Thursday, 1 December 2005

NZ businesses ready to shrug?

Will New Zealand businessmen 'shrug' -- or perhaps even go on strike? At least one person worries they will. "The danger is they simply put their cheque books away, they stop investing in capital, they stop hiring people and we could get to a point where we have a very good and very resilient economy that just stops." So says ANZ chief economist John McDermott, as quoted by a worried Chris Trotter. "To hear the idea of tax cuts dismissed as an "ideological burp" was almost certainly the final straw for many [local] business people," says Trotter.

And why wouldn't it be? As Gareth Morgan points out, the impact of 'ideological burps' has been to radically change the behaviour of taxpayers. And as I argued here at the time, cutting envy taxes makes us all rich. Keeping the shackles on the highly-productive only hampers the productive and the entrepreneurial -- who could blame them if they decided to go on strike.

Whatever the case, it's clear from a record-high NZ dollar that foreign investors aren't shrugging in their enthusiasm to invest in the New Zealand economy. High interest rates and confidence in the local economy are attracting foreign investment by the boatload, and pushing up the dollar. Gareth Morgan points out that investor's enthusiasm for the New Zealand economy is in contrast to the pessimism of REserve Bank governor Alan Bollard. Worse: Bollard's pessimism-fuelled interest rate hikes are in fact fuelling the investment/borrowing orgy that has Bollard so worried, and at the same time revealing as illusory the idea that the governor has the tools with which to control inflation.

To sum up. If those supplying capital to this debtor nation do not concur that there are serious economic imbalances to worry about, the central bank is extremely limited in its ability to control inflation. This limitation is all the more severe if there are lending institutions beyond the sphere of influence of the Reserve Bank.

No amount of piecemeal interventionist distraction will overcome that reality Dr Bollard – a bad workman blames his tools.
(And if you're wondering what I mean by 'shrug,' I'm referring to Ayn Rand's novel 'Atlas Shrugged' (right) in which the people who move the world decide to go on strike, just as Trotter and McDermott are worried they will here.)

[UPDATE: Trotter link fixed to point to correct article.]

Linked Articles: Stop signs
Graphing 'idological burps'
Cutting envy taxes makes us all rich
A bad workman blames his tools.

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Anonymous Sus said...

Yep. The definition of insanity indeed applies to Bollard's numerous interest rate hikes over the last year+:

'Doing the same thing over and over again - but always expecting a different result'.

Scary as to how many things the D of I can be applied in Godzone, eh ..

1 Dec 2005, 16:46:00  
Anonymous Andrew Bates said...

"Worse: Bollard's pessimism-fuelled interest rate hikes are in fact fuelling the investment/ borrowing orgy that has Bollard so worried."


I realise state mandated higher interest rates encourages foreigners to place their savings here (and that, technically, such a capital account inflow must mean a current account deficit) but how does that fuel a borrowing orgy? If borrowers are paying a high rate, shouldn't that be discouraging them?

I agree that the RBNZ mind you.

1 Dec 2005, 18:30:00  
Blogger PC said...

"I realise state mandated higher interest rates encourages foreigners to place their savings here (and that, technically, such a capital account inflow must mean a current account deficit) but how does that fuel a borrowing orgy?"

Well, I guess you can't borrow if there's no capital to borrow. The more there is here to be lent, the more encouragement there is from lenders to sell their services. And there is a lot of advertising around to sell all those loans and all those mortgages, and a lot of mooney being borrowed, even at the interest rates being charged.

However, it's worth asking whether all that borrowing is really a bad thing. If businesses and people can make their loan and mortgage repayments, is it a bad thing? Businesses borrow to grow, taking capital and turning it into new wealth -- we can see that happening, even with interest rates as they are and tax and other government intervention as it is. And people borrowing to buy houses or to consume -- we can see them presently making enough to make their payments, even with interest rates and taxes as they are. (And as Morgan says, "lower long term rates that result mean that domestic borrowers continue to face pretty attractive fixed rate mortgages and the potency of monetary policy to roll the property market back for instance, is thwarted.")

Or is there malinvestment happening? Or too much borrowing or sonsumption? I don't know, but then neither does Keynesian Cullen or Alan Bollard. Do you have a view?

2 Dec 2005, 10:58:00  
Blogger Berend de Boer said...

NZ is just too small to have its own currency.

2 Dec 2005, 13:55:00  
Blogger libertyscott said...

The housing market continues to be quite buoyant (I've discovered to my advantage) and so is consumption, reflected in personal borrowing including credit cards, where around half of credit card users don't give a toss about the interest rates. The discouragement is in commercial capital investment which gets discouraged as interest rates go higher, because it becomes harder and harder to find an alternative to cash deposits to get a decent return.

3 Dec 2005, 03:06:00  
Anonymous Ruth said...

Remember that so long as asset prices are rising household debt ratios are actually decreasing.

You have to wonder how dumb Bollard thinks people are.

3 Dec 2005, 17:39:00  
Blogger Rick said...

So did PC clear that one up for you Batesie?

8 Dec 2005, 12:37:00  

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