No Minister

Archive for the ‘Economics & Economy’ Category

The Bitcoin House

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Read an interesting article today on the news out of the USA that some 30% of men are not employed in that nation.

What was unusual about the article was that it decided to ignore the usual angle of exploring why this is the case, instead focusing on how all these millions of American men actually live without a job.

One section looked at investments and aside from a doubling in retail stock market investment accounts there was also this:

Now crypto. You can laugh all you want, but the simple fact is that the price of bitcoin is up from $4,861 on March 12, 2000 to $47,763 today, or basically up 10X, (and remember it even hit $64,888.99 this spring).

Hmmmm. That’s an annual increase of 11.49% per year over twenty one years. Not bad.

The other day I checked out what our house is worth and was shocked and appalled to find out how much it’s increased in value in just the last year.

I’ve known for some years now how crazy things have been with NZ housing. I’ve been saying for a decade that this could not go on. Yet it has and although I thought I knew how crazy it has become I was still under-estimating the insanity.

Moreover when I ran the numbers over time I saw that our “investment” in house has increased by 11% per year on average for twenty years.

Written by Tom Hunter

September 19, 2021 at 5:23 pm

Concrete Planning

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There have been many reports over the last few years about China’s “ghost” cities, monuments to China’s vast consumption of concrete and steel over the last decade as it indulged in a Keynesian effort to reduce the fallout of the GFC to its national economy.

China’s massive spend up certainly made a lot of other countries like Australia very happy as they exported iron ore and other basic commodities to the Chinese economy. It certainly helped them move out of the shadow of the GFC.

The country has used more cement in its construction of new cities between 2011 to 2013 than the entirety of the United States in the 20th century.

But the problem with all of this was always the hobgoblin of statists everywhere and for all time; the mismatch between what central planners thought the economy needed and actual economic demand from the people who make up an economy.

Those ghosts cities remained empty of people as the years ticked by. So we come to the inevitable:

Fifteen skyscrapers that were part of the Liyang Star City Phase II Project just demolished after sitting unfinished for eight years due to no market demand.

I note that one of the buildings remains leaning at an angle. All of this should be a stark reminder that China is not the all-enveloping economic beast that people expect it to be in the 21st century. It’s going to get old before it gets rich, and Xi Jinping is actually trying to force it back to a more communist approach to many things, including a bigger state role in planning.

As an addition, check out photos of these ghost cities.

Written by Tom Hunter

September 16, 2021 at 6:58 pm

The Stupid Party strikes again

It’s an entirely standard attack line of the Left that their Right-wing opponents are stupid: lacking in IQ points, ignorant, religious, inclined to conspiracy theories – like the one that Trump colluded with the Russians to win the 2016 election.

Oh wait, that was Hillary Clinton and the Democrats circa 2016-2018, with some still bitterly clinging to their Steele dossier and their windmills.

Nevertheless, the thing that the US Left in particular might be amused to know is that Republican voters actually do often refer to their own party as “The Stupid Party”.

The rationale behind their epithet is entirely different of course. It refers to the fact that the GOP, once they have gained power in the House, Senate or Presidency, promptly ignore the reasons they were elected and worse, start implementing Democrat ideas.

Some examples:

  • John McCain regularly talked of terrible border control policies in his border state of Arizona and how tough he was going to be on strengthening the border, up to and including things like walls and fences. But once re-elected he always got guilted and shamed by the Democrats about The Wretched Of The Earth and stayed with the status quo.
  • The Tea Party effectively got the GOP re-elected in 2010 to the House when all had seemed lost in 2008, based on the demand for a serious approach to fiscal spending, especially after the 2008 insanity around GFC measures such as the TARP legislation and eight years of Bush gleefully pushing general spending. But once elected the GOP House merely kept the status quo chugging along with spending extensions – the wonderfully named Continuing Appropriations process. The excuse was that without holding the Senate and Presidency nothing more could be done.
  • When all that power miraculously fell into the hands of the GOP with the 2016 elections, almost the first thing they did was pass gigantic spending bills stuffed with Democratic goodies. It was so bad that Nancy Pelosi and Chuck Schumer gloated about it in public, rubbing the face of the gormless “policy wonk” Paul Ryan in the muck and making him look like anything but Speaker of the House, the third most powerful political position in the US government. Ryan’s pathetic excuse was that all that stuff needed to be cleaned out of the way so the GOP and Democrats could get down to fighting over truly meaty fiscal issues. Having got almost everything they wanted Pelosi was still laughing weeks later.
  • They did not repeal Obamacare, although to be fair that was down to one Senator, John McCain again, who went back on all his previous votes just because he was in a personal war with Trump and wished to snub him.
  • As a result of all this, the US budget, deficits and debt continued to relentlessly rise, almost as if the Democrats had never lost power.
  • The GOP did hold back on spending for a few things – like refusing to appropriate money towards Trump initiatives like the Southern Border Wall because the “Free Trade” (Cheap Labour) wing of the party still refused to admit that most Trump voters (and more than a few Democrat voters) hated the idea of a border open to illegal immigrants.

Sure, they did pass some serious tax cuts, and curbed (temporarily) the growth in spending, at least compared to the avalanches of the 2007-2011 Democrat Congresses, but that was it.

It thus came as no surprise that they got turfed in 2018, as GOP voters reached their “what’s the point” threshold. Naturally the GOP is relying on the “But-the-Other-SIde-is-Worse” argument to get back into power in 2022.

They better be careful though, because recent events show that it’s happening again, this time with the godforsaken “infrastructure” bill.

The Act is a $1.2 trillion, 2702 page spend up that, upon close inspection, has little to do with the real infrastructure of roads, bridges and such, but everything to do with pork barrel politics, as the WSJ helpfully details. As well as that the damned thing extends Federal, centralised control to yet more government actions that are supposed to stay with local government at the state and city level, as per the original vision of the USA.

No Lindsey! Increasingly large portions of the Republican base and even many independent voters do not need to see the Senate do “big” things because big legislation invariably leads to a bigger, more intrusive government, as well as…

But seventeen GOP Senators voted for it.

Even more stupid was the fact that no sooner had they done this than Joe Biden very publically threw them under the bus:

President Biden’s big gaffe was not his threat to veto a $1.2 trillion infrastructure deal he had just reached with Republicans. It was accidentally saying out loud what everyone in Washington knows, but most Americans do not: that he has not compromised on infrastructure at all — and does not intend to do so.

In other words he would get all the stuff the Democrats “compromised” on in the infrastructure bill, instead placed in the $3.5 trillion dollar Democrats-only reconciliation bill, and he would only sign the former if he knew the latter would pass, which it can with just 50 Senate votes. At that point, none other than Graham declared that Biden had made him look like “a fucking idiot.

No, no! Joe Biden – Joe “Bivalve” Biden – had made all seventeen GOP Senators look like fucking idiots.

Yet, after some toing and froing and yakking and sort-of-apologies for making them look stupid in public, the Democrats kept the seventeen on board.

This is very much a pattern with centre-right parties across the Western world; their idea of bipartisanship and compromise in the name of avoiding the dreaded polarisation of the nation, is to merely stop the Left from doing all the things they want right now. Then the Right-Wing party toddles back to its voters to say, “didn’t we do well, vote hard for us again”.

Undoubtedly they’ll be the usual bribery reasons; the Senators thinking they’ll be able to return to their states with all that juicy, “free” government money for their voters. But that strategy has diminishing returns in the face of ordinary voters increasingly wondering about robbing their kid’s futures:

Last September, the Congressional Budget Office (CBO) predicted the federal debt wouldn’t hit $29 trillion until 2028. Just short of a year later, the national debt stands at $28.6 trillion and is set to surpass $29 trillion within weeks.

That does not include these spending bills. Every time I think the US debt is bad it just gets worse – now aided by these profligate idiots in the GOP. As that article points out, $50 trillion by 2030 is now not out of the question. As you can see it’s basically falling off a cliff.

Then there’s the fact that an economy recovering from a government-imposed recession, unlike a normal recession, merely needs the brakes to be let off. A government that thinks it’s Keynesian time again (for the Left it’s always Keynesian time) and wants to blow trillions of dollars into an already recovering economy, especially one with all sorts of supply problems arising from the Covid-19 response, is going to discover inflation sooner or later. And wadda ya know.

There’s also the slowly rising political power of the Millennial and Gen-Z voters, who understand that they’ll be on the hook for all this shit at the very same time that government institutions like Social Security and Medicare may not be there for them as it was for their Boomer parents, or at least not as sumptuously.

Whether they’ll vote for The Stupid Party to fix it is questionable.

See also:

$5,630,859,000,000

The Great Crash of 2034

This is not going to get better.

Written by Tom Hunter

August 24, 2021 at 6:00 am

NZ Power Blows

After the recent power blackout, which did not affect me, I took a look at Peter Creswell’s long-time blog, Not PC, for his take on the situation.

It turned out that he had nothing new to add to warnings he’d made years, even decades, ago:

if I may continue a well-worn theme of previous posts over several years (No PowerNo power, againStill No Power‘More power!’ says India. ‘No power,’ says NZPower outrage ) and remind you of several famous power outages (such as Auckland 1998, 2006, 2009 … ) this news and that conclusion above simply confirms what should have been obvious years ago: in this country the lifeblood of production, energy, is running out. Not because New Zealand is short of resources with which to produce energy. But because politicians and earth-first worshippers have declared we are not allowed to use them.

That’s from 2012, although he did include this recent comment from one Hamish Rutherford.

“Between the decision to rip up the rules on the gas market, to the difficulty consenting renewables projects, to the threat to build hydro storage at Lake Onslow, the market is simply responding to the signals that the Government is sending it.”

Running through his old posts the most detailed was Meet the Enfeebled, which had lots of graphs on power production, like this one:

... over the years from from 1980 to 1998, the growth in New Zealand’s generating capacity matched the growth in demand, growing at an averaged rate of about 150MW per year.  Despite this, regular power shortages such as the famous outages of 1992 showed that even at this time capacity was near its limits — partly because of the lack of backup generation for the occasionally fickle hydro generators.

The basic thrust of the article was that since the turn of the Millennium (up to 2008 when the post was written) production growth had not matched consumption growth. You can read the detail of power stations built and closed:

TOTAL NEW CAPACITY 1993 – 2008:   1850.5 MW .

TOTAL DECOMISSIONED 1990-2008:       1333 MW

TOTAL NETT NEW CAPACITY SINCE 1990: 949.5 MW

This while consumption grew by 2700MW. The margin was growing thin. But what’s happened since the mid-2000’s? This from the MBIE:

Luckily the consumption has also plateaued at tje same time to roughly the same level: 42,000GWh vs 44,000GWh production.

That is likely due to the steady conversion to energy saving devices such as LED bulbs and heat pumps, as well as the steady increase in insulated houses. But there will come a point where even slow economic growth of 2-3% per year will eventually outpace the improvements in energy efficiency.

But the greatest increase will come with the flip side of the renewable energy push: the electrification of everything. of everything. Below are the NZ consumption figures for 2018 in Petajoules (source MBIE report. pdf pages 14-15):

The supply figures are a little different, since we have to import most of our oil while we produce more than we consume for coal (38 vs. 25) and gas (172 vs. 74).

Current total electricity production from all sources in NZ is about 160PJ. So we’re talking about more than doubling our electrical production, and some 84% of it already comes from renewable sources. Geothermal has grown tremendously since 2005 but there are limits being approached quickly. Hydro reached its limits years ago; there have been more cancelled hydro projects to add to Not PC’s 2008 list – and most of those have been due to the Resource Management Act and the Environment Court

So that leaves Wind and Solar, which means an even greater increase needed from that slim red line below.

Basically from 8Pj to more than 300Pj – an increase of 3,750%.

I’m being generous in allowing that the remaining 82PJ might come from a mix of new hydro and geothermal, with a slight assist from residential PV (solar panels).

Moreover that’s just to replace current fossil fuel energy consumption.

Finally it must be noted that since Wind (and solar) are unreliable, tanking to zero on a regular basis, they will need backup generating capacity – 300Pj of it. Where will that come from? A doubling of hydro/geothermal power? In the case of Hydro it has problems itself, though nowhere near as bad as Wind, but Huntly was built to back them up in drought years.

To paraphrase Sir Humphrey, these are heroic assumptions.

There is one other possibility that should not be dismissed, even as crazy as it may sound. I’m not talking about Thorium Molten Salt Reactors, Fusion reactors or nuclear power in general on the supply side.

No, I’m talking about crushing the demand side. A policy of Zero Economic Growth, or even negative economic as all that fossil fuel energy is shut down to enable a Zero Carbon nation. Look how happy many Greens are with what Covid-19 has delivered to Fortress NZ: the huge reduction in airline flights to and from the nation and the subsequent massive drop in tourism and internal travel in general.

After all, as Robert Bidinotto explains:

Typically, the person who calls himself an “environmentalist” is really just a nature-loving “conservationist.” Appreciating the earth’s natural beauty and bounty, he is understandably concerned about trash, noise, pollution, and poisons. Still, he sees the earth and its bounty as resources–resources for intelligent human use, development, and enjoyment. At root, then, his concern for the earth is human-centered: he believes that this is our environment, to be used by people to enhance their lives, well-being, and happiness.

But the leaders of the organized environmentalist movement have a very different attitude and agenda.

Their basic premise is that human activities to develop natural resources constitute a desecration of nature–that, in fact, nature exists for its own sake, not for human use and enjoyment. By their theory of ecology, they see man not as the crowning glory of nature, nor even as just another part of “the web of life”–but rather as a blight upon the earth, as the enemy of the natural world. And they see man’s works as a growing menace to all that exists.

Written by Tom Hunter

August 19, 2021 at 11:00 am

Hand over the $35 trillion, you old farts

It would be an understatement to say that the latest Generations, Millennials and Gen Z, are increasingly a bunch of unhappy campers here in Western societies.

The main reason for their unhappiness is a growing feeling of falling behind and never being able to catch up as their forebears did after WWII. The target of their wrath are the Baby Boomers who, in their view, inherited a rapidly developing economy of plentiful, well-paid jobs – many of which did not require great education – as well as plentiful and cheap housing.

Obviously those are broad and crude generalisations. Many a Boomer will gladly tell you about mortgage rates of 20%+ in the 1970’s as they struggled to get their families together.

But the generations are often scathing about their predecessors; look at what Boomers had to say about their parent’s generation, they of Great Depression and WWII experience.

Strangely my Gen X group seems to have escaped the abuse, despite the fact that we got pretty good economies in the 1980’s and 1990’s, at least if you went overseas back then, something that Boomer Chris Trotter is still bitter about:

People like Bernard bade their country farewell at the first opportunity. All that free education and health care, all that social security: the tens-of-thousands of dollars invested in him by his fellow citizens; it all went to foreigners. If all the Bernards and Bernadettes of the 1980s and 90s had thrown in their lot with Anderton and his followers, the tragic failures detailed in Hickey’s Spinoff post might have been avoided. But Bernard and his ilk sneered at Anderton and the Alliance. The Left were economic Neanderthals. Losers.

The Mill / Gen Z groups do have legitimate complaints. With Western economies not exactly booming in the last twenty years as they did after WWII and with wage and salary earnings having stagnated as a proportion of the economy, plus ridiculous housing inflation that has actually got worse as the 21st century has developed. They’re just not building wealth as the Boomers did for the same age range.

However, that graph actually contains the answer, and it’s analysed in a WSJ article, Older Americans Stockpiled A Record $35 Trillion. The Time Has Come To Give It Away. It starts with what everybody knows – or suspects even if they haven’t looked at the data:

At the end of this year’s first quarter, Americans age 70 and above had a net worth of nearly $35 trillion, according to Federal Reserve data. That amounts to 27% of all U.S. wealth, up from 20% three decades ago. Their wealth is equal to 157% of U.S. gross domestic product, more than double the proportion 30 years ago, federal data show.

But nobody lives forever:

Older generations will hand down some $70 trillion between 2018 and 2042, according to research and consulting firm Cerulli Associates. Roughly $61 trillion will go to heirs—increasingly millennials and Generation Xers—with the balance going to philanthropy.

To which Mill / Gen Z might say, “So what. I need the money sooner than that”. Well the good news is that it’s already started.

The average inheritance in 2019 was $212,854, up 45% from an inflation-adjusted $146,844 in 1998, according to an analysis of Fed data by economists at a unit of Capital One Financial Corp.

And people aren’t waiting until they die. Annual gifts taxpayers reported to the Internal Revenue Service—a fraction of the gifts that flow outside the tax system—rose to $75 billion in 2016, from an inflation-adjusted $45 billion in 2010. Over that period, the amount that people could give away without paying taxes on gifts rose from $1 million to more than $5 million for individuals, and from $2 million to more than $10 million for couples.

Because of indexiing in the US system, those latter figures are adjusting up every year. There’s just one fly in the ointment:

The pending wealth transfers have caught the attention of the Biden administration, which recently proposed reducing a $40 billion annual tax break that has been the cornerstone of estate planning for generations of Americans. Today, people who inherit assets that have risen in value, such as stock held outside retirement accounts, a family home or a three-generation manufacturing company, don’t pay capital-gains taxes unless they sell. If they sell, they can exclude gains that occurred during the prior owner’s lifetime.

Under the Biden proposal, the owner’s unrealized gains would become taxable in the year of his or her death

Our Beloved And Kind Socialists here in NZ are obviously also thinking along the same lines: Is Labour going to introduce a death tax?

Oh I think they will, if they can get away with it, because they “know” that governments are better at distributing wealth across generations than families, just like they’re better at spreading the wealth around in the here and now.

I wonder what that will do to the youth vote in both nations?

Written by Tom Hunter

July 19, 2021 at 10:13 am

Inflation you say?

Why are people surprised?

Back in 1993 the newly installed Clinton Administration was mad keen on a “stimulus plan” that would revive the US economy from the “terrible” recession of George H W Bush. The plan was classic Keynesianism but it was strangled in the crib for two reasons.

First of all the recession, which was a fairly mild one starting in late 1990, had already finished by mid-1991, as is usually the case. Things like unemployment lagged of course, which was why the MSM was able to make such a meal of it. The crown in the jewel were TV scenes of a four-wide line of job seekers stretching around a city block in the snow in early 1992, applying for jobs at some new Chicago hotel. Had it been filmed in Black & White by Dorothea Lange it could not have been better.

As a result, by the time Bill became President in January 1993 the entire economy was really picking up a head of steam on all fronts, and it was obvious to everybody and their blind dogs that no “stimulus” was needed.

Incidently, having done it’s job up to the election in getting a Democrat elected, the MSM promptly began painting sunny headlines about how well the economy was doing under the youthful leadership of Bill, even while everybody again knew that no credit could be given to an administration that had not passed any legislation, let alone anything that could affect the economy in less than six months.

Second was that Bill made a crucial mistake in appointing Senator Robert Byrd to lead the stimulus bill effort in the Democrat-controlled Senate and House. In addition to being a former Grand Kleagal of the KKK (and whose death years later would result in an ecstatic eulogy by then Vice President Joe Biden), he was also known as the Porkiest of the Porkmasters of Congress. There was hardly a highway, courthouse, outhouse or doghouse in his state of West Virginia that didn’t have his name on it as a result of the money he’d extracted from Congress. Even Democrats rolled their eyes at what a stimulus package in Bryd’s hands would mean.

The effort rapidly faltered and that was a good thing for the USA, which economy did not need a “stimulus” from the Federal government: the 1990’s would go on to be one of the great economic times in recent US history.

But lessons are not learned. While there might have been some justification for the 2009 stimulus spending plans in the wake of a financial meltdown far worse than that of 1987 (which also led to another such failed effort by the Democrat Party in the face of Reagan’s opposition), it was obvious by the end of that year that it had not spiced up the economy. Obama regularly bemoaned the reports that landed on his desk showing only moderate improvements, bluntly asking his experts and fellow Democrats why all the spending was having no effect.

But in the face of a government-induced lockdown of a roaring economy there was never a need for the insane amounts of spending to continue as the Chinese Lung Rot pandemic waned and the lockdowns and other restrictions were lifted. All that was required was for the government to simply allow the economy to come back to life, as it had in 1992/93 and earlier recessions. Yet each of the subsequent recessions of 2001/2, 2008/9 and 2020 have been met with ever greater stimulus efforts.

Yet, far from helping, there’s good evidence that government efforts in 2021 have caused unemployment to stick in the face of massive welfare incentives not to return to work. Then there’s the rapidly rising inflation in the USA, as all that created credit chases products and services that are not increasing as fast as the tsunami of money. The incredible number of business destroyed by the Covid-19 pandemic response will not be magically re-created by Federal spending.

So we have that graph of US debt, piling onto trillions of already existing debt, even as the spending it allows fails to do its Keynesian job.

This cannot end well, and is already not going well. As the economist Hebert Stein once wrote: “If something cannot go on forever, it will stop.”

Brace for impact.

=================================

See Also:

Stagflation and Pretty Graphs – May 2021

This is not going to get better – Feb 2019

The Great Crash of 2034 – June 2020

$5,630,859,000,000 – August 2020

Written by Tom Hunter

July 17, 2021 at 3:00 pm

NEWSFLASH

Inflation hits 3.3%. The OCR now predicted to rise in the near future. Middle NZL fights back.

New Zealand, the way you’ve got it.

Written by The Veteran

July 16, 2021 at 12:46 pm

False advertising

It’s no secret that the big Democrat controlled cities of the USA have badly hurt themselves with their Chinese Lung Rot lockdown responses and allowing Burn Loot Murder and Antifa to have so much smashing, hitting, wrecking and arson fun in 2020.

Defunding police did not help either, nor siding with criminals against cops, which resulted in hundreds of early retirements, leaving these big city forces short-staffed even as some Democrats belatedly talk of restoring funding. But that’s a topic for another day.

As both pandemics wane these same cities now want to try and get back to normal, and that means advertising themselves. For cities like New York and Chicago, however badly damaged they were and remain, the advertising task is easier because they already have brand power.

But what if you’re a place like Portland? I say Portland, you say … ?

If the first thing you thought of was “rioting, beatings, killings and arson”, then congratulations! Your powers of observation are as acute as ever. And you’re not the only one. Others have noticed. That’s why tourism in Portland, Oregon, is in the toilet.

But if you’re an advertising agent you do what you always do; you embrace the reality and put the best spin on it that you can. Take it away, Travel Portland:

You just have to love these phrases that cover the (cough) reality they know the rest of the USA knows about:

Some of what you’ve heard about Portland is true.

Tell me the truth, baby.

We have some of the loudest voices on the West Coast. And yes, passion pushes the volume all the way up. We’ve always been like this. We wouldn’t have it any other way.

Glitter. Turds. Rolling in.

This reads more like a recruiting poster for Antifa: “Come to Portland where setting federal courthouses and ICE buildings on fire and blinding police officers with lasers is so quirky and so…  Portland.”

They also had a YouTube advert with much the same drivel. They actually do address the riots at the 1:32 mark – and it’s an insult to locals who have to live with this crap.

Some of the locals on Reddit were not impressed:

Lifetime portlander here. Cute sentiment I guess, but I hate it. Because it’s bullshit.

Portland is pretty fucked up right now, for a lot of reasons. Putting on rose colored glasses and painting the city as progressive and quirky feels like a slap in the face to those who suffer as a result of this city’s problems.

It’s also extra weird to allude to the racial justice and police violence protests and then not mention it at all + kinda frame it as “lol we have passionate people here! on both sides!”

But I’m not surprised. Travel Portland’s job is to bring people with money into the city, not make the city better for Portlanders.

Oh well. If there are no riots there are always other sights in Portland. It is still the Whitest big city in the USA.

Written by Tom Hunter

July 5, 2021 at 11:16 am

Survival in changing times

The predecessor of this blog was named after the famous comedy character from the Yes Minister and Yes Prime Minister TV series of the 1980’s, Sir Humphrey Appleby.

I was reminded of yet another aspect of him the other day when reading one of Chris Trotter’s latest missives, They Say We Want A Revolution – But Do We?.

The article is about both the proposals from the Climate Change Commission and the He Puapua report, but it was this part that caught my eye:

As a “free-marketeer” of no mean ability (the man has a PhD from the prestigious Wharton School of Business) Rod Carr could contemplate the installation of cash registers in public hospitals without flinching. 

I’d forgotten about that long-lost tidbit from Rod Carr, back when he looked like this:

Yep. Every inch the 1980’s/90’s Rogernome businessman on the make, expensive business suit and cool tie with the suitably modish beard – and free market ideology at the forefront of thinking.

Nowadays however it’s Climate Change at the forefront, likely combined with a bit of He Puapua and so…

From 1980’s business suit and tie to being a bearded git who resembles nothing so much as an Amish elder, but with a huge chunk of pounamu around his neck for added Aotearoan authenticity, Carr is testimony to Sir Humphrey’s philosophy:

“Bernard, I have served eleven governments in the past thirty years. If I had believed in all their policies, I would have been passionately committed to keeping out of the Common Market, and passionately committed to going into it. I would have been utterly convinced of the rightness of nationalising steel. And of de-nationalising it and re-nationalising it. On capital punishment, I’d have been a fervent retentionist and an ardent abolitionist. I would’ve been a Keynesian and a Friedmanite, a grammar school preserver and destroyer, a nationalisation freak and a privatisation maniac; but above all, I would have been a stark, staring, raving schizophrenic.”.

At least Sir Humphrey never grew a beard.

Written by Tom Hunter

June 28, 2021 at 9:35 am

A distorted economy

Two graphs that summarise where we are economically as a nation, and without even looking at the tourism numbers, which are bad enough on their own.

First up, real estate prices for residential properties.

Those increases, in one year, are staggering. In dollar terms they exceed any “help” that any government, even one as spendthrift as Labour, can give to young, first-time home owners.

The price to income multiplier increased during the “nine long years of neglect” of National from 5.05 to 6.08. Under Labours stewardship it’s now at 8.61.

It’s been common wisdom for twenty years now that Aucklanders were cashing up and heading to the Waikato and Bay of Plenty. But since when are retired Aucklanders or Wellingtonians cashing up their houses and moving to Gisborne (almost 50% increase) or for that matter the West Coast (33.6% increase). There will be specific reasons for this inflation but they all boil down to factors driving the basic economic law of demand exceeding supply.

In Auckland those factors have been population growth increasing faster than homes can be built – which in turn is based on government immigration decisions on the demand side vs. building regulations and costs, and even more so the land-banking of city planning causing huge lifts in the cost of land, far beyond the increase in house value itself.

But can those factors be driving demand exceeding supply across the whole nation this time? Immigration has been basically zero for the last year and while land-banking and city planning are a nation-wide supply restricting problem there have not been dramatic changes in those factors in the last year, and some areas have always been more relaxed than others. So what’s driving this recent nationwide inflation?

  • Government changes on investment deductibility and the increased time over which the bright-line test can be applied (basically a Capital Gains Tax) mean that investors are deciding now it’s not a great time to sell, reducing the number of listings (supply)
  • Sensitive people are feeling the breeze of general inflation and take positions to protect their own capital base by lifting those sales from the market, further tightening supply. Better to sit on the potential capital gains, increase the mortgage and use that money to buy a new boat. Notice the increase in prices for second-hand boats, caravans and motor homes.
  • Interest rates pushed down in 2020 as the classic mode of Keynesian response to a potential recession. That increases demand, at least for a while.

The government must be hoping that this is just a one-off and that once the housing market has adjusted to a post-Covid world, things will settle down. We should all hope for that but I see merely the results of a “critical mass” of factors that have finally come together at one point in time rather than individually affecting the market at different times. Even if this spike cools down, the ongoing house price increases will still be greater than we can cope with.

Then there’s this:

That’s Fonterra’s share price in the last three months. An awful drop from $5 per share to $2.82 that exceeds the percentage drop in 2018. That last was caused by financial problems at the company. Problems that, like the housing situation, had been bubbling away for years, but which hit critical mass that year.

Fonterra has since cleaned up many of those problems and was looking pretty healthy internally, with a good payout. So what’s happened?

Professor Keith Woodford is on the case as usual with two articles in May that discussed what might be coming.

You can read the details in those two articles . The summary comes to five points, the first two being around proposals only.

  1. Reduce farmer requirements to own shares, with them needing to hold one share for every four kg of Milksolids supplied, compared to the current one share for every kg of supply. That last is a hangover from Co-op days when the shares were a nominal $1 that never changed as farmers joined and exited co-ops.
  2. Shut down or cap one arm of its two-armed share investors world, the Shareholders Fund. This Fund and the related Trading Among Farmers (TAF) scheme allowed a two-way flow of “units” and shares between the Fund and the Farmer share trades, which kept the price of shares and units within a cent or two of each other and supplied vital pricing information to both farmer investors and external investors.
  3. The Fund allows non-farmers to buy shares and get a dividend but with no shareholder voting. While there was talk about enabling the company to raise capital this way without trying to get cash from cooperative members, the real reason was to remove the redemption risk as farmers exited the company. Under the old co-op model they would not have had the cash to pay them out. The Fund and TAF would shift the risk.
  4. The flaw was that the only way TAF could remove the redemption risk should Fonterra lose a major number of suppliers was by taking on a new risk of losing control of the company to non-farmer investors.
  5. The risk now is not from exiting farmers but from a substantial and ongoing reduction in production, perhaps in the order of 10% to 20%, primarily driven by future environmental regulations around herd sizes. That’s one rock. The other is that farmers still want to control the company.

While only proposals, they did suspend trading before the announcement and they have cut the link between farmer share trading and the external fund, showing the future to investors.

Those investors, the market, have reacted badly to all of this and although it would be easy to say that this is just frippery that ignores the now “healthy” internals of Fonterra, the fact is that share prices tell us what the market thinks of any company’s future.

Clearly Fonterra’s and perhaps the rest of the dairy industry’s future in NZ is not good. What that means exactly for the wider NZ economy is another question, but clearly for some environmental and economic extremists like No Right Turn the message is the same as for the Huntly power station and the fishing industry: Let It Die.

Written by Tom Hunter

June 19, 2021 at 12:24 pm