Who's laughing now

Risk of recession

This morning I woke up to news on the radio, and I almost laughed myself silly.

Okay, not really, but I could have.

For the past six month, I've been predicting that both the New Zealand house market will cool down and that the Reserve bank's OCR (offical cash rate) will come down, and neither of them happened. I was so convinced in my predictions that I have moved all my family's investments to long term products to protect them against low interest rates. Since I did that, the Reserve bank has raise the OCR twice, and made me looked like an idiot.

My vengeance came this morning, when ANZ announced their survey results suggesting an economic recess is in sight. I really shouldn't be happy about this, but I couldn't help. I've been wronged for too long by the two biggest idiots in New Zealand.

In a normal market, people borrow more when the OCR is low, and the borrowings more often than not go into the real estate market. And I predicted that both the housing market and OCR will move down. So you might wonder now, why would I make two contradicting predictions?

The key, you see, is that those two things are not really related in New Zealand. Most of money banks lend to people as home loans in New Zealand come from overseas, and whether there's a lot of money available domestically (as determined by the OCR) has no influnce over home loan at all.

Why the housing market will cool down has been discussed widely by economist (who looked as stupid as I did), so I'm going to skip that for now. Meanwhile, the OCR has to decrease because of a few reasons:

1. The New Zealand economy has been relying on foreign capitals for the past two decades, and the amount of foreign capital coming in is likely to decrease in mid-term because of reduced immigration (which at one stage brought in 7 hundred million annually) and (supposedly) cooling down real estate market, which will result in less return for foreign investors (remember, those are the guys who are funding all the new house purchases.). In order to keep the steam going, the Reserve bank has to increase domestic productivity, which often requires a low OCR.

2. One of New Zealand's biggest problem right now is that mounting foreign deficit, which is largely due to NZD's overbloated strength, which attracts foreign investors, which in turn causes foreign deficit to increase. Well you can the how the vicious cycle works. The cycle exists for consumer spending on foreign goods as well.

3. The OCR is at, if not past, its historical high for the past 15 years; and we all know the days of 20% interest rate will not come back again. Therefore, from a technical standpoint the interest rate has to go down.

But it didn't happen because:

1. The NZRB operate on the principle that its main purpose is to curb inflation, but it didn't have any weapon against the inflation we've been seeing for the past couple of years, which was caused by raising oil prices and a hot real estate market. However, Alan Bollard was so afraid that he might lose his job if he didn't have inflation under control (which he didn't, and couldn't) that he's gone out and violated pretty much every rule you could learn in Macroeconomics 101. This made him the second biggest idiot in New Zealand.

2. Bad fiscal policies, which often go with a Labour government. If you think about it, any change the Labour party could make to its fiscal policies will only make it look bad to its supporters (less public spending, less taxes, etc), and their have enough trouble getting votes as it is. Seeing how far Labour was willing to go to form a government, I don't think they're too concerned about screwing up the economy to keep themselves in power. Michael Cullen is the biggest idiot in New Zealand for this because he doesn't seem to know that fiscal policies could affect the economy. [edit: He just said today, and I quote: “Tax has nothing to do with growth”. Seriously, did this guy even graduate high school? Is his PhD in physical Ed?]

So what the two idiot did was basically making it very difficult for New Zealand businesses, who are great affected by a high OCR, to operate or expand. As stated in the link, low business confidence is a self-fulfilling prophercy, and with OCR up in the sky, a recession seems unavoidable. For all their shouting and FUD in the past year, the two idiots didn't do anything to effectively reduce NZ's foreign deficit or lower the NZD exchange rate, but ended up causing an economic recession. The housing market would have come down anyway without their interferences. So essential we ended up with the worse case scenerio. Great work guys.

All these will have great political implications, and yet another vengeance of mine. But that will be another post.

Anyway, here's the conclusion: Economic predictions are only correct if we don't put idiots in charge.