|Last Updated: Mar 25th, 2013 - 16:46:15
Thought for the Day
In the second half of 2005 we had a small shrinkage of the economy by 0.1%. Hardly anything, but enough to rouse up the senior members of the Labour Government into making a series of speeches designed to boost up the economy.
Of course, one can't just rely on words so to help things along they ensured that a jolly good supply of money (printed from thin air) was injected into the economy. The extra money amounted to $26,160,000,000 which is an increase of 16.4% for 2006. This has had the desired result and all through 2006 the economy was bouyant and surveys came back with rising confidence in various sectors.
Unfortunately all that extra money had to go somewhere and the banks, being as canny as they are, pushed it into mortgages where it would be safe in "bricks and mortar". A farmer friend tells me that the local bank manager approached his neighbour and tried to pursuade him to purchase another farm next door - on borrowed money of course. But beware, when the bank manager comes calling and offering money then that is the time to pay off all your loans and ride out the hard times that are sure to follow.
You see, as the government pokes and prods the economy, the main result is to distort the natural shape of things. People can borrow money easily and they buy houses - even with 100% financing as I see Westpac offering. Unfortunately this causes concern back at the money printing office and to stop peole buying nice safe things like houses they push up the interest rates which prompts the money men in the carry trade to borrow more money at 0.5% from Japan and lend it out to the nice banks in NZ at 7%. Nice work on a 10% margin!
How long can this state of affairs continue? It is looking a bit sad in America where a similar situation has been progreesing for longer than in New Zealand. Thirty "easy money" mortgage institutions have gone belly up in the last few months. New Century Finance was selling at US$66 two years ago - last week it went into chapter 11 bankruptcy.
Last year in NZ three finance companies who lent money at the bottom end of the car market went out of business. Manufacturing businesses are laying off staff as they cannot compete at the present high value of the NZ$. Two more were in the news this morning with 140 jobs gone.
The government is between a rock and a hard place. As they raise the interest rates to stop people taking all the money they have just issued and boosting the price of houses, they boost the incentive for the money men in the carry trade to bring in more money from Japan. High interest rates boost the money coming in, which increases the exchange rate as ther money men compete for New Zealand dollars. This higher exchange rate makes exporting more and more difficult and our manufacturers start to lay off staff.
Will the government be able to solve this dilemma? What will happen next? What economic theories are the government following? Are these theories correct? Did they work 20 years ago?
I look forward with interest to the next episode in this unfolding saga.
Apr 5, 2007, 09:41
When governments have the power to print money without having it backed up by a gold standard, they do.
Mar 30, 2007, 14:07
From Our Aussie Outpost.
And from our correspondent in the land of Oz comes this little gem telling us that Australia's 3.5% GDP growth comes from their recent increases in productivity. You will remember that our productivity has just plummeted to the lowest level for a very long time. How are we ever going to catch up with our mates across the ditch with our current government's policies?
WTO PRAISES AUSTRALIA’S ECONOMIC PERFORMANCE
The World Trade Organization (WTO) has praised Australia’s impressive economic performance. A recently released WTO report on Australia’s trade policies and practices from 2002-06, strongly supports Australia’s workplace reforms in finding that “unemployment declined to its lowest level since the 1970s, in great part due to reforms that have rendered the labour market more flexible”. The report also refers to recent structural reforms and Australia’s prudent macroeconomic policies and says “the resulting rise in productivity and improved competitiveness of Australia’s goods and services in world markets has enabled real GDP to grow at an average annual rate of about 3.5 per cent during the past 15 years, which has raised per capita income to eighth place among OECD countries”. The report highlighted Australia’s continuing process of trade liberalisation as “an integral part of the structural reforms that have contributed to Australia’s impressive economic performance”.
Mar 30, 2007, 12:05
Money is always interesting. This article may help your understanding.
Without sound money economies will always thrash from boom to bust and back to boom again, followed by the inevitable bust. I don't know, but I suspect that they longer a government can hold off the bust the bigger it will be.
An interesting thought; A series of little recessions or one big one every few decades?
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Sep 11, 2006, 18:54