- by Tony Richardson.
The world has changed. Economists, central banks and politicians do not know what to do.
The conventional remedies of printing more money and dropping interest rates have failed to generate economic growth. All that has happened is asset prices [property and share market investments] have substantially increased in value. In several major countries, interest rates are negative, while in Denmark you can get a 20-year house mortgage at 0% in interest. There is nearly USD 13 trillion earning negative interest rates. That is, you pay money to the bank to deposit with them and get less back later. The speculation that drives this is that the rates will go lower so you will make a gain when they do.
Is all this sustainable? Of course not.
Radical options are being considered. One option being floated is giving out “helicopter money” – a helicopter flies overhead dropping money from the sky in the expectation that it will be spent. It is argued that will be better for the economy than low interest or lower tax rates. Another option is used in Finland which is a universal benefit for everyone. That appears a far better option than Family Support or welfare benefits with all the bureaucracy and regulation that go with them.
Whatever, radical re-think and change are needed.
I heard an interesting address from Kiwi, Professor Robert Wade of the London School of Economics & Political Science.
He analysed 3 stages of economic/political developments since the end of WWII in 1945.
There was the Bretton Woods agreement of 1944 setting up the international monetary system IMF/gold standard etc which lasted until the early 80s when Ronald Reagan and Margaret Thatcher came to office in the US and UK. The linking of USD to gold was cancelled, taxes were lowered for businesses, and free-market reigned in the expectation that this capitalism approach would generate wealth for all.
This did not happen with the top few becoming very wealthy, while those in the middle and at the bottom suffered badly. The gap between rich and poor grew dramatically. One could almost characterise this as the age of “greed”.
Then, after around 30 years and following the fallout from the 2008 GFC, we have the “Trump” phenomenon – the backlash against the established economic order and politicians who have failed the people.
“Look what the politicians have done to you. They can’t be trusted. I’ll fix it. I’m on your side”.
Donald Trump is just one of several such leaders around the world such as in Hungary, Italy and the UK.
If the media is not on side with these new leaders, then they just outflank it through social media instead to get their message across. With current smart technology, this can be targeted right down to the street level of the recipient and their likely economic circumstances and voting behaviour. The other news put out by the normal media is just “fake news”. Blaming anyone else from all politicians and immigrants, to Jews and Muslims is also part of the strategy. These new reactionary leaders often have no fundamental policies – so there is no accountability – which is quite scary. The effect of this new phenomenon is to polarise the population into extreme right or extreme left. The middle does not matter apart from their votes.
Self Interest now rules as can be seen with US/China trade negotiations.
Is this change an aberration? Robert Wade does not think so. It could be here for 3 decades, so we need to adjust to it.
What does NZ do about all this?
NZ’s economy is tracking along well with most exports [apart from logs and some dairy] at generally high prices and the world needing what we produce. Only a major catastrophe is would change that. The US/China trade war will affect China more than the US. Already manufacturing is moving from China to other nearby Asian countries where labour rates are cheaper. This is a fundamental change which is unlikely to be reversed. China will lose out. Therefore, over-reliance on China by NZ exporters is a significant risk and needs to be managed carefully.
The view is that the NZD is likely to remain weak. That is good for exporters but not so good for importers. The feeling is that consumers will not spend so much.
Wage growth and inflation in NZ remain subdued. Confidence is low, and when coupled with difficulties on getting staff new business investment decisions are being deferred.
GDP growth is also decreasing but is still positive. Even the RBNZ says that more Government spending is needed to change this. The petrol tax increase in Auckland is just being banked, while the roading budget has been slashed by $5b. Government is failing Kiwis badly on this. We need the infrastructure now not let’s think about it in 10 years’ time.
NZ has one of the lowest government debt to GDP ratios in the world. We are well-placed to weather any storm as the Government can borrow and spend on infrastructure now or welfare support if needed.
Interest rates are likely to go lower but in the view of most economists are unlikely to go negative. Borrowing has never been cheaper so now is potentially a good time to borrow – provided you can service the principal repayments and a bank is willing to lend. Accelerating paying down personal or other debt while rates are low is also a good move.
Housing is a mess. Both National and Labour Governments have totally failed to deliver the needed number of houses for people to live in. The Resource Management Act coupled with bureaucratic delay and inertia is a major problem. This needs to change so the process of getting consent and building is streamlined and houses can be built quicker and cheaper.
Ring-fencing rental losses was a major mistake as it made the position worse. Landlords are needed long term, while the tax cost to Government was a modest contribution only to foster investment in the sector. Other Government incentives or costs are many times that with almost nothing to show for it. Many people do not want to buy a house even if they could afford to. The beneficiaries of the ring-fencing change are the large property investors who can now avoid paying tax indefinitely.