Why politics and savings don’t mix

Over at the Standard they discuss Bill English’s statement that we will become a “nation of savers”.  Now their attack line is relatively weird, especially given that he is just saying that if we need a bigger deposit to buy a house we will have to save it – he doesn’t say we should take on policy that imply “save more”.

However, he illustrates a strange view that National have of savings when he suggests that tax cuts will lead to an increase in savings – it will increase private savings but it is also dis-savings for the government, hence it will lower national savings (unless you believe it will magically cause a massive increase in economic activity).

Obviously the term “savings” is being used in a loose way – which is also “loaded” in the sense that these people assume that an “increase” in savings is a good thing.

I think it would be good if we review a series of posts which was (and eventually will be extended into) our “productivity series“.  In the four posts here we discuss Kiwisaver, national savings, and what savings is.

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We’ve been tagged

So we’ve been tagged by MandM (explaination of it here).

The rules are:

  • Link to the person who tagged you
  • Post the rules
  • Share seven random or weird facts about yourself
  • Tag 7 random people at the end of the post with their links
  • Let each person know they’ve been tagged by leaving a comment on their blog

So, lets give it a go (note this post is under-construction ;) – we will add “tags” later)

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Nats to bail out big business?

I was slightly concerned when I saw the headline on stuff this morning “Nats eye bailout of big business”

If the government is saying ex ante that they will bail out big businesses I would be concerned as this has the potential to cause a moral hazard problem. This is where firms know they will get bailed out and thus make riskier decisions. The actual quotes from Bill English don’t appear the be as explicit as I originally thought they might be

“You’re in an environment when almost anything any government could contemplate doing is getting done somewhere in the world,” he said.

“There is a small chance that events that have transpired elsewhere could transpire here. You can’t ignore that and so we need to give some thought to the extreme event.”

Are quotes like this enough to give the big companies in NZ enough comfort that they will bailed out? Only time will tell….

Picks for the December RBNZ meeting

I’m going with a 75 basis point cut on December 4. Now no-one might agree with this, iPredicit certainly doesn’t (putting the probability at 3% when I looked), but there are reasons:

Update: I brought some 75 shares in iPredict after posting this post – because agnitio told me to.

  1. Petrol price collapse (which might be seen as inflationary),
  2. Mortgage rate collapse,
  3. Wholesale cost of credit is falling.

In fact, I would go for a 50 if it wasn’t for the fact that 2 year ahead inflation expectations tumbled to 2.7% in the December quarter! Let me sort of sketch out why.

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Promoting consumer debt in the US: Should we?

I have to admit that I am confused. The US wants to pump a bunch of money into the economy in order to get consumers borrowing again – why?

I thought that one of the primary issues was that the US consumer has borrowed too much in the past, supposedly to make up for a “glut in savings”. This had to give way at some point surely.

Of course the Fed and the US Treasury should be looking at loosening credit constraints that have appeared – but are they there. Megan McArdle was able to get hold of a good number of credit cards, and as I noted there seems to be some “throwing of funds” at consumers in LA at least.

Now, businesses over there (and potentially here) are suffering from credit constraints – so why doesn’t the Fed and Treasury work on loosening the constraint on business borrowing, instead of trying to knock down mortgage rates. Businesses that haven’t shut down don’t lay off all their staff!

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….