TVHE

Big ups to our Prime Minister for recognising that there are limits to government (ht Anti-Dismal and Kiwiblog):

There is actually a limit to what governments can do

And on intergenerational equity:

You’ve saddled future generations with an enormous amount of debt that then they have to repay

Another quality quote is:

Good regulatory reform can be an important catalyst toward driving economic growth and coming out of the recession faster

I agree – I do think there is scope for government as well.  There are limits on government and there is a role for government – I am glad to see that we have a PM that recognises this.

However, my main question has to be – what defines his “limit” on government involvement?  This is an important question – as one can recognise there is limitations, but then they can just keep “pushing out” where these constraints hold.

John Key’s statements are a lot better quality than the tripe Aussie is getting with Kevin Rudd (I get the feeling that Key is more “economically literate”) – and I feel that our policy response is relatively more appropriate as well.

One piece of information managed to shake me out of my flu induced daze for long enough to write a post – Australian GDP had a surprising fall over the December quarter, falling 0.5% (seasonally adjusted) on September.

Appears that inventory accumulation was knocked down sharply – that is very interesting.  Usually during a recession inventories are a positive contributor – as spending slows more quickly than production.  This implies to me that the fall in GDP may not be sustainable – as inventory accumulation will need to build back up.

As a result, even with a 0.5% fall this quarter, I’m not sure if we are going to see an Aussie recession (two quarters of negative growth) quite yet …

Of course – the steep fall in their terms of trade is concerning – but that is a story for when I’m actually able to think

The Reserve Bank of Australia has left their rates unchanged at 3.25% (statement here). We suggested that this was a possibility earlier in the day – and it is the closest thing to a correct rate call that I’ve have made for the last 18 months

Relatively robust domestic demand, combined with commodity prices that just won’t fall sharply, has convinced the RBA that there is now enough stimulus.

They haven’t given up on future rate cuts. “The Board will consider the position again at its next meeting” indicates to me that there is room for cuts if Australian output starts to decline or if commodity prices from their end are really starting to sag.

This will definitely dent expected rate cuts in New Zealand. Before this I would have bagged a 75 cut – now a 50 cut is looking a lot more likely (than it was). I’ll keep an eye on iPredicit to see what is going to happen.

In all this negative news there is one plus that keeps on going:  Australian commodity prices:

Source(RBA)

In Australian dollar terms export prices are virtually unchanged.  I prefer looking at world prices though, as it gives you some idea of relative prices without having to look at the terms of trade (a sketchy idea).  In this sense prices are down 12% on their September 2008 peak.  However, to put this in perspective, this is 20% higher than February 2008!

I am very surprised with how strongly Australian commodity prices have held up.  Late last year people told me it was because the RBA measure was a “lagging indicator.  However, its February now and the index still looks very strong – why?  With this sort of information I can understand why the RBA might not cut rates today.

So, where do I get figures on Singapore refined petrol prices?

Crude oil has been falling, the exchange rate has stayed stable, but rising refining costs have driven up the retail price of petrol.  If anyone knows where I can find the figures it would be much appreciated

Following yesterday’s 100 basis point rate cut by the Reserve Bank of Australia, a statement was released that appeared to indicated that this could be the END of cuts by the RBA.

This surprised me, given that the RBNZ has stated that it is looking at cutting rates. At 3.5% our cash rate is only 25 basis points higher than the Aussie rate – implying that we might cut BELOW our neighbours, which would be very unusual. Why?

Read more…

Or so says a report released by Institute of Public Affairs (IPA) in Melbourne.

Aparantly they surveyed some literature showing that prices acutually rose in the years following cartel presecution in the states (disclaimer: I’ve only read a description of this report somewhere else!).

Seams to be a classic case of correlation vs causation to me, but as mentioned above I haven’t actually read the paper. The author is an economist who is the head of the “Deregulation” unit……

An excellent article by Stephen Kirchner of Institutional Economics on why the paradox of thrift has to be taken in context.

Key quote for me:

But recessions are not made worse via increased saving, so long as the financial system continues to put that saving to work

As long as the financial system is working (eg credit constraints are not firing up) then there is little need for rising savings to be met with rising government spending. Even in the case where there are financial issues, government intervention should focus on the market failure – rather than arbitrary fiscal spending.

One thing I would note is that there is also a role for confidence here which has been missed – if consumers and businesses lose confidence savings increases and demand for investment falls. If this decline is sufficient, and if interest rates are bounded at zero (or are interest rates, or the price of investments are too sticky) there can then be a role for increases “public investment”.

However, the appropriate role of government in the current crisis needs to be identified and defined (and quickly) before policy is determined. Doing something for the sake of doing something is nonsense – and such policy is often defended by the term “the paradox of thrift”.

The Reserve Bank of Australia cut 100 basis points last night taking the cash rate to 4.25% – well into easing territory.

A feeling that global commodity prices were in for a sustained lower period was a driving force behind this stimulus.  Surprisingly the Reserve Bank of Australia did not mention to enormous decline in fuel prices – however, there suggestion that the terms of trade would fall markedly implicitly suggests that the decline in petrol prices will be dominated by other factors.

What does this mean for New Zealand – a rule of thumb stemming from cuts so far (Aussie cut + 25) would suggest 125bp.  100 is still conceivable, as is 150.  My pick of 75 now seems incredibly unlikely.  Note, further discussion of the decision occurs in the comments of this post

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Apparently the Aussies are blaming Fonterra’s Global Dairytrade online auction platform for lowering the price of milk.

Interesting. If the auction is simply reflecting the true value of milk then the I feel no sympathy. This quote from the manager of the auction system sums up it’s purpose

Fonterra’s global trade managing director Kelvin Wickham said the auction was all about “the international market getting a transparent price” and all global dairytrade was doing was “making it more transparent more quickly”.

As an economist that is music to my ears. On the other hand here’s the quote from the Aussies

“Given things are bleak with the economic outlook, people are holding back on purchasing to see what happens with the auction,” Ms Bills said.

“Mostly, the price doesn’t recover. It is fine to want to have a transparent price system, but why not open at the closing price? If you put a price out there for something in an auction, people see it as a reserve.

“Buyers are waiting to see the price from the auction before they make their purchase.”

So basically they want the auction setup so that it props up the price of milk, can’t say I really have much sympathy for that view….