The visible hand in economics

Archive for the ‘Monetary economics’ Category

In what appears to be becoming a “stand up for the Bank” day, I was surprised to see Steve Pierson at the Standard state that he believes the Reserve Bank cut interest rates too late!

Now, if the Reserve Bank had known exactly what was going to happen in the world and decided to hike rates for the hell of it I would agree – but ex-ante they (like the majority of other people) had no idea what was going to happen.

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A lot of people appear to be discussing the RBNZ’s call that the New Zealand recession is over (here, here, and here).

Now I have to admit that I do not find his call ridiculous for a few reasons:

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With the official cash rate set to fall even further later this week, shares become relatively appealing when compared with other financial instruments, such as bonds and term deposits.

The old adage of ‘buy low, sell high’ seems fitting, given the battering shares the world over have taken in the past while. The NZX and Dow Jones industrial averages, for example, are both down around a quarter from their respective values six months ago.

But just when is the market ‘low’?

I don’t know! If I did, I’m sure I’d be a lot wealthier than I am. However, I thought it would be useful to write a blog entry to stimulate discussion and debate on what TVHE readers are picking for the sharemarket:

  1. Is now a good time to buy?
  2. What industries/companies would you consider investing it?
  3. What factors are influencing your decisions to invest, or not?

I look forward to hearing our readers’ views on the current state of the sharemarket.

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Over at Paul Krugman’s blog he discusses the idea that monetary authorities could have prevented the Great Depression and how that relates to now (ht Economist’s View). Specifically he states that recent events imply that “the thesis of the Monetary History (Friedman’s book) has just taken a hit”.

I am not sure I agree with Krugman’s argument here. He states that the Fed controls the money stock. Given that the money stock grew through the late part of the Depression, and given the money stock has increased meteorically now he states that we can’t “blame” the Fed for either slowdown.

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It appears that the UK wants to spend their way out of a recession. The US has a plan too, as does New Zealand, Europe, and Australia. Governments all across the world want to spend their way out of a recession – however, there is only three ways they can get the money together.

  1. Increase taxes – knocking out any stimulus anyways,
  2. Borrow,
  3. Print money.

Assume that monetary policy will act to constrain any excessive “money printing” that will be going on this leaves us with borrowing.

If all the governments in the world want to increase their borrowing, this will increase demand for global credit, which will push up interest rates – won’t it? This will lead to an increase in private savings, and will just move around the allocation of resources rather than creating wealth.

There is no free lunch when it comes to “getting out of a recession” – give me the “market failure” we are facing, then we can talk about improving outcomes!

Complaining about inflation now may seem to be similar to the captain of a boat complaining about pushing the engine too hard when the ship is sinking – but I’m going to do it anyway 😉

Bank in September Fred Mishkin wrote an article for the Wall Street Journal (ht Economists View and Greg Mankiw).  In it he mentions that the concern should not lie with headline annual growth in the consumer price index, but a more generalised and persistent increase in the price level.  Looking at core inflation, nominal wage growth, and the such in the US indicates that they are not truly suffering from an inflation problem.

Heading into the recent crisis this still seemed to be the case.  The October NBNZ Business confidence survey (which I will discuss tomorrow) still had elevated inflationary pressure, and I suspect the labour market data we have seen today and back on Monday (note that I haven’t seen this data when I wrote this) would indicate a strong inflationary undercurrent.

The truth is, even with a drastic slowdown in domestic economic activity, there is the risk that some form of underlying inflation mark-up is occurring during the wage negotations of the firm and the price setting behaviour of other firms.  I think this is evident in changing marketing strategies – with a “fixed price contract” now seen as an amazingly special deal by electricity retailers.  Purging this from the economic environment is difficult and costly – and is the ultimate cost of loose policy over the past six years.  If our recession is deeper than that experienced by the rest of the world, we can probably put it down to a historical failure by our central authorities.

The US may be able to relax about inflation – but we still can’t 😦

To put my personal value judgments out initially, I generally DO NOT think that government (through fiscal policy) can be blamed for inflation. However, among many people, and even many economists there is a feeling that government is to blame in some way. Personally, I completely blame monetary policy for the failure to control inflation – and although I think they are behaving in an appropriate way in the current crisis – I think that policy was too weak in the past, which has made things more difficult now.

However, the view that it is “the government fault” is not completely without merit. Iprent at the Standard asked me to link to a discussion of how this COULD happen, and as a result I will write a post and link to it here 🙂

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