Richard Prebble: House prices only going up while credit tap’s running


Last week the Reserve Bank monetary committee had two judgment calls to make: how the economy is going and predicting the economic future. They got them both wrong.

It is hard to determine how the economy is going. All the data is out of date. Despite noting a “rebound in economic activity is under way”, the committee believes “the economy is subdued”.

As one of the finance ministers, I used to meet with the bank and Treasury to make these assessments of the economy. The weekly freight tonnage reports I received as Minister of Railways were a much better indicator of the health of the economy than the data the officials relied on.

Today that indicator is the ANZ Bank’s truckometer index.

“Heavy Traffic Index in October was 7.1 per cent higher than a year ago, while the Light Traffic Index is 5.9 per cent higher than a year ago (3-month average),” said the ANZ. November’s index continues the trend.

The heavy trucks index indicates what is happening in the economy now. The light traffic index is an accurate predictor of the next six months.

Seven per cent traffic growth is an economy roaring out of recession. There is no need for the bank to further stimulate the economy.

The Reserve Bank committee reached a different conclusion: “Significant monetary stimulus remains necessary to deliver our inflation and employment objectives over the medium term”. Indeed, the committee went further and agreed “to provide further monetary stimulus”.

Predicting the future is very difficult. No forecaster predicted the pandemic. No one knows how economies will emerge from Covid, but in China the economy is growing strongly.

The Reserve Bank monetary committee believes it knows the future. The committee had already announced that the economy will need $100 billion of credit stimulation until June 2022. The committee has never explained why that figure is $100b, or what is special about June 2022.

The committee could have made an optimistic prediction. With proper precautions, a travel bubble could be opened with Australia. With quarantine, international students could return.

Last week’s decisions were to ignore the data and double down on credit expansion.

Printing money is high risk, or the bank would not have insisted on a letter of guarantee from the Finance Minister. You as a taxpayer are paying if it all goes wrong and interest rates have to rise.

The government funds its deficit by issuing $1b in new bonds each week. The trading banks buy the bonds and immediately flick them on at a profit to the Reserve Bank.

The Reserve Bank funds the purchase by creating the money with a few computer strokes. (Central banks creating money and lending it to the government directly is social credit, which would freak out the market. The expensive use of middlemen is to pretend it is not social credit.)

Some quantitative easing was required for the shock of lockdown, but not a two-year programme of printing money, which is causing huge distortions. Cheap credit is fuelling the house and share market boom. Savers who relied on fixed bank deposits have been devastated.

Asset bubbles end badly. Last week the influential Bloomberg magazine ran an article calling the New Zealand policy “Japanification”. The article says the Reserve Bank’s ownership of “outstanding nominal government bonds has rocketed from 6 per cent to 37 per cent in the space of seven months”. The author notes that starting at 11 per cent, it took Japan three years to reach 37 per cent ownership.

New Zealand has the most aggressive QE programme in the Western World.

The Bloomberg article says: “Falling yields may deter capital flows needed to fund deficit”. A foreign exchange crisis could be how it ends.

Foreigners do not need to hold the Kiwi. Good export receipts means today there is little pressure on the currency.

New Zealanders, in contrast, have to hold the Kiwi. We have lost confidence in cash. There is a rush to convert money into assets, any assets. As Rod Duke explained his family trust’s purchase of shares in his company, Briscoe Group: “The banks do not want my money”.

Cash must be draining out of the trading banks. Last week the monetary committee announced a new programme to create even more credit and lend it to the trading banks, to on-lend at super low interest rates. Even more cheap credit funding means even higher house prices.

If there is a run on the Kiwi, it will be led by New Zealanders who have lost confidence in the Reserve Bank monetary committee’s ability to maintain a sound currency.

Who remembers economist Ludwig von Mises’ famous quote: “There is no means of avoiding the final collapse of a boom brought about by credit expansion”.

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