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Why are credit card costs not coming down? Any views? Is it purely their unsecured nature- which I understand will justify their higher fee relative to a mortgage for example- but why no movement?
Yep- two years ago credit cards were pretty easy to get; minimum security was sought- household goods was enough for a $500 starter in effect. Show yourself capable of handling that and the amount available goes up- until there are problems.
Are we witnessing the start of what will be one of the truely great Prime Ministers of New Zealand. All the signs are there. I could not be more impressed with John Key’s first week WOW!
And to adjust your income expectations. It’s been difficult to find good Business Analysts in Wellington as the public sector has been mopping them all up and way, way ahead of private sector market rates. And then the public sector has been housing them in expanding chunks of commercial real estate which has pushed rentals up.
OECD rank 22 kiwi said: What message is John Key delivering to the Public Sector Unions? Time to polish up your CV’s.
Indeed, that is the message OECD rank 22 kiwi. I’ve blogged about it over here – John Key’s first broken promise. Before he’s even been sworn in, the “cap” has become a “cut”.
Have a look at Chris Trotter’s column in the DomPost.
He has had an epiphany.
Its about equal opportunity not outcome.
Watch out Mr Hide, he’s after your job!
(sorry, still looking for an electronic link to the article)
“Are we socialists, in our drive for an absolute equality of outcomes, really willing to descend to the level of a certain species of crab which will, when collected in a bucket, seize and haul back into the doomed mass any individual that attempts to escape its fate by climbing out?”
Trotter clearly needs a long holiday. First the rant about the stupidity of the New Zealand voters and now this statement that John Key is the personal embodiment of what the welfare state was set up to achieve. He is obviously confused.
Or maybe, just maybe, with age and experience — in his case the experience of his daughter doing well at school — has come the realisation that there is actually nothing wrong with effort being matched by reward. And that the aim of those of the right is to build a society where state housing, welfare and public provision of services are largely unnecessary because there are no poor people anymore.
getstaffed – I’d say that saving does have some positive effects i.e. banks can lend more to those requiring capital to grow as saving increases. However, spending is probably more critical in downturns. GDP is essentially a measure of aggregate annual spending. Every time you spend a dollar, someone is getting paid for providing that product or service. If they then spend that dollar on something, someone else is getting paid for that product/service. The faster the money-go-round the more people are busy producing stuff. Saving takes money out of the money-go-round until it is lent out again… and at the moment banks are looking to build their balance sheets up rather than lend.
I’m a layman too though. Other commenters please chip in.
We had some interesting discussion going on the thread “Labour’s Financial Legacy” yesterday, regarding the financial crisis and NZ’s distinct position; and for all those people who asked questions of me about my postings, sorry I’ve only just gone back to that thread and responded.
getstaffed (2536) Vote: 0 0 Says:
November 14th, 2008 at 9:31 am
Can anyone explain to me (on layman’s terms..) why spending is seen as the best way to stimulate an economy? Why isn’t saving good/better?
>>>
Inflation aka growth is near zero therefore no new jobs, no wage increases etc the punter dont feel rich. on top of that house prices are falling, income from dairy is falling.
As no one else is pumping cash into the economy via wage increases or import revenues the govt tries to keep growth positive by dropping borrowing costs and stimulating growth by spending itself.
A short term fillip that assumes things will come right and the additional govt debt can be paid off via tax receipts once things pick up.
On top of that the economy has been left in the lurch by dodgy spending in the up years by labour, a much larger govt war chest now would be nice.
Camryn, the difference between spending and saving, is that savings are what get “leveraged” by banks, and result in increases in the amount of money in circulation. When we have a crash like we have had, if the banks actual reserves (from real deposits) get halved, if their “leverage ratio” was, say, 30 to one before the crash, it has then gone to 60 to one. Hmmmmm……..
This is a fascinating subject that I doubt anyone truly understands.
You are quite right that the sysem desperately needs new deposits now, to bring that leverage ratio back to the point where the banks are not so exposed. And the only thing that will do that, is earnings and profits that result from productive activity. Government spending doesn’t count, as ALL government spending has been sucked OUT of the earning and profitmaking sector in the first place, where it would have been spent or saved anyway.
I keep saying, the only way out, is massive cuts in company tax and taxes on income generally. FDR and the “New Deal” did NOT “solve” the Great Depression, they turned a financial crisis INTO a “Great Depression”. Actually, Herbert Hoover started the ball rolling, he was certainly no free-marketeer, just as George W. Bush today is no free-marketeer either.
In a small open economy, the link between saving and investment is weak. Our interest rates, especially at the long end, are set in world capital markets.
Do a little though experiment: overnight, all Kiwis decide to put an additional 10% of their income into their bank account. What happens?
Firstly, private consumption, which makes up 60% of total economic activity, would fall dramatically. Layoffs would start in the retail sector, then the distribution sector, then manufacturing. Then a “reverse multiplier effect” would kick in, as consumption from the people laid-off also fell.
But the banks would have a lot more money, won’t that lead to an increase in lending? No. All that would mean is that they would not have to borrow as much from overseas to finance their lending. And since New Zealand is so small, this reduction in borrowing would have no noticeable effect on the supply and demand for funds globally, meaning that world interest rates would not move. Which means interest rates in New Zealand would not move.
So, increasing savings is probably the last thing we want to happen in the short-term.
THIS GUY got in a bit late in the thread yesterday (Labour’s Financial Legacy), he deserves a fresh look in now:
# Bogusnews (198) Vote: Add rating4 Subtract rating 0 Says:
November 14th, 2008 at 6:49 am
“I remember vividly the set of books Labour inherited. The vital stats were these:
1. From 1990 to 1999 the economy grew 283,000 new jobs (real ones, not the govt dept jobs and the list as people being “employed” if they only worked 1 hour a week.)
2. Interest rates at 6.95%
3. Inflation at under 2 %
4. Economy grew 3%
5. Personal productivity – the engine for growth – was 2.3x higher than currently (they are now the lowest on record.)
6. Surplus of 1.5 Bil
This was the result of the “failed policies of the 90’s” that Clark went on about.
Labour inherited a VERY strong economy, and were then lucky enough to get the highest prices for our primary produce in the last 50 years. Rather than being responsible, they went for a tax a spend approach, which economists have known for 30 years will always eventually strangle the goose that lays the golden egg.
A very insightful post on this blog last year mentioned that because Labour had buggered up the fundamentals that by 2008 the economy would be so bad it would become apparent to many financial commentators and even a few journalists.
Unfortunately, Labour is very successfully blaming the world economic conditions. What should be blamed are the piece by piece destruction of good economic policy by one Mickey Mouse Cullen.”
GeorgeBolwing, there is some truth in what you are saying, precisely because the banks leverage is now so extended that new savings will not, as you say, flow on to increased lending. But they still NEED those deposits, they can’t just stay overextended.
You are right about banks having borrowed overseas to fund their lending; that borrowing has merrily flowed along to pump up our housing bubble.
I have asked before and will ask again; could somebody justify that? What good has that done for the NZ economy? Why was that better than borrowing money from oveseas to fund expansions of our business and industry sector, and why did that not happen, but a housing bubble did happen? There are some hellish distortions in our whole economic incentive structure at work here, and government interference in free market processes are responsible for 90% of it.
Question: What happens when all those Japanese investors decide they would like their money back out of New Zealand?
getstaffed: government spending is seen as the best way to stimulate an economy because that is what Milton Keynes taught – and it’s a load of cobblers because it does harm not good. To spend money the government prints new money and devalues each existing dollar – this is visible as inflation.
John Key is a Keynsian, he’s been talking about government spending to stimulate the economy. Key is a socialist, just like Helen Clark but with a paler shade of red.
getstaffed – one reason why spending is seen to be good is the so-called multiplier effect wheerby the $100 that I spend at a store becomes some profit for the store owner, some wages for his staff some payment of debt and some payments to suppliers. In turn those payments become wages and payments and debt servicing and in turn …… in smaller and smaller amounts.
In the end my $100 spent goes round enough times to make significantly more that $100 in circulated cash. The faster it moves and the less saving involved, the greater the multiplier.
Offsetting that of course you need savings or capital creation which is what drivesinvestment.
In the short term though the theory goes that an economy will be stimulated to a greater extent by retail spending than by increase in savings.
Import costs tend to get in the way a bit and this beconmes a function of the exchange rate so the whole equation becomes more complex the deeper you look into it.
Inflation does not grow an economy, investment in productive activity does, and this is independent of inflation. A zero inflation economy would possibly be the best thing for planning and predictability.
There is every reason to suspect that interest rates are in reality nowhere near high enough to cover the true rate of inflation when housing is taken into account. Add to that the fact that you will be taxed on interest earnings, and it is no wonder people do not want their money in low risk, low return investments.
Banks require deposits, which they then lend out, “leveraged”, so savings end up having a much greater impact on ecenomic growth than spending does.
The trouble is, our banks “savings” are savings by Japanese, not savings by New Zealanders; AND instead of the free and easy lending environment boosting investment in our productive sector, it has pumped up our housing bubble. There are some hellish distortions in our whole economic incentive structure at work here, and government interference in free market processes are responsible for 90% of it.
Question: What happens when all those Japanese investors decide they would like their money back out of New Zealand?
What we desperately need, are changes in the economic incentive structure so that lending goes to the productive sector that will provide jobs and income, not to speculation in non-productive assets like houses.
I suggest:
1) Abolish company tax. Profits are taxed anyway when they are distributed as income to shareholders. Why tax profits BEFORE that point, when they could be re-invested, providing jobs and wage increases? If a company’s profits were ALL re-invested and none of it distributed as income to shareholders, no tax would be paid. And why not? Think of the future income that the government will get from the PAYE of the new jobs and pay rises created, not to mention when the business DOES start distributing profits to the patient shareholders.
2) Free up land supply so that investment money results in new houses being built instead of olde houses prices being pumped up. (Which flows on to numerous extremely harmful consequences as we are slowly and painfully learning now – if we are learning).
That is just the 2 most important things. Tax cuts generally and reductions in the size of government are essential. Almost NO government spending is as effective in terms of economic growth and invesment, as just leaving that money in the economy in the first place would have been.
The Reserve Bank Act has really screwed NZ over. It’s worked in completely the wrong way to the complete detriment of NZ. Our currency is so small it has been easily manipulated by carry trades and our dollar has in no way been associated with its real value. This has been screwing our predominant value makers in NZ, our exporters whilst encouraging consumers to spend more because of the drop in prices in consumer goods. This also made lending cheap from our banks, because our dollar bought lots of cheaply sourced loans from the Europeans. This meant that our mortgage rates could closely follow the OCR. Now that things have gone pear shaped around the world, the Japanese (and others) have sold off our currency in droves because our OCR came down and the carry trades don’t work so well any more. This was widely predicted. The problem is that most people in NZ got used to the result of cheap money and having their mortgage rate track the OCR very closely, everyone forgot the fiduciary duty of company directors is to make money. This absence of knowledge meant that everyone forgot that mortgage rates and interest rates don’t just track the OCR, they’re dictated by the company lending you the money needing to make a profit. Because our dollar has tanked against the Euro, where our banks source a lot of the money they lend people for mortgages, our repayment costs have just shot up. This eats into bank profits, so they slide your interest rate up to cover that gap. Also, all of our imports have just got a lot more expensive, this drives up inflation which makes day to day living more expensive. When living gets more expensive, more people default on loans and banks lose money. Which means they need to make more money to cover their losses to maintain their profits. Credit card default rates are skyrocketing in the US and so this is why credit card rates are going up, to cover them. Insurance on credit cards and loans are also going up so banks have to cover these too.
So to sum up, lifes about to get a whole lot more difficult for everyone. Hopefully you made hay while the sun shone and you have some savings and considerable equity in any property you own, say atleast 35%. Because a lot of people have also forgotten in the good times that the small print in your mortgage agreement says that the banks can demand equity anytime they please. They haven’t done it yet that I’ve heard of but once one bank starts doing it, it’ll be a race to the bottom, just like the carry trades.
Ah taking a 1/2 day, to enjoy the weather, Oh how I love being self employed & a capitalist……….
Need I mention they lost, we won, eat that.
Hey adc, yes why did you listen to Law’s?
All is well with my world, and adc you damn well listen to anything you want, you have my express permission.
Ah I may well open a Crown lager and sit on the deck, soak up some sun.
adc: Michael Laws is, like Chris Trotter, a one trick pony that’s long overdue a trip to the knacker’s yard. If he’s not going on about the minutiae of his domestic life, it’s some splenetic clubland rant. And as he fades further into irrelevance and obscurity (after losing DWTS and getting hives on Celebrity Treasure Island, where does one go?) the ranting becomes more extreme. Eventually he will either explode, covering bystanders with bile and spittle, or self-immolate on the steps of the Wanganui Town Hall, having first negotiated media rights to the event (with an exclusive ‘My heart rending bonfire decision’ feature sold to Wimmins Daze).
There’s been a little bit of simplification of Keynesian (John Keynes not John Key) economics wrt the aims of the national government’s spending plans ..
Keynes saw the biggest issue was one of too many people saving too much and that this, in effect, led to potentially productive money being ‘hidden’ out of the economy. I am simplifying terribly as well. One of the major consequences of Keynesianism is that it promotes governments actively working to effect\control the economy. It went somewhat out of favour but has had somewhat of a renaissance because it’s better able to explain some of the behaviours in the 70s and 80s and the current issues with Japan than other models. The concept that it just promotes inflation is somewhat simplistic, kiwiploemicist. It also has some serious faults where it struggles to predict what will occur – a work in progress.
One of the biggest risks of a strong Keynesian approach now is what we have just had with labour ie ‘bad spending’ – spending for the sake of it or for political rather than productive outcomes. The risk on the other side of the ledger is that the government (some 30 odd % of GDP from memory) shuts up shop as well as the commercial sector. This then potentially starts a spiral effect – job losses – reduced income – reduced consumption – reduced production – job losses – etc ala the Depression. In this environment I am concerned that we end up with lots of bad spending as a hangover from the labour government – spending on ‘good’ infrastructure is at least an investment for the future. Lots of the spending on new civil servants rarely is, for instance. Note my emphasis on ‘good’ infrastructure. Keynesian economics also implies governments should spend less when the economy is doing well otherwise they are contributing to inflation and increasing the effects of natural business cycles ie making the booms bigger and thus also the busts – exactly the opposite of what labour did.
So in short…. Key probably has to continue to spending but has to be very careful to make it better spending – probably
In short, US authorities have just shut down an ISP that’s been responsible for providing the backbone for 75% of the world’s spam. So if you’ve been less than usually concerned about the size of your equipment these past few days, that’s why
( To avoid spoiling your weekend, just don’t read the bit that says they expect it’ll take less than a week before some other money-grubbing S.O.B. steps in to provide the spammers with the service )
Rex,
In short, US authorities have just shut down an ISP that’s been responsible for providing the backbone for 75% of the world’s spam. So if you’ve been less than usually concerned about the size of your equipment these past few days, that’s why
You do not celebrate on your own. Spammers are the scum of this planet.
Trouble is, who has all the mailing lists saved? They need prosecution.
BTW my weekend is not spoiled, Big Boys Toys.
See what I can spend my tax cut on …….
Just don’t give your email to the advertisers.
The swanky Auckland mansion of Prime Minister-elect John Key is giving the Diplomatic Protection Squad security headaches because it is so big, and a dwelling may have to be built on his grounds to give the bodyguards a permanent home.
Protection squad staff are always outside when a prime minister is home. DPS staff rented a house beside Helen Clark’s Mt Eden villa during her reign, but that’s not really an option in Key’s well-heeled neighbourhood. His $7 million luxury Parnell house, which features a pool, tennis court, spa, marble floors and seven living areas, sprawls over half an acre, meaning DPS staff are a long way from him if they are stationed outside the gate. And his neighbours are not keen to vacate their homes.
Pathetic tall-poppy, hand-wringing envy media in full force. Sad pack of losers.
Fairfax: You are part of the reason that NZ is in the mess it’s in.
November 14th, 2008 at 9:25 am
What message is John Key delivering to the Public Sector Unions?
Time to polish up your CV’s.
November 14th, 2008 at 9:27 am
Why are credit card costs not coming down? Any views? Is it purely their unsecured nature- which I understand will justify their higher fee relative to a mortgage for example- but why no movement?
November 14th, 2008 at 9:27 am
I hope it’s going to include if you are shown to not be neutral you’re on your bike.
and those of you already complicit this is your only warning.
November 14th, 2008 at 9:28 am
I wasn’t aware that someone could get a credit card with no security in their application?
November 14th, 2008 at 9:31 am
Can anyone explain to me (on layman’s terms..) why spending is seen as the best way to stimulate an economy? Why isn’t saving good/better?
November 14th, 2008 at 9:32 am
Yep- two years ago credit cards were pretty easy to get; minimum security was sought- household goods was enough for a $500 starter in effect. Show yourself capable of handling that and the amount available goes up- until there are problems.
November 14th, 2008 at 9:33 am
Just what is Michael Cullen playing at?
http://keepingstock.blogspot.com/2008/11/in-confidence-very-preliminary.html
November 14th, 2008 at 9:35 am
Are we witnessing the start of what will be one of the truely great Prime Ministers of New Zealand. All the signs are there. I could not be more impressed with John Key’s first week WOW!
November 14th, 2008 at 9:38 am
And to adjust your income expectations. It’s been difficult to find good Business Analysts in Wellington as the public sector has been mopping them all up and way, way ahead of private sector market rates. And then the public sector has been housing them in expanding chunks of commercial real estate which has pushed rentals up.
November 14th, 2008 at 9:43 am
OECD rank 22 kiwi said: What message is John Key delivering to the Public Sector Unions? Time to polish up your CV’s.
Indeed, that is the message OECD rank 22 kiwi. I’ve blogged about it over here – John Key’s first broken promise. Before he’s even been sworn in, the “cap” has become a “cut”.
November 14th, 2008 at 9:45 am
Have a look at Chris Trotter’s column in the DomPost.
He has had an epiphany.
Its about equal opportunity not outcome.
Watch out Mr Hide, he’s after your job!
(sorry, still looking for an electronic link to the article)
November 14th, 2008 at 9:53 am
Here is the link to Chris Trotters column
http://www.stuff.co.nz/vote08/4760830a28480.html
“Are we socialists, in our drive for an absolute equality of outcomes, really willing to descend to the level of a certain species of crab which will, when collected in a bucket, seize and haul back into the doomed mass any individual that attempts to escape its fate by climbing out?”
November 14th, 2008 at 9:56 am
Looks like the NZ dollar might reach record highs against the pound. Go the kiwi!!
November 14th, 2008 at 9:57 am
Trotter clearly needs a long holiday. First the rant about the stupidity of the New Zealand voters and now this statement that John Key is the personal embodiment of what the welfare state was set up to achieve. He is obviously confused.
Or maybe, just maybe, with age and experience — in his case the experience of his daughter doing well at school — has come the realisation that there is actually nothing wrong with effort being matched by reward. And that the aim of those of the right is to build a society where state housing, welfare and public provision of services are largely unnecessary because there are no poor people anymore.
November 14th, 2008 at 9:58 am
Great new title for the NBR column. Very clever!
getstaffed – I’d say that saving does have some positive effects i.e. banks can lend more to those requiring capital to grow as saving increases. However, spending is probably more critical in downturns. GDP is essentially a measure of aggregate annual spending. Every time you spend a dollar, someone is getting paid for providing that product or service. If they then spend that dollar on something, someone else is getting paid for that product/service. The faster the money-go-round the more people are busy producing stuff. Saving takes money out of the money-go-round until it is lent out again… and at the moment banks are looking to build their balance sheets up rather than lend.
I’m a layman too though. Other commenters please chip in.
November 14th, 2008 at 10:02 am
We had some interesting discussion going on the thread “Labour’s Financial Legacy” yesterday, regarding the financial crisis and NZ’s distinct position; and for all those people who asked questions of me about my postings, sorry I’ve only just gone back to that thread and responded.
November 14th, 2008 at 10:03 am
getstaffed (2536) Vote: 0 0 Says:
November 14th, 2008 at 9:31 am
Can anyone explain to me (on layman’s terms..) why spending is seen as the best way to stimulate an economy? Why isn’t saving good/better?
>>>
Inflation aka growth is near zero therefore no new jobs, no wage increases etc the punter dont feel rich. on top of that house prices are falling, income from dairy is falling.
As no one else is pumping cash into the economy via wage increases or import revenues the govt tries to keep growth positive by dropping borrowing costs and stimulating growth by spending itself.
A short term fillip that assumes things will come right and the additional govt debt can be paid off via tax receipts once things pick up.
On top of that the economy has been left in the lurch by dodgy spending in the up years by labour, a much larger govt war chest now would be nice.
November 14th, 2008 at 10:11 am
Camryn, the difference between spending and saving, is that savings are what get “leveraged” by banks, and result in increases in the amount of money in circulation. When we have a crash like we have had, if the banks actual reserves (from real deposits) get halved, if their “leverage ratio” was, say, 30 to one before the crash, it has then gone to 60 to one. Hmmmmm……..
This is a fascinating subject that I doubt anyone truly understands.
You are quite right that the sysem desperately needs new deposits now, to bring that leverage ratio back to the point where the banks are not so exposed. And the only thing that will do that, is earnings and profits that result from productive activity. Government spending doesn’t count, as ALL government spending has been sucked OUT of the earning and profitmaking sector in the first place, where it would have been spent or saved anyway.
I keep saying, the only way out, is massive cuts in company tax and taxes on income generally. FDR and the “New Deal” did NOT “solve” the Great Depression, they turned a financial crisis INTO a “Great Depression”. Actually, Herbert Hoover started the ball rolling, he was certainly no free-marketeer, just as George W. Bush today is no free-marketeer either.
November 14th, 2008 at 10:18 am
In a small open economy, the link between saving and investment is weak. Our interest rates, especially at the long end, are set in world capital markets.
Do a little though experiment: overnight, all Kiwis decide to put an additional 10% of their income into their bank account. What happens?
Firstly, private consumption, which makes up 60% of total economic activity, would fall dramatically. Layoffs would start in the retail sector, then the distribution sector, then manufacturing. Then a “reverse multiplier effect” would kick in, as consumption from the people laid-off also fell.
But the banks would have a lot more money, won’t that lead to an increase in lending? No. All that would mean is that they would not have to borrow as much from overseas to finance their lending. And since New Zealand is so small, this reduction in borrowing would have no noticeable effect on the supply and demand for funds globally, meaning that world interest rates would not move. Which means interest rates in New Zealand would not move.
So, increasing savings is probably the last thing we want to happen in the short-term.
November 14th, 2008 at 10:20 am
“Why are credit card costs not coming down? Any views?”
Profit.
November 14th, 2008 at 10:27 am
THIS GUY got in a bit late in the thread yesterday (Labour’s Financial Legacy), he deserves a fresh look in now:
# Bogusnews (198) Vote: Add rating4 Subtract rating 0 Says:
November 14th, 2008 at 6:49 am
“I remember vividly the set of books Labour inherited. The vital stats were these:
1. From 1990 to 1999 the economy grew 283,000 new jobs (real ones, not the govt dept jobs and the list as people being “employed” if they only worked 1 hour a week.)
2. Interest rates at 6.95%
3. Inflation at under 2 %
4. Economy grew 3%
5. Personal productivity – the engine for growth – was 2.3x higher than currently (they are now the lowest on record.)
6. Surplus of 1.5 Bil
This was the result of the “failed policies of the 90’s” that Clark went on about.
Labour inherited a VERY strong economy, and were then lucky enough to get the highest prices for our primary produce in the last 50 years. Rather than being responsible, they went for a tax a spend approach, which economists have known for 30 years will always eventually strangle the goose that lays the golden egg.
A very insightful post on this blog last year mentioned that because Labour had buggered up the fundamentals that by 2008 the economy would be so bad it would become apparent to many financial commentators and even a few journalists.
Unfortunately, Labour is very successfully blaming the world economic conditions. What should be blamed are the piece by piece destruction of good economic policy by one Mickey Mouse Cullen.”
November 14th, 2008 at 10:35 am
GeorgeBolwing, there is some truth in what you are saying, precisely because the banks leverage is now so extended that new savings will not, as you say, flow on to increased lending. But they still NEED those deposits, they can’t just stay overextended.
You are right about banks having borrowed overseas to fund their lending; that borrowing has merrily flowed along to pump up our housing bubble.
I have asked before and will ask again; could somebody justify that? What good has that done for the NZ economy? Why was that better than borrowing money from oveseas to fund expansions of our business and industry sector, and why did that not happen, but a housing bubble did happen? There are some hellish distortions in our whole economic incentive structure at work here, and government interference in free market processes are responsible for 90% of it.
Question: What happens when all those Japanese investors decide they would like their money back out of New Zealand?
November 14th, 2008 at 10:38 am
getstaffed: government spending is seen as the best way to stimulate an economy because that is what Milton Keynes taught – and it’s a load of cobblers because it does harm not good. To spend money the government prints new money and devalues each existing dollar – this is visible as inflation.
John Key is a Keynsian, he’s been talking about government spending to stimulate the economy. Key is a socialist, just like Helen Clark but with a paler shade of red.
http://www.kiwipolemicist.wordpress.com
November 14th, 2008 at 10:47 am
Heh heh, from notpc:
https://www.blogger.com/comment.g?blogID=11906042&postID=4240353009690632591
+ comments section
November 14th, 2008 at 10:49 am
getstaffed – one reason why spending is seen to be good is the so-called multiplier effect wheerby the $100 that I spend at a store becomes some profit for the store owner, some wages for his staff some payment of debt and some payments to suppliers. In turn those payments become wages and payments and debt servicing and in turn …… in smaller and smaller amounts.
In the end my $100 spent goes round enough times to make significantly more that $100 in circulated cash. The faster it moves and the less saving involved, the greater the multiplier.
Offsetting that of course you need savings or capital creation which is what drivesinvestment.
In the short term though the theory goes that an economy will be stimulated to a greater extent by retail spending than by increase in savings.
Import costs tend to get in the way a bit and this beconmes a function of the exchange rate so the whole equation becomes more complex the deeper you look into it.
cheers
November 14th, 2008 at 10:53 am
GetStaffed, Expat;
Inflation does not grow an economy, investment in productive activity does, and this is independent of inflation. A zero inflation economy would possibly be the best thing for planning and predictability.
There is every reason to suspect that interest rates are in reality nowhere near high enough to cover the true rate of inflation when housing is taken into account. Add to that the fact that you will be taxed on interest earnings, and it is no wonder people do not want their money in low risk, low return investments.
Banks require deposits, which they then lend out, “leveraged”, so savings end up having a much greater impact on ecenomic growth than spending does.
The trouble is, our banks “savings” are savings by Japanese, not savings by New Zealanders; AND instead of the free and easy lending environment boosting investment in our productive sector, it has pumped up our housing bubble. There are some hellish distortions in our whole economic incentive structure at work here, and government interference in free market processes are responsible for 90% of it.
Question: What happens when all those Japanese investors decide they would like their money back out of New Zealand?
What we desperately need, are changes in the economic incentive structure so that lending goes to the productive sector that will provide jobs and income, not to speculation in non-productive assets like houses.
I suggest:
1) Abolish company tax. Profits are taxed anyway when they are distributed as income to shareholders. Why tax profits BEFORE that point, when they could be re-invested, providing jobs and wage increases? If a company’s profits were ALL re-invested and none of it distributed as income to shareholders, no tax would be paid. And why not? Think of the future income that the government will get from the PAYE of the new jobs and pay rises created, not to mention when the business DOES start distributing profits to the patient shareholders.
2) Free up land supply so that investment money results in new houses being built instead of olde houses prices being pumped up. (Which flows on to numerous extremely harmful consequences as we are slowly and painfully learning now – if we are learning).
That is just the 2 most important things. Tax cuts generally and reductions in the size of government are essential. Almost NO government spending is as effective in terms of economic growth and invesment, as just leaving that money in the economy in the first place would have been.
November 14th, 2008 at 11:07 am
Anyone else sick of the MSM seemingly having only one verb lately? Seems like any comment on anything is a slamming.
Goff slams Maori move to support National
Turia slams Goff warning
Judge slams ‘media circus’ of cop’s assault on wife
To see more just Google the Herald for slams
November 14th, 2008 at 11:29 am
The Reserve Bank Act has really screwed NZ over. It’s worked in completely the wrong way to the complete detriment of NZ. Our currency is so small it has been easily manipulated by carry trades and our dollar has in no way been associated with its real value. This has been screwing our predominant value makers in NZ, our exporters whilst encouraging consumers to spend more because of the drop in prices in consumer goods. This also made lending cheap from our banks, because our dollar bought lots of cheaply sourced loans from the Europeans. This meant that our mortgage rates could closely follow the OCR. Now that things have gone pear shaped around the world, the Japanese (and others) have sold off our currency in droves because our OCR came down and the carry trades don’t work so well any more. This was widely predicted. The problem is that most people in NZ got used to the result of cheap money and having their mortgage rate track the OCR very closely, everyone forgot the fiduciary duty of company directors is to make money. This absence of knowledge meant that everyone forgot that mortgage rates and interest rates don’t just track the OCR, they’re dictated by the company lending you the money needing to make a profit. Because our dollar has tanked against the Euro, where our banks source a lot of the money they lend people for mortgages, our repayment costs have just shot up. This eats into bank profits, so they slide your interest rate up to cover that gap. Also, all of our imports have just got a lot more expensive, this drives up inflation which makes day to day living more expensive. When living gets more expensive, more people default on loans and banks lose money. Which means they need to make more money to cover their losses to maintain their profits. Credit card default rates are skyrocketing in the US and so this is why credit card rates are going up, to cover them. Insurance on credit cards and loans are also going up so banks have to cover these too.
So to sum up, lifes about to get a whole lot more difficult for everyone. Hopefully you made hay while the sun shone and you have some savings and considerable equity in any property you own, say atleast 35%. Because a lot of people have also forgotten in the good times that the small print in your mortgage agreement says that the banks can demand equity anytime they please. They haven’t done it yet that I’ve heard of but once one bank starts doing it, it’ll be a race to the bottom, just like the carry trades.
November 14th, 2008 at 12:15 pm
Camryn, expat, kiwipolemicist, david, PhilBest & labrator: thanks for your comments. Very informative!
November 14th, 2008 at 1:19 pm
Holy shit, now we find the total number of public servants, as provided by the State Services Commission, is just shy of 46,000…. omfg!?!?!?
I wonder if that number includes the dweebs over at The Strandard ?
November 14th, 2008 at 1:38 pm
was just listening to Michael Laws on Radio live.
Man that guy is full of sh*t.
today he’s suggesting that people shouldn’t have a right to defense in court if he doesn’t like it.
yesterday, he was suggesting that people shouldn’t have the right to silence (I guess we should just torture confessions out of them then hey?).
he can’t even say the word “children”, it comes out like “trildren”… plus a raft of other misuses of words whilst trying to appear intelligent.
How he could make mayor of Wanganui is beyond me, but why does anyone listen to him?
November 14th, 2008 at 1:44 pm
Goff slams EFB
Goff slams Maori
Goff needs to slam himself!
November 14th, 2008 at 2:12 pm
Ah taking a 1/2 day, to enjoy the weather, Oh how I love being self employed & a capitalist……….
Need I mention they lost, we won, eat that.
Hey adc, yes why did you listen to Law’s?
November 14th, 2008 at 2:20 pm
when I go to work, that’s who is on the radio, and I’m obviously either
a) too apathetic;
b) too gob-smacked by his moronic ravings
to change the channel
yes, it is a beautiful day!
November 14th, 2008 at 2:29 pm
All is well with my world, and adc you damn well listen to anything you want, you have my express permission.
Ah I may well open a Crown lager and sit on the deck, soak up some sun.
November 14th, 2008 at 2:32 pm
“Labrator slams over-use of hackneyed phrases”
Sorry
adc: Michael Laws is, like Chris Trotter, a one trick pony that’s long overdue a trip to the knacker’s yard. If he’s not going on about the minutiae of his domestic life, it’s some splenetic clubland rant. And as he fades further into irrelevance and obscurity (after losing DWTS and getting hives on Celebrity Treasure Island, where does one go?) the ranting becomes more extreme. Eventually he will either explode, covering bystanders with bile and spittle, or self-immolate on the steps of the Wanganui Town Hall, having first negotiated media rights to the event (with an exclusive ‘My heart rending bonfire decision’ feature sold to Wimmins Daze).
November 14th, 2008 at 2:34 pm
There’s been a little bit of simplification of Keynesian (John Keynes not John Key) economics wrt the aims of the national government’s spending plans ..
Keynes saw the biggest issue was one of too many people saving too much and that this, in effect, led to potentially productive money being ‘hidden’ out of the economy. I am simplifying terribly as well. One of the major consequences of Keynesianism is that it promotes governments actively working to effect\control the economy. It went somewhat out of favour but has had somewhat of a renaissance because it’s better able to explain some of the behaviours in the 70s and 80s and the current issues with Japan than other models. The concept that it just promotes inflation is somewhat simplistic, kiwiploemicist. It also has some serious faults where it struggles to predict what will occur – a work in progress.
One of the biggest risks of a strong Keynesian approach now is what we have just had with labour ie ‘bad spending’ – spending for the sake of it or for political rather than productive outcomes. The risk on the other side of the ledger is that the government (some 30 odd % of GDP from memory) shuts up shop as well as the commercial sector. This then potentially starts a spiral effect – job losses – reduced income – reduced consumption – reduced production – job losses – etc ala the Depression. In this environment I am concerned that we end up with lots of bad spending as a hangover from the labour government – spending on ‘good’ infrastructure is at least an investment for the future. Lots of the spending on new civil servants rarely is, for instance. Note my emphasis on ‘good’ infrastructure. Keynesian economics also implies governments should spend less when the economy is doing well otherwise they are contributing to inflation and increasing the effects of natural business cycles ie making the booms bigger and thus also the busts – exactly the opposite of what labour did.
So in short…. Key probably has to continue to spending but has to be very careful to make it better spending – probably
November 14th, 2008 at 7:28 pm
Oh well it looks as if everyone is outside in the sun playing. And you call yourself nerds?! Bah!!
I’ll just celebrate this alone then.
In short, US authorities have just shut down an ISP that’s been responsible for providing the backbone for 75% of the world’s spam. So if you’ve been less than usually concerned about the size of your equipment these past few days, that’s why
( To avoid spoiling your weekend, just don’t read the bit that says they expect it’ll take less than a week before some other money-grubbing S.O.B. steps in to provide the spammers with the service
)
November 14th, 2008 at 8:15 pm
Rex,
In short, US authorities have just shut down an ISP that’s been responsible for providing the backbone for 75% of the world’s spam. So if you’ve been less than usually concerned about the size of your equipment these past few days, that’s why
You do not celebrate on your own. Spammers are the scum of this planet.
Trouble is, who has all the mailing lists saved? They need prosecution.
BTW my weekend is not spoiled, Big Boys Toys.
See what I can spend my tax cut on …….
Just don’t give your email to the advertisers.
November 14th, 2008 at 11:22 pm
Just to say hello, back in Blighty and mission accomplished.
Shit weather here,and the economy under the Socialists is as bad as it can get.
In my research it occurs to me that many of the previous administration need to be thoroughly investigated.
Most Western Democracies would not tolerate the shenanigans that are apparent and crowed about by the Corrupt Regime that has just lost power.
Fish and Scampi Quotas need a thorough investigation.
The deal with Toll Holdings and the Mickey Mouse Train Set is dodgy in the Max.
Goff berating the Maori Party is symptomatic of an arrogant administration, that doesn’t know when to stop.
I could bang on all Morning, but there is certain information due to be considered, and I hope that the New Government don’t
actually gloss over the maladministration, and frankly corrupt practices taken in the last 3 years.
Whilst their effort needs to go into fixing the Future, they can set up a Judicial Enquiry with recourse to the Privy Council.
In my opinion many of the ‘Top Team’ need to go to Prison!
November 16th, 2008 at 8:40 pm
From Stuff:
Pathetic tall-poppy, hand-wringing envy media in full force. Sad pack of losers.
Fairfax: You are part of the reason that NZ is in the mess it’s in.