Hard News: Theories, please ...
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Anyway, what do folks think of Cullen's op-ed in today's Herald? On the political tip, I'd have to give him credit for striking just about the right tone. But substantively, a sounds assessment of the prospects for New Zealand, Pollyanna making a party political broadcast or a bit of both?
There's a bit of political alibi-seeking in his comment about expanding fiscal policy more if the economy needs it. The fact is, we're going to have an expansionary fiscal policy over the next couple of years whether the economy needs it or not - regardless of who wins the election. And, personally, I think both the main parties are nudging into irresponsible territory on this.
On the wider economy though I don't think Cullen is being Pollyannah-ish - as you say, I think he struck about the right note on that.
Bollard this morning stressed the economy is pretty sound at the moment: we're not teetering on the brink of recession like the US, and although inflation is uncomfortably high we're not in the same position as the Aussies.
Although the big good news story - dairy - will probably come back a bit it still puts us in a good position for the next couple of years.
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Personally I do get aggrieved at the way we're made to all feel personally responsible for inflation
Although the big good news story - dairy - will probably come back a bit it still puts us in a good position for the next couple of years.
I thought all those dairy dollars (and resulting inflationary pressure) were one of the reasons we have such high interest rates?
If so, I'm aggrieved at having to pay more for our home loan because some cow cocky has a few extra bucks to buy a tractor or a new Holden Rodeo or whatever. :-)
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dc_red
We had high interest rates even when the dairy price was low.
The main reason they're so high is we're a more risky bet. We've still got a relatively narrowly-based economy, but, much more importantly, we've got a large overseas debt, and have had since the early 1970s.
And the high dairy prices - if they turn out to trigger, as some economists are starting to cautiously suggest, better terms of trade for NZ - are the best bet we have for lowering that large debt.
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Danyl, self-discipline is only part of the necessary equipment to wind up with a comfortable retirement fund. Attitude is all.
If you don't mind a bit of homespun philosophy, I have found the best ways of saving to be as follows. Here's my four-step investment plan.
First, invest in infrastructure. Your own. That means basics before treats. Metaphorically speaking, eating your veges instead of going straight to the icecream.
Second, learn to distinguish "buyer's rush" from "contentment", and aim for the latter. It's curious that what makes most of us content tends to be good relationships, not good possessions - so invest in your relationships.
Third, avoid flashy friends. Envying other peoples' possessions gets us into stupidly competitive purchasing, trendiness, and having to add rooms onto our houses to put all our stuff in. Fashion is at best a con, at worst a form of slavery. That includes fashionable electronics and vehicles.
Last, slow and steady wins the race. Boring, yes, but as true as it ever was. Save little and often, and don't wait till you can afford it.
None of this is rocket salad; your Mum could have told you it and probably has. It's not bad advice for countries, either, as the Salon article indicates.
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You fiscally responsible people, with your fund thingamabobs and your managed whatnots and your economic theories and your newfangled mathematics! You're freaking me out! :)
All I'm thinking is that it looks like some of us (ie me) are going to have to eat cat food when our fixed mortgage rate ends...
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...and, despite the fact that I promised to say no more about Krugman, because I love things going full circle I feel obliged to point out that Robert Reich was the chief target of Krugman's assaults on the early Clinton administration.
As it happens, the dispute was over industrial policy and the impact of globalisation on American workers. And, if anyone's changed their stance over the intervening years (on globn not IP) it has been Krugman who is now more inclined to believe that globalisation is harming US workers. Krugman would probably quote Keynes in his defence ("when fact's change I change my mind") but Reich can probably smirk a little on this one.
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Moz,
wondered if one could set up your own advisory firm and secure the discounts for yourselves and friends on perfectly straight-forward investments.
In Oz this is common - many financial advisors will rebate any kickback they get for investments. The guy I use is reasonably priced, charges by the hour for the work he does, and pays me back the full "commission" he gets on anything I invest in.
Danyl: for some of us $5000 is only a couple of months savings. But you're right in that I find it hard not to spend money once I get a few months savings accumulated. For me, I'm "living poor" because I'm happier that way so I direct debit a big whack into a fund every month. They're a low-fee, no-commission fund so it doesn't cost much to deposit. Also, many funds have a "low income earner" discount of some sort so it's worth asking. My partner was getting free deposits while she was student from one fund (instead of a fee of up to 4%).
I also use a high interest saver account as my "daily" account because I'd rather pay $5 for my 2-3 monthly withdrawals and use cash for everything and get their high interest when the alternative is token interest and "free" services that I don't use. For the same reason I use my credit card quite a lot, since that cost is built into the prices I pay everywhere (ditto the loyalty scheme) and if I don't I'm subsidising people who do. Sucks, but that's the way it works. I still get good value out of "my" flybys card that I swap with people I meet whenever I can. Just to screw with the data it collects.
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I do wonder though: as long as the Reserve Bank believes personal tax cuts are inflationary, we can expect it to do its best to hoover the "extra money" out of the economy quick smart?
Unfortunately that's bang on. The Reserve Bank are tasked solely with keeping inflation between 1-3% by setting the underlying interest rates.
They can't do anything but see additional money floating around (that is likely to be spent on inflationary "consumables") and put up the interest rates to take some of that back.
Hence the calls to modify the Reserve Bank Act so that the focus isn't so blunt and maybe introduce some nuance into it (because those interest rate hikes really hurt our exporters and homeowners in ways that only affect inflation indirectly...
Was rather glad to get a letter from my Kiwisaver provider (Fisher Funds) the other day saying they had processed my application to join but that the IRD holds the funds for the first 3 months and is paying me 6% interest until they hand over. Better that than being in a stock-weighted fund right at the moment... -
One other possible reason for NZ sharemarket "looking better" than say Australia at the moment is the events of Oct '87 pretty much scared a whole generation away from the market.
Consequently the type of people trading there now are possibly those for whom fundamentals and longer term cycles are more important and maybe they are less panicked than some others.
Secondly - many of NZ's biggest companies are actually private and not really listed (Fonterra.)
I've also heard compared to Australia the % of NZ investors on the local sharemarket in each country is much lower here than in Aus.
This also reflects on the size of our market which is tiny.
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Was rather glad to get a letter from my Kiwisaver provider (Fisher Funds) the other day saying they had processed my application to join but that the IRD holds the funds for the first 3 months and is paying me 6% interest until they hand over. Better that than being in a stock-weighted fund right at the moment...
Lucky you! My Fisher Funds Barramundi units have dropped 30%, and their Kingfisher units are also way down. My portfolio has dropped $30k in the last two weeks. Bummer.
Where did I go wrong? A few years back I took Cullen at his word and got out of property, and put it into index stocks (TNZ, WiNZ, Ozzy, Mozy, etcc) which is what Mary Holm and others recommended passive investors should do.
I say again: Bummer. But I need not worry, because now the pundits have pointed out that it only took two years for stocks to recover from the 87 crash, and 9/11. Guess what I'll be doing in 2.5 years?
</cue Labourites responding with "if you'd kept your money in property you'd also be crying right now". No, I wouldn't.> -
So what's your return now? Are you ahead or behind? How far back was "a few years?"
Kingfisher and Barramundi are both less than 2 years old - hardly enough time to assess a long-term return.
If you look at the 10 year return for the NZX50 it's done quite nicely even if your end point is yesterday. And unlike a house with a mortgage, you wouldn't have been leveraged to get into it; you wouldn't have had dodgy tenants to deal with; you would have had no running costs like rates or insurance; and you could sell at minimal cost on any business day.
At least, the preceding sums up all the reasons I like shares, but your priorities may be different.
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PS: to clarify, I don't think you've been unwise, I think you've been unlucky
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To me it just looks like a good time to buy. I'll wait for the US to hit rock-bottom though.
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When did the financial management mob take over the world (and this blog)???
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When did the financial management mob take over the world (and this blog)???
I'm betting it wasn't long after counting was invented.
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PS: to clarify, I don't think you've been unwise, I think you've been unlucky
Yeah I don't think I've been unwise either but I don't think 'unlucky' covers it. I hate to come across as a Japanese institutional investor, but it seems all my investments are dogs and I'm pissed.
And yes, just like the 87 crash, I think most 'common folk' are going to bail on investing in the sharemarket.
Which is why Kiwisaver will probably be made compulsorary after the election (by either party).
FYI - if I'd retained my properties instead of selling them I would have 65% equity and be positively geared. I've never had a problem with tenants, cos I'm such a sweet guy!! </honest!>
FYI 2 - after 5+ years in the stockmarket I'm $30k down on when I started. All I got wuz the dividends along the way ...!
FYI 3 - yes, I'm just venting here today, sorry to upset ppl, I feel better now ... </I'm better off than many, and not really much else to complain about> -
And, personally, I think both the main parties are nudging into irresponsible territory on this.
Rob, I'd say you're erring on the side of generosity on this one. It looks like both major parties are going to be offering personal tax cuts, and I'm all for it. But I do hope you and your colleagues are going to ask -- and keep asking until you get a fudge-free answer -- some hard questions about the trade offs involved. Sorry, "it's not inflationary, and we can keep increasing government spending, because I say so and you're stupid" just don't cut it.
Personally I do get aggrieved at the way we're made to all feel personally responsible for inflation.
Up to a point, Kyle. But a reality-based discussion might finally be in order -- because I'm not sure duelling talking heads playing pass the ticking parcel is really much help either. 'The economy' is not some super-terrestrial abstraction we can step aside from when its convenient to do so.
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IO, face it, you've been unlucky. Thinking you have a talent for finding dogs is just as irrational as thinking the opposite. It would be a sweet talent, in fact, you could just reverse what you say and avoid the dogs.
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Up to a point, Kyle. But a reality-based discussion might finally be in order -- because I'm not sure duelling talking heads playing pass the ticking parcel is really much help either. 'The economy' is not some super-terrestrial abstraction we can step aside from when its convenient to do so.
No, we can't step aside, and talking heads never particularly help.
But there's no hard link between x% of tax and y% of inflation. The tax rates we have at present aren't at this level because it's the level to maintain a certain level of inflation. It's the amount of money that a government wanted to get an amount of tax income to spend on what they wanted, relative to what the old tax rates were and the income groupings at that point in time etc etc. Inflation settled after the tax rate was set, and it'd settle again, prices won't keep going up to infinity.
Yes a change in tax levels will affect inflation. That doesn't mean we shouldn't ever cut taxes, or increase them. The media portrays inflation as all bad. Well sometimes inflation, particularly if it follows a tax cut means that people have more money to spend on various things, so economics 101 teaches us that the price goes up a little. Even with the higher price, they still got to buy a bit more stuff, and for some people, that's really big. I find it a little rude for economists on six figure salaries to tell me, and people less well off, that a tiny bit more money in our pockets will massively upset an economy. I'm not sure when the economy got ahead of actual people in the list of things that mattered.
The market is a mixture of: A) A big boy - it'll get past a little bit more money being spent, and B) a small player on a big international stage, and everyone having a little more change is going to make a lot less impact than the American economy going belly-up.
I'm not in favour of tax cuts, they're down my list of what I'd like the government to do. But to me the argument against them isn't "ooh, inflation! bogey man! run away!". It's 1. Education spending. 2. Health spending. etc.
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I wrote:
And, personally, I think both the main parties are nudging into irresponsible territory on this.
Craig wrote:
Rob, I'd say you're erring on the side of generosity on this one.
A bit, maybe. I've been immersed in reading on NZ's recent economic history recently (because that's the kind of wild and crazy guy I am) and by comparison the current pollies are only being a bit reckless. Maybe. (and not because they're more virtuous, but because we've got far greater transparancy now with an independent Reserve Bank and the Fiscal Resp. Act).
But I do hope you and your colleagues are going to ask -- and keep asking until you get a fudge-free answer -- some hard questions about the trade offs involved.
Yeah. It's something I've decided to make a bit of a mission this year.
The 1996 tax cut is the nearest parallel we have to the current situation and back then the Reserve Bank did some rough calculations and said it should be OK. However that was based on what turned out to be two optimistic presumptions: one was that inflation would not get nudged higher by other factors (which it did) and also that people would save about half their tax cut (which they didn't).
Mind you, at least back then the govt of the day consulted the Reserve Bank and got its public endorsement of the tax cut. That hasn't happened this time.
A couple of points in response to Kyle:
Are we being made to feel responsible for the economy? Well, no more than we're all being made to feel responsible for global warming or other environmental concerns. And its similar in principle: you can do a little bit to help, perhaps: put out the recycling and when you need to replace your car try to get something a bit more fuel efficient. So with the economy: save a little bit more, if and when you can.
I'm in favour of tax cuts. It's money we earned. And the govt has been taking more than it needs for several years now, partly because there's been an inbuilt pessimism in the Treasury's forecasts; partly because since the post-Asia Crisis bounce-back in early 1999 the economy has been growing far faster than anyone predicted, and faster than it has, for an extended period, since the early 1950s.
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Are we being made to feel responsible for the economy? Well, no more than we're all being made to feel responsible for global warming or other environmental concerns. And its similar in principle: you can do a little bit to help, perhaps: put out the recycling and when you need to replace your car try to get something a bit more fuel efficient. So with the economy: save a little bit more, if and when you can.
I think there's probably a similar level of personal involvement in the two things in your example. The comparisons though - running around burning gasoline is bad for the environment, there's no good in it. More is obviously worse, and less is better, but they're all along a scale of "not good for the environment".
The economy is a little different. More spending will have mixed effects for the economy. It will lead to inflation if everyone does it, but it'll also be good for retailers and importers and manufacturers. No spending, unlike no using gasoline, would obviously be a disaster economically.
I guess where I've come around to is - the current tax level is kinda arbitrary, and its not set for the purposes of stabilising inflation, it's set to get the government to a certain level of income.
The argument 'a tax cut would be bad because it would lead to inflation' would make more sense to me if the government took a firmer hand with the 2/3 (or so) of income that people actually took home already. If there was compulsory savings or something.
But our tax rate isn't a method we use to control inflation (EXCEPT when we've chosen a tax rate and then want to fend off the opposition who are arguing for a tax cut, all of a sudden changing the tax rate would lead to inflation).
We shouldn't cut taxes because debt of (graduating?) students jumped $10,000 in four years (I heard this morning). In the context of that, what's prices going up 1%, particularly when spending of taxes directly affects student debt, but it only has a partial and non-direct effect on price increases.
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So with the economy: save a little bit more, if and when you can.
Um, that's good advice on a personal level but I'm not sure the economy benefits, per se. Not saying it doesn't, just not convinced either way. What Kyle said.
I personally don't feel any responsibility to the 'economy'. When I save, it's for me, not for inflation or balance of trade etc. I don't get down on others for excessive debt or profligate spending - these are not moral issues, just practical ones.
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Kyle, Ben,
My analogy with the environment wasn't a perfect analogy - but then you almost never get a perfect analogy.
What I was getting at was it's all kind of small scale, low key stuff, that people can do.
Ben, as your comment about saving not necessarily being good for the economy - yes, that;s right. Sometimes people can be too keen to save - Japan has been a recent example of this.
But in some cases it can be. And in NZ there is an issue with our huge personal debt - did you see those figures out this morning?
That high level feeds into the current account deficit, and that's what is keeping our interest rates high by international standards.
There's an argument - I've run it myself - that the reason NZers don't save much is our low incomes. There's an element of that, yes.
But there's also an issue of culture, to use a fairly wooly term. Countries with lower average incomes than ours have managed to have a good savings record. At a personal level, I've known people on low incomes with a good savings habit.
I'm saying all this, btw, as someone who (a) doesn't have a particularly good personal record in this area (although I'm better now - marrying a Dutch woman had something to do with it) and (b) used to take the view that concerns about our savings level were a beat-up by the funds management industry. What changed on this point was seeing what was keeping our interest rates so high.
On the quesiton of taxes and inflation: fiscal policy isn't set to deal with inflation: as you noted, its there to raise money for govt services.
However how it is managed can have an impact on inflation.
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Rob, at some level savings are good for the economy. I'd much rather we were as rich as the Japs, however much of a recession they are in. And obviously a nation of bankrupts is bad - if economic indicators can't capture this then they are broken.
But my point was more that what's good for individuals is not necessarily good for the group, and yet I would not urge people to do what is good for the group to their own cost. When you're in front of a hurricane, burn rubber to get the hell out, and bugger whether the extra gas burned leads to global warming and more hurricanes.
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