The real economy vs the casino

Written By: - Date published: 10:57 am, July 26th, 2010 - 14 comments
Categories: uncategorized - Tags:

For the business pages, it’s Reserve Bank week and once again the banks want the Governor to push up the price of money, while those in the real economy where the jobs are want interest rates kept steady. As they say, there are no signs of rampant inflation and growth forecasts are uncertain.

But the money markets want a one-way bet. And some of them were not subtle:

Darren Gibbs at Deutsche Bank said it was “virtually unthinkable” that the Reserve Bank would keep interest on hold.Roland Randall at TD Securities said such a move would be seen by the markets as the Reserve Bank “failing its first test of faith” which could prompt a selloff of the New Zealand dollar by currency traders.

On the other hand:

Some sectors of the economy have called for interest rates to be kept on hold until there is evidence of a broad-based recovery.

The New Zealand Manufacturers and Exporters Association said last month’s rate hike was based on an optimistic reading of economic conditions and that another interest rate increase could damage the recovery. Chief executive John Walley said the recovery was, at best “weak and unbalanced”.

“A dip back into recession in Europe or stagnation in China could see commodity prices fall further and very quickly,” Mr Walley said.

“The risks posed today by these potential shocks far outweigh any potential inflationary pressures a year or so down the track.”

And the old inflation bogey gets trotted out again.

Khoon Goh, senior markets economist at ANZ/National, said in Wellington last week that keeping interest rates down would stimulate the economy, but rather than increase productivity it would drive up consumption, fuelling another housing bubble.

“What the historical experience has shown is that if you keep interest rates too low for too long, yes it stimulates the economy, but it stimulates the wrong part of the economy.”

The twenty-first century risk is deflation, not inflation. If interest rates are kept too high for too long it also stimulates the wrong part of the economy – the financial sector. Holding rates in check this month is not going to start a housing bubble, but it may save jobs in manufacturing.

14 comments on “The real economy vs the casino ”

  1. vto 1

    Enough of interest.

    Debt providers can take an equity stake from now on. As is done in other societies.

  2. Lanthanide 2

    “which could prompt a selloff of the New Zealand dollar by currency traders.”

    Isn’t this actually what we want? The NZ$ should be more like 60 US cents, not 70.

    • Bored 2.1

      A very good reason for there to be as Keynes long ago suggested an international currency clearing house as opposed to a speculative market. What we actually need is an end to the whims and desires of a speculative bunch of financial types who set up the market to act as parasites.

  3. john 3

    Neo-liberalism,Reaganism, Rogernomics, Wodneyism, Jonkeyism, call it what you will has made a virtue of profit by speculation rather than creating real industry and wealth. Example? US stock holders made a mint offshoring their production to China ; dirt cheap wages boosted Company profits skywards everything great! in the Dow index, but an underclass of 40,000,000 Americans now exist on food stamps.( Also 50,000,000 Americans die from treatable conditions every year because corporate medicine doesn’t think they can pay to be saved!) The Casino made a mint by exploiting their own people!! Look at our news stock prices, like a casino going up and down figure prominently divorced from the reality on the ground. Eventually the Jonkeys and Wodneys move into their cloud cuckoo worlds permanently separated from the real world until the empty shell of the economy,as in the US, leached by the free marketeers collapses! Money must be tied to real work not monopoly exploitation ie: if you’re rich you can get richer! Do you want an asian style society of very rich and beggars on the street? That’s the choice ,we move forward together or we fall apart!

    • JJ 3.1

      Lol 50 million people die in America each year?

      • loota 3.1.1

        At least 50 mill, could be closer to 75 mill p.a.

        I’m moving over there next year as there will be no one left in Wyoming so can claim it under squatters’ rights 😆

    • ghostwhowalksnz 3.2

      The mortality for the US is more like 2.5 million per year
      Number of deaths: 2,423,712(2008)
      Death rate: 803.6 deaths per 100,000 population
      Life expectancy: 77.9 years
      Infant Mortality rate: 6.75 deaths per 1,000 live births
      Number of deaths for leading causes of death:
      Heart disease: 616,067
      Cancer: 562,875
      Stroke (cerebrovascular diseases): 135,952
      Chronic lower respiratory diseases: 127,924
      Accidents (unintentional injuries): 123,706
      Alzheimer’s disease: 74,632
      Diabetes: 71,382
      Influenza and Pneumonia: 52,717
      Nephritis, nephrotic syndrome, and nephrosis: 46,448
      Septicemia: 34,828
      http://www.cdc.gov/nchs/fastats/deaths.htm

      The current population will take 78 years to all die off ( as an average)
      Dont count on getting Idaho any time soon, allthough if you arranged for the numbers for the smaller states to go first, you could have Idaho in about 3 months time

  4. Herodotus 4

    The banks alread expatraite billions per year, now they are telling us (possable after making a bet on what the OCR could do) that we are flush and well into a recovery.
    After reviewing the retail sales stats, house sales, prices and the days that take to sell lenghtening by another 3-4 days,wage growth, our successful implementation of employment policies(!!!!!) the Res Bank govenor, if he does increase should enter the real world and not remain permanently within his office complex.
    Why do we employ our top Civil servant to destroy NZs potential and screw those of us who fund his salary?
    Sure he can hide behind the act, but does that not confirm Labs desire to widen what is currently the single focus of the Res Bank to protect us from the evils of the economy. How can we approach Aust economy when Bollard will just slash any recovery with high interest rates. So the masses and business pay for these high rates as money goes to Aust in the form of dividends. This is a race we cannot win.
    http://www.westpac.co.nz/olcontent/olcontent.nsf/content/FM_Bulletin_20100723/$FILE/RBNZ_OCR_Preview.pdf
    http://www.bnz.co.nz/binaries/w150710.pdf

  5. Nick C 5

    I dont see how raising interest rates would mean that the financial sector would make more money. They would sell money at a higher price but they would also have to borrow it at a higher price. What matters for banks is their margin, there is no evidence that will change.

    • Pascal's bookie 5.1

      What can they do if there is a difference between our rates and other countries rates?

      Is what they can do made more profitable if that gap is bigger?

      If it is more profitable, will there be more of it?

      Do they charge fees?

    • Herodotus 5.2

      If raising interest rates assisted in inflation to start to increase, with the ability and ease to axcess capital then the continuation of borrowing and speculation would occur. Remember we are programmed to spend and oil the consumer machinery. Govts would be less inclined to remain within their financial restraints (They need to tempt us with treats as health care, 65 pensions etc. for a nike swoosh every 3 years) i.e we would be living beyond our means again. Then there is the ability for banks to distance themselves when the crap hits the fan again. This is the secret The Capitalise Profits…. blah blah.
      Previously if there were rogue countries (e.g.Latin Americas) the consequences were limited to that countries sphere of influence, now with globalisation there is the domino effect. Of which I think we have not seen the 08 recession complete its course yet.
      Otherwise how would banks contiue their earnings requirements if no one borrowed or consumed?

    • loota 5.3

      Dude, higher interest rates mean that hot speculative foreign money would pour into NZD. The banks would have a lot more to play with and would have more capital to lend out, more credit cards they could issue, etc.

      All good profit making activity for the banks.

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