money, or writing off debt might prevent a crisis right now – but it is both unfair and threatens future stability.

    People are poorer than they expected so there is going to be some pain – the role of government is to soften the transition. I fear that analysts get a bit over excited about the idea of recession – thanks to the assumption that “growth cannot fall” and if it does we have to do something about it. The truth is, we have to accept some pullback in economic activity – it just doesn’t make sense that the developed world has been borrowing from the faster growing developing world for so long.

  • What would Hayek say

    Hi Matt, happy to agree with you. We need to ask the why question more often in anlysis, as well as what is the underlying problem (people often present solutions looking for a problem, rather than first assess what is the problem before developing options for solutions). And I need to spend five minutes to organise my rants.

    I agree with your point about printing money/debt write off and would add that while it is one immediate solution to addressing debt (i.e you owe $20 so print $20 to pay it off, therefore no debt), but then as you point out it not fair (person debt owed to loses an asset) and essentially creates an inflation trap (excess monetary supply) that causes bigger problems medium term. It could be considered a form of intergenerational taxation by eroding the value of savings.

    So yes there will be pain – hopefully it just means we are on a diet for a few months helping us to shake off the excess consumption kilos, but in the end we are fighting fit and more productive.

    Recession businesses such as veda advantage are probably a good place to look to see the shape of the recession and a watch of there share price might be one way to see if markets have some confidence in investing, even if it is on the pick off more bad debts. Spending in the regions would then indicate confidence of the farming/export community and maybe provide and initial rough indicator of the shape of the recovery.

    As a behaviourist would say – given human nature, there is another bubble waiting to develop out there, probably from a previously undervalued sector or new industry that will develop – so its worth finding what will be the next growth area.