Friday, 15 April 2016

Herald business editor praises latest asset bubble

 

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The moron is thick this week with the Herald’s business editor, who reveals that whatever he knows about editing, he knows little about the economics that drives business.

You’ll remember the so-called “rock star” economy we were supposed to be enjoying by now? Driven, it was alleged, by three things underlying what economists call “growth” that the groupies saw as fairly foregone conclusions:

  1. The dairy boom.
  2. The housing boom.
  3. The Canterbury RebuildTM

There aren’t just problems with the way the morons measure “growth”  (by which they generally just mean consumption). There were problems, as we’ve discovered, with these three supposed pillars of permanent prosperity.

But not to worry says the Herald business editor. “The resurgence of Auckland house prices could be good news,” says the moron,

_Quote5with the wealth effect making home owners more likely to spend money and stimulate the economy through the dairy slump…
    REINZ figures released this week showed the median price of the more than 3000 houses sold in the Auckland region last month surged $70,000 to $820,000, the first time it's broken $800,000…

    Higher prices did lead to higher confidence among consumers and could lead to increased borrowing and spending…
    This was the "wealth effect" where the rising value of peoples homes could make them feel more financially secure. [Emphasis mine.]

You couldn’t demonstrate an economic fallacy more succinctly.

It is yet another example of the destructive yet widespread addiction to blowing asset bubbles.

The “wealth effect” being the form of stimulunacy the world’s central bankers have been hoping to have some effect for the past seven years: pump up asset prices they surmise by goosing all the markets (stocks, bonds, bricks and mortar) and everyone owning these newly-rich assets would feel so goddamn rich they simply wouldn’t be able to help themselves emptying their wallets in shopping malls in record and increasing numbers.

In other words, what they’ve been after is a bubble-created recovery: a “bubblecovery.”

Hasn’t happened. (Hell, even their own flawed theorists tell them that the more income people have the less they tend to spend!) As David Stockman explains of the American experiment:

If the monetary central planners have been trying to create jobs through the roundabout method of “wealth effects,” they ought to be profoundly embarrassed by their incompetence. The only thing that has happened on the job-creation front over the last decade is a massive expansion of the bedpan and diploma mill brigade; that is, employment in nursing homes, hospitals, home health agencies, and for-profit colleges. Indeed, the HES complex accounts for the totality of American job creation since the late 1990s…
[All along, the Federal Reserve had assured us that the United States was experiencing genuine prosperity]. Flooding Wall Street with easy money, the Fed saw the stock averages soar and pronounced itself pleased with the resulting “wealth effects.” Turning the nation’s homes into debt-dispensing ATMs, it witnessed a household consumption spree and marveled that the “incoming” macroeconomic data was better than expected. That these deformations were mistaken for prosperity and sustainable economic growth gives witness to the everlasting folly of the monetary doctrines now in vogue in the Eccles Building.

This was not genuine prosperity in the US then.

It is not genuine prosperity in Auckland now.

You simply do not create prosperity by juicing up consumption. All you do instead is consume your capital, eat up your seed corn, while creating an even bigger debt mountain than the one that generated the last big bust.

Nor do you acquire economic health from a system that is so fucked up.

Figures from the Reserve Bank of New Zealand indicated that just two years ago the New Zealand housing stock had a “value” of some $NZ716 billion … roughly 3.4 times its GDP. It should not exceed 1.5 times ($NZ315 billion … ideally 1.2 times ($NZ252 billion). This suggests, even back then, that there was already something something in the order of $NZ401 and $NZ461 billions of bubble value in New Zealand housing – and rising!

Now, consider that it takes about 25% of mortgages incorporated within this bubble value to fuel it … some $NZ100 billion through $NZ115 billion of at risk of bubble mortgage value – on the capital base of NZ banks which is just $NZ29 billion.

So at a time of historically ultra-low (unsustainably low) interest rates, with a mortgage bubble grown by more than 165% in a little over a decade and nearly half of all NZers mortgages enjoying floating interest rates (and with mortgages themselves accounting for nearly 60% of banks’ loan portfolios) we have the business editor of New Zealand’s major daily that the continuing inflation of this asset bubble could be “good news.”

In a pig’s arse, it is.

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1 comment:

  1. Seems to be on a knife edge. RBNZ needs 2% inflation to justify a higher interest rate which they can lower in a recession. Auckland property is in a horrible bubble but it isnt creating inflation in the wider economy. RBNZ cant raise rates they are trapped but the real problem isnt the central bank its politicians.

    Politically National have opened immigration and have done nothing to address planning restrictions which really fuels the glorious tax free Auckland bubble and wins them elections.

    Government spending is almost 40% of gdp which is the real issue. The government sucks the life out of the real economy there can only be deflation. Central banks can only play around with interest rates.

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