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Bernard's Top 10: Monetary policy in the new normal; Australia's not-so-free trade deal with Japan; Migration and housing affordability; Selling houses via WeChat; Dilbert

Bernard's Top 10: Monetary policy in the new normal; Australia's not-so-free trade deal with Japan; Migration and housing affordability; Selling houses via WeChat; Dilbert

Here's my Top 10 items from around the Internet over the last week or so. As always, we welcome your additions in the comments below or via email to bernard.hickey@interest.co.nz

See all previous Top 10s here.

My must read today is #5 from Larry Summers on secular stagnation and bubble blowing. 

1. Australia's deal with Fortress Japan - The big story in and around our world of trade diplomacy this week was Australia's 'free' trade deal with Japan, which is separate to the Trans Pacific Partnership. 

There's plenty of people around the world who are very grumpy with the deal Tony Abbott has settled for with Japan.

The Americans were about to enter similar bilateral style talks over agriculture with Japan as part of the TPP.

Now Australia has settled for much weaker access (a bit more beef and dairy but no rice) the Americans are not happy.

Here's the FT with the detail:

The Australian government hailed the deal, announced during a visit to Japan on Monday by Australian prime minister Tony Abbott, as the first ever struck with Japan by a significant agricultural producer.

But its bigger strategic impact may be in what it means for the far larger Trans-Pacific Partnership now being negotiated by the US, Japan, Australia and nine other countries.

Tokyo quickly seized on its deal with Australia as an example of how to unlock a stalemate with the US over agricultural products holding up the broader TPP talks. The US, however, was downright dismissive, declaring it “significantly less ambitious than what leaders agreed to seek in the TPP”.

2. Just like 2004 all over again - The Australian 'free' trade deal with America in 2004 was notorious for not delivering much. Australia's exports to America actually fell in the first year after the deal. Now Australian farmers are looking through the details the deal with Japan and finding the same dead rats and blocked access.

Here's BusinessSpectator:

It seems that Australian trade negotiators have been defeated again at the gate of Fortress Japan, despite the government’s claim of a historic victory. Australian farmers have been quick to point out the failure of the deal with Japan. Some are more diplomatic and others are scathing of the so-called free trade agreement.

Brent Finlay, the President of the National Farmers’ Federation, said “we are disappointed with the overall outcomes for agriculture with a number of sectors facing marginal improvements or limited commercial gains.” “This agreement does not improve -- or marginally improves -- market access and terms of trade for a number of sectors such as dairy, sugar, grains, pork and rice.” And these sectors happen to be many of the most important agricultural sectors for Australia.

The dairy industry, the country’s third-largest rural industry behind beef and wheat, didn’t mince words when it issued a press release high critical of the free trade agreement. The Australian Dairy Industry Council said it was “extremely disappointed” about the deal.

3. Lessons from the United States - Treasury has published a research paper by US economist Mark Skidmore on the lessons New Zealand could learn from America on the issue of housing affordability.

The conclusion is measured in saying that there is no one solution. But it's useful collection that concludes (surprise, surprise) with a call for more research :)

While no single policy is likely to fully address the relatively high rates of housing price growth in Auckland, addressing the challenge across multiple dimensions could contribute to housing affordability now and in the future for all of New Zealand.

4. The migration effect - Treasury has published a research paper by US economist Julie Fry looking at the macroeconomic effects of migration in New Zealand. It's again very measured, but it does suggest some sort of planning or controls might be useful.

Reviewing the literature, the balance of evidence suggests that while past immigration has, at times, had significant net benefits, over the past couple of decades the positive effects of immigration on per capita growth, productivity, fiscal balance and mitigating population ageing are likely to have been modest. There is also some evidence that immigration, together with other forms of population growth, has exacerbated pressures on New Zealand's insufficiently-responsive housing market.

Meeting the infrastructure needs of immigrants in an economy with a quite modest rate of national saving may also have diverted resources from productive tradable activities, with negative macroeconomic impacts. Therefore from a macroeconomic perspective, a least regrets approach suggests that immigration policy should be more closely tailored to the economy's ability to adjust to population increase. At a minimum, this emphasises the importance of improving the economy's ability to respond to population increase. If this cannot be achieved, there may be merit in considering a reduced immigration target as a tool for easing macroeconomic pressures.

5. Secular stagnation and bubble blowing - Larry Summers has written this Washington Post Op-Ed to coincide with the half-yearly meetings of the IMF in Washington. The IMF issued its economic outlook overnight.

Summers again warns about the problems of near-zero interest rates. They don't seem to boost actual economic growth much, but they do pump up asset prices with extra leverage.

In the face of inadequate demand, the world’s primary strategy is easy money. Base interest rates remain at essentially floor levels throughout most of the industrial world. While the United States is tapering quantitative easing, Japan continues to ease on a large scale and Europe seems to be moving closer to taking such a step. All this is better than the kind of tight money that in the 1930s made the Depression great. But it is highly problematic as a dominant growth strategy.

We do not have a strong basis for supposing that reductions in interest rates from very low levels have a large impact on spending decisions. We do know that they strongly encourage leverage, that they place pressure on return-seeking investors to take increased risk, that they inflate asset values and reward financial activity. The spending they induce tends to come at the expense of future demand. We cannot confidently predict the ultimate impacts of the unwinding of massive central bank balance sheets on markets or on the confidence of investors. Finally, a strategy of indefinitely sustained easy money leaves central banks dangerously short of response capacity when and if the next recession comes.

A proper growth strategy would recognize that an era of low real interest rates presents opportunities as well as risks and would focus on the promotion of high-return investments. It would have a number of elements. 

6. Monetary Policy in the New Normal - As if to celebrate the Washington shindig, the IMF released this 35 page paper on the lessons from the crisis for monetary policy. It's all very topical as we approach an election on September 20 where the three Opposition parties are promising Reserve Bank Act reform, albeit without the devilish details...yet.

Here's a few suggestions on questions to ask from the IMF, although New Zealand doesn't face the same zero interest rate problems others face.

Should there be new objectives for monetary policy? Long-term price stability must remain a primary  objective of monetary policy. But the crisis showed that it is not a sufficient condition for macro stability. 
 
Going forward, additional intermediate objectives (such as financial and external stability) may play a  greater role than in the past. When possible, these should be targeted with new or rethought instruments (macroprudential tools, capital flow management, foreign exchange intervention). But should these prove insufficient, interest-rate policy might have to play a role.
 
Should unconventional policy tools become conventional? During the crisis, central banks employed unconventional tools (such as bond purchases and forward guidance) to provide economic stimulus as the policy rate approached zero, and to ensure transmission despite disrupted financial markets. This raises the question of whether unconventional tools should also be used in tranquil times. We conclude that with the exception of forward guidance, the costs seem to exceed the benefits. A related—and still unsettled—question is how one can avoid hitting the ZLB again in the future

7. When it costs a lot to be late - The Chinese made DL class locomotives now in New Zealand were late and have been plagued with problems (and asbestos).

This Reuters piece delves below the surface in China's ship-building sector, where more than a third of the ships being built are late and banks are having to pay big penalty payments on behalf of the shipbuilders. The article gives a taste of some of the pressures inside the economy and how the Government operates when it wants to stimulate activity.

One in three ships ordered from Chinese builders was behind schedule in 2013, according to data from Clarksons Research, a UK-based shipping intelligence firm. Although that was an improvement from 36 percent a year earlier, it was well behind rival South Korea, where shipyards routinely delivered ahead of schedule the same year.

That means Chinese banks may be on the hook to pay large sums to buyers if the yards can't come through per contract, with little hope of recouping the cash from the yards. China is the world's biggest shipbuilder, with $37 billion in new orders received last year alone. Buyers pay as much as 80 percent of the purchase price upfront.

Chinese bankers rushed to finance shipbuilding after the 2008 global financial crisis as Beijing pushed easy credit and tax incentives to lift the industry and sustain industrial employment levels in the face of collapsing exports.

8. Easy money - Just imagine if you could sell your house to a buyer from China over social media sight unseen. Brilliant. This piece via BusinessInsider gives a taste about the amount of money flying around and the keenness to invest in property outside of China.

A recent blockbuster sale by Ryan Serhant, NestSeekers agent and star of “Million Dollar Listing: New York,” really takes things up a notch.

According to New York Magazine, Serhant recently closed a $US13 million deal solely using WeChat, a popular Chinese social networking site. An unnamed buyer used the site to message Serhant’s team, ultimately buying two units at the yet-to-be-completed Baccarat Hotel & Residences on West 53rd Street in New York City.

One unit was a three-bedroom residence costing $US10 million; the other was a $US3 million one-bedroom apartment.

“This price for a deal that was done and initiated 100 per cent through social media and across the world?” Serhant said to NY Mag. “A complete stranger who learned about us via social media and basically gave us $US13 million and change to invest in something that’s not even been built yet in a city they have never even been to? I don’t think [anyone else has done that].”

9. Gross Domestic Wellbeing - British peer Gus O'Donnell writes in Project Syndicate about need to target well being and economic stability, rather than purely going for growth. 

 

A group of economists (including me) concluded in a report commissioned by the Legatum Institute that, despite its apparent subjectivity, “wellbeing” – or life satisfaction – can be measured robustly, compared internationally, and used to set policies and judge their success. The task for governments is to commit to putting this focus on wellbeing into practice.

A few key insights should inform that process. First, governments would be better served by focusing on stability, even if it means sacrificing some output. As Kenneth Rogoff and Carmen Reinhart have shown, financial crises are costly because recoveries from them are slow. 

But wellbeing research yields a sharper insight: even if we could bounce back from a crash, the cost would be high. Boom-and-bust destroy wellbeing, which is diminished far more by a fall in GDP than it is enhanced by an equal and opposite GDP increase.

10. Totally the Daily Show is back - There was a time when The Daily Show was both geo-blocked for New Zealand and not available on either free-to-air or Sky.

Now that has been rectified. Here's the latest from Jon Stewart on new record bonuses on Wall St.

 

(Numbers 3 and 4 have been corrected to make clear the Treasury papers are from US economists Julie Fry and Mark Skidmore. They do not currently work for Treasury).

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5 Comments

#4 Migrtion - NZ needs to set a population limit that we can afford to sustain.

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Bernard , I'm not aware that there was a " plague of problems " with the new DL locomotives from China ... some initial teething problems only , and a few dodgey welds on the alternator fans ... do you know of more faults than that , a " plague " ?

 

... a buddy who's in KiwiRail swears that the new locos are brilliant !

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Re #4 immigration :- Had a good chuckle at the NZ Herald story about easing migrantion rules , says investors with $5,000,000.00 or more up to $10 million who cannot speak English should be allowed in even if they cannot understand English .

I would like to meet the successful businessman who  has a spare $5,000,000.00 (in any currency)  to invest and cannot understand English .

Every succesful Chinese , Korean , Japanese , Taiwanese , Singaporean or Malaysian I have ever come across anywhere, has a basic  if not sound command of English

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The non-English speakers are not interested in coming to settle in NZ. They are more likely to be holders of illegitimately obtained money looking for a bolt hole to avoid being caught.

We should get real and stop ALL asset based immigrants who have no other reason to be advantageous to our economy immediately on arrival and that does not include swapping cash for housing or business premises or farms.

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There you go Tim Groser.  Australia-Japan FTA.  Boom!  that’s how it’s done! No nasty investor state dispute resolutions or draconian copyright fish hooks.  No A-hole SOPA lobbyists writing the rule book.  Japan’s food bowl is radioactive, and Australia’s car industry is toast anyway.  Get rid of the tariffs and Bob’s you uncle.  Now what bargaining chips do we have again? 

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