Over the weekend, some good friends of mine had their house go to auction, and it went for well over $2 million. Foreign Chinese buyer, and welcome to the neighbourhood. This in a suburb where that price hadn’t happened before.
A day earlier, the Chinese currency had been deemed to be a global reserve currency. This means analysts will be able to advise money traders the world over about how different economies should be valued.
The two points converge on the brittleness of New Zealand’s economy. And our Prime Minister gets that. Since he’s come back from New York, he’s got a sharper sense of how major external threats can throw our economy totally off track. Even with growth and activity as it is.
Quoted by Fran O’Sullivan in the NZHerald, he says:
Almost every recession we’ve had is driven by real interest rates going up. This is the big risk.”
You just heard our PM offer the word “recession” unbidden, in the middle of high growth. Risk: interest rates.
He clarified that was very unlikely at the moment.
We really are bucking the international trend. We are still at two per cent base rates. Inflation is running incredibly low. There is fundamentally no pressure on the Reserve Bank to raise rates.”
All good apparently. Then there’s the risk of something big internationally.
The risk is a really unforeseen increase in inflation because in all the discussions I’ve had it is not at all clear these central banks have an idea of how they will get on top of this carry trade. Because all of a sudden money will be pouring the other way in really quite a significant way.”
He’s talking Japan’s central bank.
And the reason we should listen there, is because he’s extremely experienced in this area.
Apparently he said, to a Westpac audience:
We are just in so much better shape. We can spend money if we want to. We are back in surplus we can cut interest rates if the Reserve Bank wanted to. And we are not printing money and we have no intentions of doing that.”
While he also said a bunch of stuff about the U.S. elections, let’s pass on that for a moment. He’s flagging a massive risk. China and Japan hold up the world’s economy, and Japan’s bank has run out of options, and no one knows the truth about China.
Times like this, looking out over the risk-bomb called Auckland from my house, make me think about the letters the IMF and Muldoon exchanged in the late 1970s. Or the housing markets and sharemarkets 1988. If by some miracle our housing market cools steadily, we will have avoided real social chaos.
If only we had a Prime Minister who could do more than point out the risks.