This the time of year when papers are thin and economic prognostications abound as the pop-star economists from banks and brokers look to raise their public profile. In 2013 the same Cameron Bagrie gave us the “rock-star” economy, this year apparently in Wellington we can all be part of the “movie-star” economy. Such puffery is not just a feature of New Zealand’s summer though, as this from my favourite cartoonist Alex of The Daily Telegraph shows.
Following on from Bryan Gould’s post, I think a less superficial and more fundamental look at our economic prospects makes much more sense. Such a one was given by John Bolton on interest.co.nz, where he says:
With incredibly loose monetary policy implemented around the world we are going through uncertain economic times. Nobody convincingly knows what will happen and over what timeframe. In the media we are dished up with a succession of short-term views on the currency, growth, and interest rates. None of which capture the big structural issues lurking ominously in the background.
Early in 2014, NZ economists were forecasting that mortgage rates would hit 8% by the end of 2015. Rates would be fuelled by our rock-star economy, confidence, record commodity prices and full capacity leading to underlying inflation. All of this was based on short-term signals. There was little regard for 2014 being the peak of a commodity cycle, which has since fallen back by around 40%. Inflation sits at 1% and it is now clear that interest rates will remain low.
The whole article is worth a read. Bolton has a sober warning
Asset markets are driven by surplus money buying up assets at higher and higher prices, and lower yields. There is too much money floating around and not enough places to invest it. Businesses have surplus capacity and face weaker demand and lower prices. All of this is a recipe for a massive market correction when it finally arrives.
I once heard an Indian proverb about rivers that is a great analogy for printing money. I can’t for the life of me find it, so here goes the JB version …
When Man diverts rivers, the river responds by building up sediment and so the water level increases. Over time Man builds a higher riverbank, and yet more sediment forms. This repeats until the riverbank is too high and eventually collapses during a flood. Whereas once a flood was manageable it now destroys the entire valley.
.. and so it is that history repeats.
The bubble goes “pop.” People suffer, big-time.
If there’s a lesson, it is that our media should pay less attention to the self-interested bankers and brokers about the state of the world and the New Zealand economy, and more attention to those with an eye on the fundamentals and on history.