Matt Nolan

Why I’m in a bad mood

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Agnitio asked me what has been going on recently, as I was complaining its a mess.  I emailed him my summary, so I thought I’d also put them down here:

The ECB announced that its going to accept some things as collateral – but dump others.  Leaving markets confused about what the hell was going on, and what it means for sovereign debt purchases.

The US followed this up by saying that they would buy a smaller amount of long-term debt than forecast, sell short-term debt, and flatten the yield curve.  They say it will be stimulatory because NK models say so – however, a flat yield curve is a bit dodgy, given that it’s formed by expectations of either weak growth or weak inflation in the future.  In essence NK models say “get the long-run real interest rate down as much as possible” which you do by increasing inflation expectations, not nominal rates – so markets collapsed after that.

US government decided to get involved by refusing to extend the debt limit AGAIN, if they can’t make up by Sep 30 the US will default.

Then the European commission decided that it was a good time to say they were going to introduce a financial transactions tax – just when financial markets are panicking – and for good measure they said they hadn’t figured out what level it would be at, or what would be taxed yet, just to add to uncertainty.

While all this is happening Italy and Greece have continued to say they’ll get their fiscal situation in order – but they keep delaying introducing actual policies.  Given Greece is effectively insolvent, the dithering by them, other European governments, and the ECB, makes it unclear who holds the liability the entire European financial system is at a stand still.  Given the exposure of Australian banks to this, we have seen funding costs rise considerably (luckily no-one in NZ is actually borrowing anything).

With Europe having fluffed around while the crisis has been in full swing over the past 2 months, purchases from China have pulled back, seeing activity there slow as well.  A slowdown in China will have the impact of lowering our export prices.

Party.

This mix of awesome factors has seen the cost of insuring against default in Australian banks increase to within a whisker of their Lehman Brother peaks.  It has seen uncertainty measures push at new highs.

Unlike the Lehman Brother’s collapse there is no reason for these indicators to be high solely based on the financial fundamentals – the debt burden, and who holds what, is known.  However, while policy makers were trying to improve outcomes during the crisis in 2008, they seem more interested in trying to cause a crisis this time around.

Matt Nolan

Terms of trade: An Australian perspective

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Institutional Economics has some good points on the boost to Australia’s terms of trade – points we can keep in mind over here.

Relative to what we pay for our imports, Australia now gets higher prices for its exports than at any time since at least 1870. This was illustrated by Reserve Bank Governor Glenn Stevens’ observation that ‘five years ago, a ship load of iron ore was worth about the same as about 2,200 flat screen television sets. Today it is worth about 22,000 flat-screen TV sets.’

This increased international purchasing power is attributable not only to rising commodity prices, but also lower prices for imports, not least manufactured goods. The flip side of Australia’s terms of trade boom is the collapse in the terms of trade for countries like Japan.

So a higher terms of trade allows us to buy more imports for the same quantity of exports – something that is important to keep in mind when we bang on about “rebalancing” the economy.  Furthermore:

Our best response to the terms of trade boom is to become even more open to inflows of foreign labour and capital and to reduce the government’s command over resources so that the mining industry can expand with less pressure on other sectors. While the non-mining sectors will contract relative to mining, they can still expand in absolute terms if we continue to remove government-imposed resource constraints to overall economic growth.

The industries that aren’t experiencing higher returns should be expected to fail – proping them up is a policy that will just lead to worst outcomes from everyone.

So much of what has happened to New Zealand has been due to massive changes in the terms of trade – both in the 1970’s and in the 2000’s.  Asking for the “balance” of the economy to return to some past point doesn’t make sense – when the “prices/values” that dictate this point have changed … a change in economic structure is what NEEDED to happen.

It is possible some things may have gone a bit far – but it is better for us to try and understand why, where, and how before introducing policy, rather than aiming to meet some magical level of tradable to non-tradable GDP (or real consumption as a share of GDP).  If you want more details on the why, where, and how – look around the blog (pro-tip search imbalance), or contact me directly.

Matt Nolan

A point on debt

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Around the world there are a lot of complaints that there is too much debt, that debt will prevent a recovery, and that debt is the root of all problems – be it fiscal deficits, debt fueled consumption, or a debt powered housing market.

While there are undeniable issues to keep in mind, there are a few things to remember with these large debt levels – and one of the most important is that there are some people on the otherside of this debt.

Unknown to some is the fact that, as a planet, we are not actually in a net debt position with the rest of the galaxy (although the statistics say otherwise, I think there is an error – rather than us owing money to Martians).  As a result, for every person who has a liability owing there is another person or group who views that as an asset.  When we look at what the “issues” are with debt, we have to keep this point in mind.

Now this sounds like me stating the bleedingly obvious AGAIN … but lets think about some of the conclusions that come out of this:

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jamesz

This is not about cycling

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An Australian cycling magazine claims that you could save $3.5 million over your lifetime if you ride instead of owning a car. They say that their calculations are solid and we have no reason to doubt them, but this is not a story about how great it is to ride a bike.

Their calculations assume that you save every cent you don’t spend on a car in an account earning 6% interest. Unsurprisingly, the magic of compound interest — and probably a complete absence of discounting the value back to today — gives huge savings over a forty year career. Do cyclists really save all that money? No. Is it misleading to add interest on top of the savings and not discount the value back forty years to today? A bit. Does this really tell us much about the benefits of bike commuting? Not really, it’s just a story about how easy it is to make big numbers with daft counterfactual assumptions. Are they more misleading than most headline numbers in the newspapers? Probably not.

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Matt Nolan

Black markets, crime, and costs

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Via Facebook I’ve been informed that our Australian friends have added an interesting interpretation to the costs of crime syndicates.

“Every dollar stolen through organised crime activity is a dollar that cannot be spent on education, health or any number of services,” O’Connor said.

Now on the face of it this statement is patently ridiculous – not every dollar taken by criminal syndicates would have gone to government for the government to spend on services.  However, we already know politicians struggle to think outside their own interests – so lets give them the benefit of the doubt here.

In that case, we may interpret this statement as saying “every dollar taken by a crime syndicate translates into a dollar taken from a ‘victim'”.  Ok, this is alright – its a tautology, but its still alright. Now this DOES NOT imply that the actual economy is any smaller as a result of the existence – simply that resources are being transferred from one set of people to another (sort of like with tax).  I would go as far as saying that we would not like some of the transfers to occur – I’m not a fan of people hacking into bank accounts and stealing funds.  But the claim that resources are being “is ripped from the economy by drug cartels and other crime syndicates” … they are part of the economy.

However, in of itself we still can’t get a feeling for the costs and benefits of what is going on – and the associated policy response – without actually thinking about what the syndicates are doing.  Luckily we are given such a list:

Increasingly sophisticated criminal operations included narcotics, money laundering, fraud, corruption, tax evasion, counterfeiting, identity theft and people smuggling.

Right.  So lets think about this.  We are being told that there is a cost to people smuggling, identity theft, corruption, counterfeiting – well no sh*t.  However, that is the cost to the individuals involved – we are being told here that some individuals lose out, and we may believe that is unfair.  Again, this isn’t a cost to the “economy” overall – this is a direct issue stemming from the crime having a victim, and this being seen as morally unfair.

However, that isn’t the case with all of these “crimes”.  The drug cartels they discuss exist BECAUSE of government policy.  When people voluntarily buy drugs this isn’t ripping money out of the economy – its actually creating value.  The cartels are IMPROVING economic outcomes by providing goods that people value – when government is trying to restrict individual choice.

Counting spending on illegal drugs as a “cost” to the economy is nonsensical – and that is what they have done hear.   If the Australian government is annoyed it isn’t getting the tax revenue from it (which seems to be their focus), the solution is to legalise drugs and tax them …

Thanks to the drug lawyer Perth as their expert team of attorneys are helping prevent more crimes by placing away criminals behind bars.

Do you need a personal consultation? Contact Lauren Campoli.

Matt Nolan

A note: Migration and the GFC

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There have been claims by the Labour party that rising departures from NZ are the fault of the National party, and that the increase during their tenure was due to the global financial crisis (GFC).  Now this is a little bit untrue in terms of the way it is framed, I’ll just quickly point that out and then have a little chat regarding why we might be seeing departures rise, and whether it is really a policy relevant issue in of itself.

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