Hard News by Russell Brown

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Hard News: Death Spiral!

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  • BenWilson,

    Most of the problem with our political economic ideas is that we even bother to have them. If people just got their own personal finances in order, rather than worrying about what the american dollar is doing, they might be better insulated against both.

    Get rid of debt, unless it's against assets like property, pay your property off, save some money, and guess what, who gives a shit what policy the government is running? I really don't care what the tax rate is, what the interest rates are, what the government's monetary policy is, what the long term economic strategic plans of other nations are.

    I mentioned that my exports are pegged to the NZD. That was NOT because I speculated on a rising NZD at all. It was because I wanted stability in my earnings so I could make plans. My business partner made a big mistake in not only tying his earnings to the USD, but also keeping his money in the bank over there. I finally managed to convince him that Bush was a fuxor by pointing out how much money he had lost by doing that.

    You might say that it's hard to negotiate pegging to NZD. I say bollocks - I only had to ask. So long as you keep focussing on making your own shit better (in my case it is software), then you can dictate how you get paid, and plan for the future. There is far too much focus in modern capitalism on micromanaging economic statistics and far too little focus on BUILDING CAPITAL. It doesn't matter how good my accounting systems are, or how well I can pick international currency movements, if my software is shit and noone wants to buy it.

    Anyone who seriously fears international crash should be doing everything they can to NOT be one of the little people when it happens. That doesn't necessarily mean being worth millions, but it does mean not running up massive debt for consumer items, or even worse, beer and cigarettes. It's a bitter pill to swallow if you've been doing that for years, but you have to swallow it or you will be someone else's bitch forever. No matter how clever you are in your understanding of politics and economics, both are ultimately spectator sports. No matter how much I scream my head off tonight, it's going to be 15 men who aren't me deciding how the game turns out. I would be foolish to let my emotional stability ride on that, just as I would be foolish to let my financial stability ride on the winds of international politics.

    Auckland • Since Nov 2006 • 10650 posts Report Reply

  • Raf Manji,

    Nat,

    To answer your question as foreigners take cash out of the economy and back overseas they sell NZD so someone has to buy it right? But its the nature of the flows.

    The profits made by the Australian banks here in NZD are around $4bln....nice work if you can get it. Whose idea was it to sell National Bank to the Aussies?

    That $4bln will come back as financing money so we can pay for our imports on credit.

    Which is why we have a current account deficit of 9%. So its productive cash flows going out and non productive ones coming in.

    I know Kiwibank is a bit behind in its services but really if you care about where your money goes you should bank there as at least the profits stay at home or any other local financial institution such at TSB.

    When they improve their services i'll be happy to use them for everything.

    We can solve this problem by issuing the money ourselves instead of borrowing from overseas. We can then control the amount of money issued and thus avoid asset price booms, exchange rate volatility etc.

    Malaysia fixed its currency back in 1998 after the Asian currency crisis and slowly lifted various controls on it and now its floating again.

    Just remember who is in charge of our money. Money is a sovereign right, a tool of Parliament. Only the Reserve Bank is authorised to create money....unfortunately 98% of the money supply is debt having been created by the private banking system as bookkeeping entries.

    I am calling for a democratisation of the money supply putting it back into Parliament's hands for the benefit of all.

    Removing the banking systems licence to print money is the only thing that will ever enable us to have a stable economy.

    As Thomas Jefferson once said "banks are more dangerous than standing armies" .

    And old Aristotle himself "money should be the servant of mankind not its master".

    Christchurch • Since Jun 2007 • 14 posts Report Reply

  • John Farrell,

    Interesting, Ben...

    We are in the process of selling our house in Auckland. We will then move to Dunedin, where we will be able to buy a house mortgage free, and have a bit left over. (There are family reasons for moving south, as well).

    I won't have to spend $40 a week on petrol, in Dunedin, to travel to work, and we may even be able to go back to owning one car.

    Hospital and other services will be easily accessible by public transport in Dunedin. Where I live now, a car is a necessity to use most services.

    Dunedin • Since Nov 2006 • 496 posts Report Reply

  • Rich of Observationz,

    Nat: when the company got sold overseas there was an inflow of cash to buy it. After that, there is an outflow of dividends, so it goes both ways. Plus, the dividends paid by a company are usually a fairly small proportion of turnover - all the expenses the company incurs in NZ stay here.

    Barry: price inflation is worked out a statistically determined "basket" of goods and service. This represents an average persons spending mix. Yours might be widely different. For ijnstance, if you have a recent big mortgage, housing will be a large part of your living costs. If you rent a small apartment, it might not be.

    With a "pegged" currency, the downsides are manifold. There will be inevitable pressure to break the peg (as happened in the ERM). This will be worsened by the fact that the peg is unilateral - the other nations are under no obligation to help keep our currency in line. So the parity will change, but it will do so in jumps - accompanied by much wailing, gnashing of teeth and adjustment of interest rates to extreme levels.

    You may argue that all that is caused by currency speculation and we can stop that by exchange controls. If we do that, we are making life harder for everyone who has to transact overseas and effectively locking ourselves away from the world.

    Once you put currency parities and interest rates under political control, you raise the question of what they should be. Borrowers will always want the lowest possible rates and exporters will always want an ever lower parity. Having such artificial economic conditions doesn't really help the economy. Inefficient producers would be cushioned - consumers incidentally, would pay more for many goods because imported items would be artificially dear.

    This isn't surmise, BTW. It's more or less what happened in Britain from the end of WW2 until the 1980s.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Rich of Observationz,

    Raf: What I think you are suggesting (fixing the money supply) has also been tried. It's more or less what the "Gold Standard" did in the 1920's and before - all currency had to be backed by gold in central bank vaults. It led to the Great Depression.

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Nat Torkington,

    Rich: didn't the locked economic conditions, inefficient production, and artificially high prices happen in NZ too under Muldoon?

    How did the gold standard lead to the Great Depression?

    Ti Point • Since Nov 2006 • 100 posts Report Reply

  • BenWilson,

    But John, how's the coffee? :-)

    Good luck with your plans. Mortgage free has got to feel nice.

    Auckland • Since Nov 2006 • 10650 posts Report Reply

  • Raf Manji,

    Rich,

    I'm not advocating a return to the gold standard. The gold standard didn't cause the great depression in the 1920s, it was caused by massive asset inflation (properties and stocks) caused by huge speculation on the back of bank credit.

    I'm advocating that the power to create new money is taken back by the people and away from the banks.

    This is a whole subject in itself so hard to fully dissect here but there have been booms and bust on an 18 year cycle for a long time. Always the same cause....expansion of the money supply for speculative endeavours.

    When you read the history of this you would laugh at the same stuff happening time after time. Our current malaise is nothing new at all.

    You'll have to read my blog if you want to learn more about this stuff :-)

    Christchurch • Since Jun 2007 • 14 posts Report Reply

  • WH,

    Where is the downside of pegging the NZD to a basket of our trading partners currencies? Wouldn't this deliver relative stability over the medium term, and encourage investment in production rather than property? Real products to real customers.

    I'm no expert, but NZ used to have a fixed exchange rate, and some people and countries do favour them. As I understand it the orthodox position (which is not very well) currency pegs are usually maintained by the state's buying and selling of currency, which can become costly (like the 1984 devaluation and Black Wednesday). Rich pointed out some of the other disadvantages, a good brief summary is here:

    http://en.wikipedia.org/wiki/Fixed_exchange_rate#Maintaining_a_fixed_exchange_rate
    http://www.eastonbh.ac.nz/?p=541

    My own concern is that our interest rate is rising because of our RB's need to control inflation in the housing market. The RB believes that we should take the housing market to the wood shed (rather than the entire economy) and thus avoid the problems created by the high interest rate and the resulting appreciating currency. I think that this makes a lot of sense, but it is not likely to happen because it isn't a very popular suggestion.

    Most of the problem with our political economic ideas is that we even bother to have them. [...] Guess what, who gives a shit what policy the government is running? I really don't care what the tax rate is, what the interest rates are, what the government's monetary policy is, what the long term economic strategic plans of other nations are.

    I reckon we would have all got to the moon a lot sooner if it hadn't been for all those crazy boffins interfering with their useless theories. :)

    Since Nov 2006 • 797 posts Report Reply

  • John Farrell,

    Ben - if you are being literal, the coffee is good! Mind you, there are two excellent cafes in the small exurban town I inhabit presently...

    Dunedin • Since Nov 2006 • 496 posts Report Reply

  • Michael Fitzgerald,

    Nice to see consistancy from the Labour Party.
    Not only xenophobic about furriners with a Whit NZ Policy but seemingly extending it to exclude Maori (or other hard to pronounce names) from electorate seats.

    Since May 2007 • 631 posts Report Reply

  • John Farrell,

    Pardon?

    Dunedin • Since Nov 2006 • 496 posts Report Reply

  • Nat Torkington,

    Re: the purchasing power of the NZD ... check out this interesting survey by The Economist. The Big Mac survey measures the purchasing power of different currencies according to how much a Big Mac costs in that country. Taking US as the base, NZ is slightly overvalued against the dollar, Australia significantly undervalued, with China being the cheapest and Switzerland the most expensive.

    Ti Point • Since Nov 2006 • 100 posts Report Reply

  • Michael Fitzgerald,

    Since May 2007 • 631 posts Report Reply

  • John Farrell,

    I take political party press releases with a large grain of salt, Michael.

    Dunedin • Since Nov 2006 • 496 posts Report Reply

  • Rich of Observationz,

    I thought Raf's figure of 4bln for bank profits was a bit high. The actual number is made up of:

    ANZ National: 635mln
    Westpac: 216mln
    BNZ: 330mln
    ASB: 440mln

    Total: 1621mln

    Back in Wellington • Since Nov 2006 • 5550 posts Report Reply

  • Michael Fitzgerald,

    John
    Leeanne of the Harley Davidsons White NZ Policy plus Labours (& now Nationals) denial of legal rights to test Foreshore & Seabed ownership based purely on Race. There is a trend here.

    Since May 2007 • 631 posts Report Reply

  • InternationalObserver,

    Here's a question: where's the American anguish about their plummeting exchange rate? In a massively importing economy, shouldn't households be feeling the squeeze? Yet I can't recall reading any commentary of that nature.

    The sleeper has awoken?

    Since Jun 2007 • 909 posts Report Reply

  • rodgerd,

    So if the dollar is at 0.8 US, why do Playstation 3s cost $1200, when then 60GB model costs US$500?

    No doubt retailers will jack prices up on everything the moment the dollar even looks like falling...

    Wellington • Since Nov 2006 • 512 posts Report Reply

  • InternationalObserver,

    why do Playstation 3s cost $1200, when then 60GB model costs US$500?

    Because the price you pay is based on the exchange rate at the time the container load of PS3's were ordered (and charged for).

    I'm guessing a lot of plasma TV's were bought by importers once the dollar hit 70¢US. They'll try and flog those before the RWC, and then come Xmas there will be even cheaper models (or higher spec'd) that were imported at 80¢US.

    Poor old Alan Bollard ...

    Since Jun 2007 • 909 posts Report Reply

  • rodgerd,

    Because the price you pay is based on the exchange rate at the time the container load of PS3's were ordered (and charged for).

    Suuuure. And when the dollar rises, importers will, as they have before, explain that the cost needs to rise to cover the replacement stock they'll be buying in the future.

    Wellington • Since Nov 2006 • 512 posts Report Reply

  • merc,

    Most importers negotiate delayed payment, especially with China, it can be paid up to 3 months after landing. Also they have hedge funds, I'm expecting some to be hoping to ride the $NZD down soon, because you know, you can go both ways.
    NZ importers seem to offer a special price premium, usually something like 150% on, because we are a cost plus lot. See 500.00 in the US is like 500.00 (say for a Mac), by the time it gets here (from Singapore, made in China) it will be say 1500.00 NZ, and that's 1500.00 in NZ, brilliant.

    Since Dec 2006 • 2471 posts Report Reply

  • rodgerd,

    Mac prices were, for a long time, a special rort. When I worked for a Mac reseller the guy who had an exclusive license to import Apple kit also owned a shipping line, overland freight company, and so on. The reason Macs were so ridiculous was because hjis Apple importing company used his other companies, allowing him to inflate the price while saying to Apple "Oh, no, look, our margins are very reasonable!"

    Wellington • Since Nov 2006 • 512 posts Report Reply

  • merc,

    I think we are fleeced on books, CD's, DVD's as well. Licensing only came off in NZ about 15 years or so ago? The business model still exists (see Telecom, AKL Airport, etc).
    Get into a monopoly with Govt. control and milk it. Sadly there is so much investment money offshore looking for a home (hat tip Rob S!) that NZ is under pressure from funds looking to get a piece of that sweet action.

    Since Dec 2006 • 2471 posts Report Reply

  • Nat Torkington,

    So, it seems obvious now I've been thinking about it:

    If Bollard puts interest rates UP, NZ is a more attractive location for foreign investors to park their cash. NZ$ goes UP, inflation goes UP because most of our products are imported.

    If Bollard takes interest rates DOWN, the housing market gets a kick in the pants and goes batshit again. Higher house prices make accommodation take an even larger chunk of everyone's paycheck, reducing amount of cash available for spending. Effectively, inflation goes up because you can buy less with an unchanged income. (Unless you also play the housing game)

    The way out of this bind is to have low interest rates (so businesses can invest in technological improvements to increase productivity) but do away with the idea that housing speculation is an acceptable source of income.

    Probability we'll see a politician from either party implement this: zero.

    Ti Point • Since Nov 2006 • 100 posts Report Reply

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