All I want for Christmas is … cash?
So says an article on Stuff.
This makes sense to me, after all having the means to buy what you value the most is useful. In fact, this is incredibly relevant for my article in the Dom Post tomorrow 😉
Archive for year: 2010
Another sentence
The shift from debt-financed consumption to greater saving and investment is also expected to support the household sector’s capacity to repay its debt.
This is from the RBNZ’s Dec 10 bulletin. This is a good article, but the nature of this specific sentence grates me. I would suggest reading and enjoying the article for what it is – and viewing my discussion below the fold as a discussion based on an interpretation of this sentence, not a discussion of the article per see.
Sentence to ponder
Via Stats NZ
Increases in borrowing, interest paid, and investment in housing by households and the private unincorporated producers sectors (sole traders, partnerships) suggest that New Zealand increased its international indebtedness through offshore borrowing to finance housing, among other things.
That is from their new Institutional Sector Accounts, which I’m going to spend a bit of time thinking about. The key thing to differentiate for me here is – were we spending too much building houses, or simply building up the mortgage in order to consume excessive amounts of non-housing goods. My impression is generally in the former camp, and I’m hoping that a bit of time looking at this data will give me a clearer idea of which view is more reasonable.
I continue to believe that any adjustment in the NZ economy will come through investment in housing, rather than through a large scale shift in household consumption (which if anything has been restrained in NZ). In this view we borrowed to build bigger houses, not to buy plasma TVs. So it will be interesting to see.
Irish and Greek crises: Why is NZ different?
This post from Marginal Revolution has moved me from thinking to writing.
On the surface there appears to be a lot in common with the Irish, Greek, and NZ economies. All three have high net foreign liability positions, liabilities are highly concentrated through banks who are borrowing overseas, all three have experienced some form of housing boom and lift in consumption, and finally all three appeared to have a relatively strong fiscal position before the GFC before moving into fiscal deficits after the shock. And yet (so far) while the Irish and Greek economies and banking systems have collapsed, New Zealand’s has been fine.
There are two major differences that have helped reduce the implied risk on our debt, making New Zealand much less likely to experience a bank run:
- Our banking system is primarily foreign owned (Eric Crampton expands on why this is a good thing),
- We have a freely floating exchange rate – combined with having much of our debt denominated in NZ$ this is useful.
These are important points to recognise. While many commentators are saying we should “peg” our dollar and set up more domestic ownership of banks GIVEN the risks associated with the GFC, I tend to reach the opposite conclusion – namely, the reason why we haven’t suffered as much as these countries has been largely the result of our free floating exchange rate and the fact that a larger economy has a large stake in our banking system.
The terms of trade boost and our proximity and exposure to Asia has also helped, but I would say that the Greek and Irish crises give us a reason to hold onto the status quo – not to chuck it out!
QE2: Is the Fed “mistaken” on purpose
There is an excellent article on QE2 by Robert Barro (ht Greg Mankiw), I suggest you read it.
However, there is one point – where it goes from descriptive to a little more forward looking about policy – where I might see things in a slightly different shade:
The downside of QE2 is that it intensifies the problems of an exit strategy aimed at avoiding the inflationary consequences of the Fed’s vast monetary expansion. The Fed is over-confident about its ability to manage the exit strategy; in particular, it is wrong to view increases in interest rates paid on reserves as a new and more effective instrument for accomplishing a painless exit.
I see QE2 slightly differently. QE is partially a means of getting the Fed to commit itself to lower interest rates in the future, by introducing the “loss on bonds” in their objective function. In essence, the Fed KNOWS that this policy will lead them to overshoot their inflation target.
Now I agree with Barro when he says that, by using different instruments the “future Fed” can reduce the relative losses – but if they have really introduced QE to commit to a lower path of short-term interest rates this is a mute point.
This is the key question for me here – are the Fed using QE as a commitment strategy, or are they just using it as a way to directly increase the money stock or directly push down longer term rates. Personally, I don’t think the uses are independent and I think that some form of “commitment” is implicit in what they are doing.
A question to all
Why do policy makers care about this graph so much right now? (ht Roger Kerr)
Specifically, my question to people is simply this three parter:
- Does this graph show an issue,
- If so, what is it?
- And if so, are their any changes that could improve matters?
Some small thoughts of my own beneath the fold.