Sludge Report #34 – A Trio Of Economic Heresies
IN THIS EDITION: Setting The Scene: Stockmarkets Mark the 13th Anniversary Of The 1987 Crash - Heresy 1: An Explanation For The Vegetative State of the Domestic NZ Economy – Ugly Monetary Aggregates - Heresy 2: Buying Tranz Rail - Heresy 3: Henry the VIth Bananas, And OPEC’s Bank Proposal.
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Sludge Report #34
Setting The Scene: Stockmarkets Mark the 13th Anniversary Of The 1987 Crash
Over the next three days the world will be watching the US sharemarket particularly closely as the 13th anniversary of the 1987 stockmarket crash is observed. Not that the anniversary signifies anything except symbolically. But this happens every year and this year the gobal economic picture is particularly bleak.
On Black Friday the key New York technology index (NASDAQ) did a remarkable impression of reversing its recent losses marking up a 8% gain, but this morning, as another week opened on Wall St, the big apple markets returned to their usual practice of late – falling. This time the falls came in the wake of further warnings about Intel profits.
Meanwhile here on the other side of the Pacific, Asian share markets – with the sole exception of Australia – are also performing remarkably badly. Here in Godzone the NZSE40 now significantly under the 2000 mark and, if it follows the usual patters, can be expected to fall when New York falls but not rise when New York rises.
The causes of the malaise are multiple with oil and inflation the key drivers. This week the oil price is continuing to rise on security concerns in the Middle East. Meanwhile there is not a lot of positive news coming out of either Europe or NZ on the business confidence front.
Heresy 1: An Explanation For The Vegetative State of the Domestic NZ Economy – Ugly Monetary Aggregates
Close readers of Sludge may recall back in June Sludge raised the subject of money supply aggregates and the vegetative state of the NZ economy. (See… http://www.scoop.co.nz/mason/stories/HL0006/S00168.htm)
In summary Sludge’s thesis was that the amount of money in the NZ monetary system was shrinking, and has been since late 1999.
The problem with this is that without an expanding money supply there is no money to pay for productive activity. Hence our vegetable economy.
Unfortunately while the international economic framework treats NZ Inc. as if it were a bank account – from which money can be withdrawn – in reality monetary systems are not like bank accounts. They have to keep growing.
Why? Because unless the money supply grows at the very least at the average rate of interest payable on debt, say 7%, then there is no money in the system to pay the interest.
Since June the picture painted by the monetary aggregate statistics has worsened sharply.
(See…. http://www.rbnz.govt.nz/statistics/monfin/C0/data.html#TopOfPage for the latest Reserve Bank figures.)
The above link shows weekly figures for M3 (broadly the measure of NZ dollars) and PSC (Private sector credit). M3 has now fallen by 2.3% year on year. Private Sector Credit which normally expands at around %6-%11 a year has fallen since May this year.
This is unprecedented on an historic basis.
Over the past decade M3 has only fallen on a year on year basis during the recession in June last year.
Even back during the tough times of 1991 M3 continued to expand at 6% a year. When times are good M3 has been known to expand by as much as 15% year on year.
But the fact that this is happening at the same time that export returns are up 25% on a year on year basis is the most confusing aspect of the current picture.
Economists all over the country, and the Prime Minister and most of her cabinet, it seems remain ever hopeful of a bounce back in growth the September quarter.
Fat chance thinks Sludge.
Monetary aggregate statistics if anything point to the September quarter being even worse than the June quarter. Anecdotal evidence would suggest that while there has been some flow through from the export boom, much of the additional income of farmers over the past year has been spent on repaying debt rather than on buying anything off fellow NZers.
And now according to this morning’s business confidence survey results the construction industry is particularly deep in the doldrums. This too makes sense in light of the money supply stats, if no one is borrowing money then no one is building.
From a policy perspective the problems facing the NZ domestic economy raise some very interesting questions for the Monetary Policy Review which is currently underway.
Namely, if the demand for borrowing money is so low and has been so low for more than 12 months – then why have interest rates been raised by the Reserve Bank by so much?
In the absence of any reason to believe otherwise it would appear that NZ borrowers have fallen into John Maynard Keynes liquidity trap. That is, that the price of money is no longer influencing demand. Unfortunately however in the mainstream economic world such a notion is closely akin to heresy.
Sludge reckons it is time NZ’s economic boffins started opening their eyes to what is really going on here.
Heresy 2: Buying Tranz Rail
In the Sunday Star Times at the weekend Terry Hall reported that Jim Anderton’s hopes of buying back New Zealand Rail on the share-market stood little chance of being implemented in light of the Government’s hefty commitment to maintaining surpluses for the super-fund. There would not be enough money he said.
Hall ought to know better. When governments purchase – or build - assets the impact on the operating balance (the fiscal position of the government) is neutral but for the cost of the depreciation of those assets. This is, of course, far lower than the cash cost of any purchase and a dabble by Treasury into the stock-market need not have too great an impact on the government’s accounts at all.
That said, issuing instructions to Treasury to start buying Tranz Rail shares would to Treasury be almost as heretical as asking them to consider the possibility that money supply growth is not always demand driven.
Heresy 3: Henry the VIth, Bananas, And OPEC’s Bank Proposal
At its recent OPEC Summit the idea of an OPEC development bank was mooted by Venezeulan President, and would be saviour of the world , Hugo Chavez.
The idea received a remarkably luke-warm response from the financial press. In the Financial Times it was observed that the proposal would probably founder because the Saudi’s would be reluctant to put up the capital.
Again the Financial Times – like Terry Hall – also ought to know better.
It is not necessarily so that an OPEC bank would have to put up huge amounts of capital in order to start lending to OPEC members and deserving developing nations the cash the need to build more schools and hospitals.
The truth is that currencies and banks are not what they appear to be.
Currencies are in fact nothing more than a promise to pay. They are only a means of exchange and they only work because we all agree to use them.
In the case of the mighty US dollar the promise to pay is backed by the US taxpayer. On this basis US banks (and the IMF) are in effect licensed to create money not only for US taxpayers but also for people everywhere else in the world.
The US and IMF monopoly on this process works largely because US dollars are good for buying things off not only the US but everyone else as well.
(If this still doesn’t make sense try thinking about the following extract from a Scoop Irish Eyes column. “Another thing that is mysterious is money, in so many different ways. For example it costs about 2 cents to produce an American $100 bank note. If the US buys a case of bananas from some other country with that 100 dollar bill and the bill remains in use in the country from where the banana came from then the US has bought a case of bananas for about 2 cents. Sixty percent of US bank notes are in use outside the country. Its quite bananas really.”)
Back in the first half of the last millennium King Henry the 6th – like OPEC – became a little fed up with the way this system seemed to work so clearly in the favour of the bankers, and against his own interests.
He solved his problem in a most ingenious fashion. He created a new currency – sticks.
He used these sticks to purchase things from his nobles and ensured that they saw them to be of value by making them good currency for the payment of taxes.
King Henry could do this - turn sticks into money – not because he had loads of money (he was broke at the time) but because he had something that people needed to purchase – taxation receipts. This is not actually as strange as it seems as sticks are no more valuable intrinsically than what we all use for money – bank notes – as explained earlier all money is purely symbolic.)
Adopting the lesson of good King Henry all OPEC would need to do to create a new bank and start lending billions of OPECs to its member states (and for that matter anyone else who wants to borrow money) is to make its OPECs good currency for the purchase of oil.
You couldn’t get much more liquid than that.
Of course Chase Manhattan, City Bank and the Federal Reserve Board’s shareholders will probably have a coronary were OPEC to do such a thing – but then hey, it’s a new millennium and maybe 300 years of global oppression by bankers is enough.
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