A smack in the face from inflation

Roger Bootle is a British monetary economist.  He had a good run a few decades ago.  Since then, his warnings about monetary instability and inflationary risk have appeared less prescient.  

But the next few decades may be kinder to him (if not to us).

Continue reading “A smack in the face from inflation”

The govt pumps $24.2m into job programmes – but look how the Treaty (or something) has determined the allocations

Young Maori should do nicely, thank you, from funding numbers bandied today by Social Development and Employment Minister Carmel Sepuloni.

And non-Maori young people?

Sorry.  They don’t loom so large in the distribution of Sepuloni’s largess.    

The Minister announced that more than 800 jobseekers will be supported on pathways into employment, education and training through funding into the Māori Trades and Training Fund (MTTF) and He Poutama Rangatahi projects.

The numbers she bandied in dollars terms add up to $24.2 million.

But ethnicity will be the critical factor in determining who benefits.  The lion’s share of the investment, almost 77%, is going into the Māori Trades and Training Fund.

Sepuloni said this will support over 500 Māori job seekers into employment and training opportunities, with $18.576 million committed to a range of new and existing projects.

The rest of the nation’s young people can’t complain they have been overlooked.

The Government is investing $5.6 million to help over 300 young people overcome barriers to employment, education and training through further funding into He Poutama Rangatahi (and we assume non-Maori are intended to benefit from this programme). Continue reading “The govt pumps $24.2m into job programmes – but look how the Treaty (or something) has determined the allocations”

Reserve Bank gets green light to tighten lending rules for housing (hopefully without impeding first-home owners)

The Reserve Bank has been given the government’s go-ahead to tighten mortgage lending rules to try to take some heat out of the housing market.

An updated Memorandum of Understanding between the Minister of Finance and the Reserve Bank will enable it to implement its proposal to reduce the amount of low-deposit bank lending banks for mortgages.

Announcing the updated MOU, Finance Minister Grant Robertson today said the central bank has proposed reducing the amount of lending banks can do above a high Loan-to-Value Ratio (LVR) of 80 per cent.  This lending will be lowered from 20 per cent to 10 per cent of all new loans.

Consultation will start with banks later this month, with a view to introduce this from 1 October, 2021.

The central bank also intends to start consultations in October on implementing Debt to Income (DTI) restrictions and/or interest rate floors. Continue reading “Reserve Bank gets green light to tighten lending rules for housing (hopefully without impeding first-home owners)”

Grimes’ grouches with the effects of govt policies on Kiwis’ wellbeing may sting more than the Groundswell protest

The  Ardern  government may  have been  stirred,  but  it  wasn’t  shaken,    by  the  nationwide protest  by  farmers  last  Friday.  And no matter how  far  the protest may have  turned   heads   in  the  rest  of  the  population,   it  leaves  farmers  no  further   advanced  in  persuading  ministers  to  modify  or  revise  the  policies  which  their  action targeted.

So  if  ministers  won’t  back  down  on their  environmental reforms or their climate change  policies,  where   can  the  farmers  go?  Parade  through  Wellington  to  Parliament?   Mount a 24-hour  vigil  in  Parliament  Grounds?

So  far  there has  been   silence  from the  originators   of  the   Groundswell  and if  there  is  a  new  sense of  unity  in  the  rural regions,   it   has yet  to  be  channelled into the  kind  of  pressure that   automatically  achieves  change.

Farmers may be disenchanted with being  told  how to farm, but the  evidence of climate  change  has  been  rammed   home in  the  provinces  in  recent  days hard  enough  to  convince  churlish  sceptics  of  the  need  for urgent  climate  action. Continue reading “Grimes’ grouches with the effects of govt policies on Kiwis’ wellbeing may sting more than the Groundswell protest”

Financial Times chips in with some advice to our Finance Minister on the folly of adding housing to central bank’s deliberations

A Financial Times leader delivers advice that Finance Minister Grant Robertson should (but probably won’t) consider.

Essentially, the advice is to resist the temptation to  involve the central bank in the challenge of slowing the rise in house prices.

Changing regulation and reforming planning law is a smarter way to go.

The FT observes that – to many – it may seem obvious that the central bank quantitative easing programmes launched after the 2008 financial crisis have led to inflation, as money printing inevitably does.

But the inflation has shown up in booming stock markets, high prices for art and collectibles, and surging cryptocurrencies.  Rather than higher consumer prices, cheap money has led to asset price inflation.

In this reading, the FT says, central banks should reconsider their stimulus policies because they are only delaying and deepening the eventual bust.

Furthermore, according to the critics, stimulus is increasing wealth inequality and worsening housing crises.  Higher asset prices increase the net worth (as measured by market prices) of those who already have substantial wealth while leaving the position of those without assets unchanged.

Similarly, it pushes home ownership further out of the reach of those lacking in savings or inheritances — inflation that shows up in assets but not wages is particularly bad news for affordability.

The FT explains that this is why New Zealand’s government has instructed our  central bank to consider the effect of its policies on the housing market.

The centre-left administration of Jacinda Ardern has said that while the Reserve Bank will remain independent, it will have to take into account the government’s objective of “sustainable house prices”, which includes taming investor demand, when making policy decisions.

It is true that a fall in interest rates will increase asset prices, all other things being equal. Lowering the cost of borrowing should make it more attractive to buy long term assets, such as housing, that bring benefits that can last for decades.

Indeed, encouraging investment spending is part of a central bank’s motivation for cutting rates.

But to refer to a change in the price of assets relative to everything else as inflation — which means a change in the value of money — is a misnomer. A change in a particular set of prices is not the same as a change in all prices: houses have become relatively more expensive to all other goods and services in the economy, not just the Kiwi dollar.

Engineering deflation in consumer prices to address the particular, idiosyncratic, problems of the housing market would be a serious mistake. Using tighter monetary policy to reduce the price of real estate would also have the effect of reducing workers’ wages — a central bank-induced recession would ultimately do little for affordability.

Interest rates cannot be used to solve every problem and central banks have struggled enough to try to hit their existing inflation targets.

As the institution responsible for financial stability in New Zealand, the Reserve Bank should consider whether it has all the necessary “macroprudential” tools to address concerns about the housing market.

In November it already announced tighter restrictions on high loan-to-value mortgages. Requiring would-be homeowners to have bigger deposits will do little to address concerns about affordability, however.

Central banks, however, make a convenient scapegoat for politicians who are unwilling to take on the vested interests that can create an artificial scarcity of housing even in a land-rich country such as New Zealand.

Changing regulation and reforming planning law is a more sensible way to address the deficiencies of the housing market than running a monetary policy that would not be justified by the inflation and unemployment data.

In short, to solve New Zealand’s housing problems, “Ardern’s administration will need to look much closer to home”.

Robertson – of course – seems unlikely to be greatly bothered by the Financial Times, having  disregarded the advice of the governor of the Reserve Bank on this matter.

RNZ reported him as saying the government needs to use all the economic tools available to try to control escalating house prices.

Robertson is defending his decision to change the Reserve Bank’s remit to include house prices in its monetary policy considerations.

That is despite the bank’s governor, Adrian Orr, warning him last year that that was not a good idea.

Robertson said the government is not saying the Reserve Bank should be responsible for house prices – but the government needs to pull every lever within its power to tackle the housing issue.

The government was not suggesting the house-price crisis was entirely the responsibility of the Reserve Bank, Robertson said.

“What we are saying is that all parts of the apparatus need to be working towards these goals.”

Robertson said the government has been considering a wide range of options on both the supply and demand side of the housing market.

Can the world economy continue to float on a cushion of debt?

Monetary policy is difficult.

Economist Scott Sumner describes in his blog how the thinking of an intellectual giant like John Maynard Keynes evolved through three distinct phases in the 1920s and 30s.  As the man himself is reputed to have said “When the facts change, I change my mind.  What do you do?”.  Sumner then argues that the thinking of the economics profession repeated pretty much the same pattern of evolution over the last decades of the twentieth century.  

It makes a persuasive case for intellectual humility in general, and in monetary policy in particular.  Even more so in unusual times.  The forcefulness and fluency of experts can conceal the fact that they are testing new ideas when they make policy.

Continue reading “Can the world economy continue to float on a cushion of debt?”

Houses (and their prohibitive prices) will be high in Ardern’s considerations as she appoints her ministerial team

One  of  the   strange  outcomes    of  the   Covid-19 pandemic   has  been  the  surge   in  house  prices,  not  just  in  Auckland   but through the  rest of the  country.    It’s  a   phenomenon  that  runs   contrary   to  past  experience  when the   economy   has  slipped  into  recession.

Many  authorities  say booming house  prices are being  driven  by  the  loose  monetary policy  operated   by the  Reserve  Bank    in conjunction  with the  economic   stimulus  applied  by the  government.   Mortgage   rates   have  fallen,  with  at  least   one  bank    offering  a  rate below   2%.

The   Reserve   Bank’s  chief  economist  Yuong  Ha  is  on  record  as  saying:

The worse situation we’d face right now is actually if we had house prices falling”.

Just  why  that   might  be  the  case    in the  present recession  has  not  been  made  clear,   though he  seemed  to  suggest   the  wealth  effect   of  rising  property prices  is  helping to  sustain  the  economy. Continue reading “Houses (and their prohibitive prices) will be high in Ardern’s considerations as she appoints her ministerial team”

Why we should be talking about modern monetary policy – and bringing science into considerations

One   of  NZ’s  leading  economists,  Shamubeel  Eaqub, says  NZ  is  facing a  huge economic shock.  He  questions what new steps the government will take to boost economic growth other than housing and immigration.

Speaking  on  Radio NZ’s  Morning  Report, he said:

More of the same is not going to give us better outcomes. We have tried to have this growth in property prices, growth in borrowing, growth in immigration without having the increase in the productive capacity of the economy, infrastructure – it is really not going to work.

 “There’s kind of this disconnect between saying that we’re going to just crank up what we’ve done before and we’re going to get better economic outcomes in the future. I just don’t buy it.

I haven’t really heard much on this campaign trail around what’s going to be remarkably different. In some ways, I think, the pain still hasn’t been enough for us to be forced into having a conversation”.

Eaqub said there needed to be a discussion about modern monetary theory.

But  later  in the same  programme  Finance  Minister  Grant  Robertson  was  unequivocal:

“That’s not where we’re heading at this time.” Continue reading “Why we should be talking about modern monetary policy – and bringing science into considerations”

It’s not too long ago that mention of QE was derided as “nuttynomics” and “wacky”

Quantitative easing has slipped comfortably into the vocabularies of commentators discussing the policy response to the Covid-19 crisis.

A post at Investopedia describes quantitative easing (QE) as a form of unconventional monetary policy in which a central bank purchases longer-term government securities or other types of securities from the open market to increase the money supply and encourage lending and investment.

Buying these securities adds new money to the economy and serves to lower interest rates by bidding up fixed-income securities. At the same time, it greatly expands the central bank’s balance sheet.

When short-term interest rates are at or approaching zero, normal open market operations, which target interest rates, are no longer effective, so instead a central bank can target specified amounts of assets to purchase. Quantitative easing increases the money supply by purchasing assets with newly created bank reserves in order to provide banks with more liquidity. Continue reading “It’s not too long ago that mention of QE was derided as “nuttynomics” and “wacky””

Covid-19 is demanding well-considered economic treatment as well as an effective health response

You  know  things have  passed a  critical  point when  politicians  start  appealing to  the  spirit of  patriotism.

This is happening as  the global  panic over Covid-19 deepens, financial  markets  price in  fear, and business liquidity is squeezed.

In  Parliament on  Wednesday,  Finance  Minister  Grant  Robertson was still  refusing  to drop  his  mantra  about the  fundamentals of the  economy  being “strong”  and insisting  Cabinet has in hand a  business  continuity package.

He said –

” … this  is not just a government response;  it is not just a business or individual response; it is a NZ response, and that’s where our values as a country are showing through: everybody prepared to muck in and do their bit to work together to respond to this outbreak”. Continue reading “Covid-19 is demanding well-considered economic treatment as well as an effective health response”