Matt Nolan

Thinking about commodity prices: What do you think the risks are?

/3 Comments/in , , /by

The June terms of trade numbers (due out on Wednesday) are likely to come in lower than they did in March – as a result of the huge lift in petrol prices over the quarter. However, even so, New Zealand’s terms of trade will still be at a historically elevated level.

A higher terms of trade implies that we need to sell less in order to buy the same basket of goods overseas – in other words, it indicates that our country is effectively wealthier. This is ultimately a good thing for the country.

The increase in the terms of trade has been the result of a lift in the price of commodities that New Zealand sells overseas – specifically dairy. More recently beef and lamb meat have joined the party, while other commodities such as coal and aluminum have also performed well. Although import prices have also increased (specifically the cost of inputs such as fertiliser and fuel), the lift in New Zealand commodity prices has been dramatic.

However, risks to commodity prices have appeared, with the dairy component of the September ANZ commodity price index recording a 7.5% slump in August!

Do we think that dairy prices can be sustained near current levels – or is the price going to fall sharply? Even if we don’t have a bubble in dairy prices, Economists View has a good piece on why commodity prices may have a long way to correct – specifically, the potential for a supply response.

This begs the question – is the increase in New Zealand’s income going to last. How much of it is a structural increase? What do you think – I will write on it following the TOT data.

Matt Nolan

The June GDP deflator in the US: Conspiracy theory edition

/6 Comments/in , /by

Over at the Big Picture, Barry Ritholtz has been constantly complaining that the GDP deflator is underestimating inflation. Well I’m not particularly surprised since the GDP deflator does not measure inflation persee.

His specific concern is that the rising oil prices have decreased the GDP deflator – he thinks this is ridiculous, however, if we are willing to stop being conspiracy theorists for a little while we will see that it is fine.

Read more

Matt Nolan

Think Big and the balance of payments

/7 Comments/in , , /by

When I was listening to Radio NZ on Sunday I heard some people discussing why they thought “Think Big” was a good idea.

Although I agree with some of the points they raised, if those points are actually true (namely that they felt, given forecasts at the time, these projects would have been viable – and that there were substantial barriers to private entry) I also disagreed with large amounts of it.

One of the main things I disagreed with was the call that increased “self-sufficiency” in terms of steel and fuel improved our “balance of payments”. Now this is a claim I’ve heard from a number of “Think Big” supporters – and as a result it is a claim I plan to discuss here.

Read more

Matt Nolan

What is modern business cycle theory

/6 Comments/in , , , /by

If you want to know, have a look at this post. It is completely non-technical, and explains the way macro-economists look at things pretty danged well! (ht Marginal Revolution).

Fundamentally, this view of the business cycle is highly focused on methodological individualism – the business cycle occurs in the context of individuals maximising their happiness given constraints.

Before this strain of thought came out, business cycle theory was a surprising holistic section of economics – something that did not match with the individualistic nature of microeconomics (see Schumpeter). Furthermore, business cycle theory, long-term growth theory, and near term macroeconomics (effectively old school Keynesianism) were relatively incompatible.

Following the collapse of the “consensus” in macroeconomics during the oil crisis the one ray of hope was that we macroeconomics could be recreated in a way that is consistent with microeconomics. According to Kids prefer cheese this research area is still active – which is exactly what we want to hear.

Update: Paul Walker discusses the same article.

Matt Nolan

The frogs challenge: Discuss imports

/34 Comments/in , /by

In a discussion on our trade balance frog blog states that mainstream economists won’t talk about the import side of the ledger. Now I’m a mainstream economist (I think I should put that on my business card 🙂 ) so I decided that I should take up the challenge.

So lets have a look at the tables. First I will discuss Frog Blog’s claims about the import series, and then I will discuss the way I see it:

Update:  Anti-Dismal captures the essence of confusion surround the issue of exports and imports here, fundamentally reminding us all that it is consumption that is good – not employment per see (the end is the target, not the assumed means!).  Very good 🙂

Read more

Matt Nolan

Credit crisis comes to Australasia?

/5 Comments/in , , , /by

Following the freezing of Hanover finance’s finances we have heard that the National Australia Bank, and the Australia New Zealand Bank have both had to increase provisions for bad debt (NAB, ANZ).

These revelations put the relatively dovish stance of the RBA and the RBNZ in perspective – after all, central bankers are more than aware of the fact that the Great Depression was, at least partially, the result of a collapse in the banking sector which exacerbated a tightening in credit conditions. In a sense, the credit crisis in Australasia is now as bad as it has been in modern times – even if (arguably) things are improving in other parts of the world.

Even so, every time I attempt to pat the RBA or RBNZ on the back a couple of phrases come in the back of the head and prevent me, these phrases are “moral hazard” and “inflation”.

Read more