An issue with the paradox of thrift

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”.

RBA cuts 100

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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Fonterra auction to blame for low dairy prices??

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….

Mortgage markets: Australia (and NZ) vs the US

Following today’s terrible house price figures (I don’t have to see them to know they would be bad 😛 ) I thought it would be appropriate to go back to the comparison of NZ (and Aussie) to the US – at least for housing.

Greg Mankiw links to an article in the Wall Street Journal.  Read this:

When Australians borrow money to buy a house, they know that if they default and the mortgaged property doesn’t cover the debt, they will be responsible for the shortfall. And the lender will chase them for it. It’s a neat way of reminding Australians to borrow responsibly.

In America, where populist post-Depression laws in many states have mandated loans be nonrecourse, the opposite is true. Americans can take out a mortgage more or less as a one-way bet. If you can’t afford the repayments and can’t refinance, you just send the keys back to the bank. Borrowers wipe their hands of liability.

Surely hearing how moronic lending practices are in the US makes us all feel better about the relative outlook for our banking and housing sectors.  Although I bet to spite me that a major Aussie bank has gone bankrupt while I’ve been out of the country 😉 (again this was written on Sunday Nov 2)

RBA cuts 100 basis points

100 basis points slashed by the Reserve Bank of Australia. There cash rate is now 6%. A 50 basis point cut was expected, 75 seemed possible, 100 is epic.

At the start of the recent freeze in credit markets a 75 basis point cut by the RBNZ seemed highly unlikely – but possible. Now a 75 basis point cut is looking increasingly likely – and 100 basis points also seems possible. To put this in perspective – the Bank may have felt that a 50 point cut in October was on the cards following the September cut. Financing costs have now moved up so much that it is (sort of) like the previous cut never happened – implying we need a 100 basis points of cuts just to get where the Bank was aiming, maybe 😛

Does this indicate that the economic situation for Australiasia has deteriorated rapidly – yes and no.

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How much poorer is New Zealand than Australia?

Over at Anti-dismal, Paul Walker links to a paper by NZIER on New Zealand incomes relative to Australia.

In the paper, NZIER states that:

the average living standards of New Zealanders in 2007 were 24% lower than those of Australians (or equivalently, relative to living standards in New Zealand, Australia’s were
32% higher)

However, I am not convinced – not yet anyway. Here’s why:

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