Turner Turns (12) Transferable Securities

When I create credit, I get an IOU from the borrower. It has limited value, as most people will not know the person who issued it like I do, so they will have no reason to trust them, even if I do. It will be quite difficult for me to sell it someone else, if I need my money back.

When a business creates credit, it will get some kind of security in return. It will be quite hard to exchange for money, unless the person or business granted credit is widely known and trusted. The security might be difficult to sell, if the business finds it needs cash for some reason.

Banks are different. They can sell securities to the central bank and get currency in return. This currency is legal tender, which is mandatory for settling debts. This gives the bank a big advantage when creating credit/money.

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Turner Turns (11) Banks Get the Money Back

Banks are different from other businesses in another way. Most of the money that they lend comes back to them. The bank deposits the money in the account of the person taking out the mortgage. It will not stay there, because the borrower will write a cheque to pay the person they are buying a house from (ignoring the solicitors for simplicity). The house seller will deposit the cheque in their bank account, most likely a different bank. The borrower’s bank will have to transfers reserves to the sellers bank to cover the cheque.

The seller might need to use some of the money to pay for goods and services. They might buy some shares or units in a superannuation fund. The money will end up in the banks of the businesses selling these things.

The big difference is that the money ends up being deposited in a bank account, somewhere. Whereas, when a business gives credit to a customer, they hand over good or services to them. They do not get anything back until the loan is due. The money does not come back to their business.

The credit created by the bank issuing the mortgage would end up in accounts at other banks. However many other loan transactions would be going on at the same time. The home buyer’s bank would most likely have some money paid into the accounts of its depositors relating to these transactions. It would receive Central Bank reserves from other banks to cover these cheques. All the transactions could cancel each other it, so the bank might need to give up any reserves at all. If this happened, the bank would have received back all the money that it has loaned out.

This difference allows a bank to create immense amount of credit, provided all other banks are doing the same.

Turner Turns (10) Banks

Banks create credit. However, the structure of a bank balance sheets means that it is not so constrained as other businesses.

Due to fractional reserve banking laws, only a small part of the bank’s assets are needed for the support of its ongoing business. They do not need to use their currency to make a loan. Reserves at the central bank cannot be lent to private individuals.

When making a loan, the bank simply records a deposit in it’s clients bank account. They record this deposit as a liability on the bank’s balance sheet. The mortgage is recorded on the other side of the balance sheet as an asset.

Banks are not constrained like other businesses. Only a small part of their assets, are needed to support their ongoing business. All they have to do is keep enough reserves of currency or at the central bank to cover potential withdraws of call deposits. Deposit insurance means that their reserves can be kept quite small.

Banks are different from businesses. They do have to give up anything when giving credit to a borrower. Banking laws give them the right to give borrowers something they do not own.

Understanding this is easier, if we think about the situation when banks began as goldsmiths storing gold. People deposited their gold with the goldsmith for safekeeping. Rather than withdrawing gold when they needed to make a payment, they would exchange the goldsmith’s receipts. These receipts acted as money. The goldsmiths realise that only a fraction of the gold was withdrawn at any one time, so they began lending some of it out in return for an interest payment.

All the gold belonged to the people who deposited the gold. The goldsmith bank did not own any the gold (although it would record on its balance sheet). When it loaned gold, it was lending gold did not own. It was cheating because it was lending something that did not belong to it.

Now that we have switched to fiat money, the same situation applies. Banks can lend out money that they do not own, just as a goldsmith bank lent out gold it did not own. The law allows banks to operate in this way. No other person or business has this right. Fractional reserve laws give banks a huge capacity to expand credit. This has been a major cause of instability in economies everywhere.

Turner Turns (9) Creating Credit

Adair Turner explains that Banks can create credit. What he does not explain is why they are able to do it so freely. Is this legal? Is it right?

Banks are not unique in being able create credit. Any individual can create credit too. If I supply you with goods or services and say that you can pay me in a year’s time, I have create credit. However, I can only give away stuff that I do not need for the next year, so there is a serious limit on how much credit I can create. I have to give some goods or services that I have produced or bought in exchange for an IOU from the borrower. Unless I am rich in resources, I will not be able to give much credit.

Businesses can create credit, too. If it supplies goods or services to person or another business, and agrees that no payment is required until a year later. This credit becomes money, because the person can use the money he would have paid to the business to buy something else.

However, a business has the same constraint on the amount of credit that it can create, as a person. It has to supply some goods or services to the borrower in exchange for the security it receives from the borrower. Creating credit will reduce it stock of goods or supply of cash in the bank. It can only lend stuff that it does not need for the ongoing operation of its business. The amount of credit created will be small, because most of its resources will be needed to keep the business operating.

A businesses balance sheet looks like this.

The business needs its capital equipment and building for ongoing production. Therefore, unless the business is willing to borrow the money it lends, it has to turn some of its cash at the bank or stocks of inventory into loans to debtors. This significantly limits the amount of credit it can give.

Turner Turns (8) Flawed Arguments for Credit Creation

Most economists assume that private credit creation by banks is the best way to ensure sufficient aggregate demand. Several reasons have been put forward to justify the need for credit creation. They are flawed but we need to understand them.

1. Shortage of Savings
   One possible reason for credit creation might be a shortage of saving constraining capital investment. If people do not save enough, then economic growth could be slowed. Lack of savings is a seriously problem in many economies, but credit creation is not a solution.
   
   At the level of real activity, investment must be matched by savings. When an economy produces capital goods, there has to be forgone consumption as less consumer goods are being produced. If Robin Crusoe devotes time to making a net, he will have less time for fishing. He will have to consume less for a while, so he can build up a supply of fish to eat while he spends time making the net.
   
   In a complex economy, decisions about investment and saving are made by different people, so intentions about saving and investment could get out of line. Business might produce more capital goods than savers are willing to fund. If that happens, there will be a surplus of investment goods and a shortage of consumption goods.
   
   Creating credit might seem like a solution, but it is not. It actually makes the situation worse, because central banks adjust interest rates to encourage the banks to create credit. When the central bank controls interest rates, the price information that savers and entrepreneurs need to make good decision are distorted. It is better to let the interest rate adjust naturally until savings and investment comes into line. Quick money schemes have an appeal, but there is no escape from the need for saving.

2. Lack of Nominal Demand
   The most common argument in favour of credit creation is that nominal demand is sometime insufficient to produce economic growth. Central banks believe they can increase growth by increasing the supply of money. This argument is flawed, because the demand does not cause production of goods and services. Rather production creates demand for the goods and services. This is summarised by Says Law, which says that supply of goods and services creates it own demand. In a barter economy, if I have produce something for exchange, that creates a demand for something that someone else has produced.
   
   In a complex economy, the wages and salaries and profits earned through the production process create the demand for the goods and services produced.

   Say claimed that production is the source of demand. One’s ability to demand goods and services from others derives from the income produced by one’s own acts of production. Wealth is created by production not by consumption. My ability to demand food, clothing, and shelter derives from the productivity of my labor or my nonlabor assets. The higher or lower that productivity is, the higher or lower is my power to demand other goods and services (Says Law).

   What can happen is that entrepreneurs make the wrong types of goods and services. They might produce to many cabbages when people are wanting more pumpkins. These problems are easily solved. Prices will adjust and businesses will adjust their production to clear the market. Credit creations just exacerbates the problem by making it seem as if there is demand for the things that people did not really want. This rewards the entrepreneurs who made bad decisions, which is like to make the situation worse in the future.

3. Short Term Liquidity
   A common argument for allowing banks to engage in credit creation that liquidity is needed for markets to function.
   
   You cannot buy what I have produced, until you have sold what you have produced. However, Jack cannot buy what you have produced until I buy what he has to sell. Trade appears to be stymied.
   
   This is an old problem, but people have always found a problem to solve it buy offering credit to each other. All it takes to get trade moving is for someone to say to someone they trust, you can pay me when you have sold what you have produced. People do this all the time. Societies have found various ways to make sure trade take place, without the need for banks to create credit.

4. Seasonal Finance.
   A common argument for increased money supply is that it is needed to finance seasonal production. This is an illusion. If I sow wheat in the ground, I will not reap a harvest until six months later. If I do not have any spare grain, then I have to get some grain from another person to avoid starving. That grain will not be available for someone else to consume. This shows that season activities, where production take a long time to be complete, has to be supported by real saving. Creating credit to for seasonal finance will distort supply and demand.

Not Needed
The accepted wisdom that credit creation is needed to foster economic growth is flawed. Credit creation, whether by banks or governments, is theft. It allows the people who get the created credit to buy something that really belongs to someone else. While economists are stuck with the idea that growth in nominal demand must be funded by credit creation, they will continue to create problems for their economy. The GFC is the most recent example.

Turner Turns (7) Moral Flaw

My turn now.

The basic flaw in Adair Turner's talk is his assumption that a gradually increasing supply of money is needed to ensure that economic growth is not constrained. Turner says that a problem with metallic money is that it does not grow fast enough. The implication is that as the economy grows, prices and wages have to slowly decline. He says that this was the situation during much of the nineteenth century. This statement is a bit odd, because this was a time of rapid economic growth arising from the industrial revolution.

Turner says that most economists believe that it is difficult to get downward flexibility and that it is more sensible to run an economy with nominal GDP growth of 4-5% price inflation of 2-2½ and real GDP growth of 2-2½. Monetary growth is needed to ensure GDP growth is not constrained.

There is a moral flaw to this argument. Monetary inflation robs savers of their wealth. Over twenty years, the purchasing power of savings is halved, if inflation averages 3% per year. That is painful, if you are living on your savings, as many people do. Over the last few decades, inflation has been much greater than 3%, so the loss have been even greater. This is theft, so it is morally wrong.

The argument that prices are sticky downward is wrong. Every time we go shopping, we see specials and offers of discounts. Clearly, retailers are quite happy lowering prices. Prices of electronic goods have declined continuously over the last few decades, without any disruption of the market.

Wages are sticky downward, but that does not matter. If all prices are declining slowly, and nominal wages are unchanged, then real wages are increasing. This is what should be happening in a vibrant economy. Improvements in productivity due to technological advances should allow business to reduce their prices. So over time, prices should be declining slowly. This increases the real value of wages, without any need for industrial pressure. This is the true trickle down.

Gradual inflation robs workers of this technology dividend. If prices are rising slowly, real wages will decline, unless employees can persuade employers to pay more. This is hard, because the truth is that wages are sticky upwards too. Under inflation the benefits of technology are captured by the richer people whose income comes from capital gains, which benefit from price inflation.

Contrary to Turner and other economists, an economy with gradually falling prices would be better for wage earners and people on fixed incomes. They would share in the benefits of technology and improvements in productivity without having to use industrial muscle of political power.

Gradual inflation encourages people to go into debt. If prices were slowly falling, people would thing twice about going into debt, because the real value of their debt would gradually increase over time. The inflationists have taken away one of the best protections against excessive data.

Turner Turns (6) Inequality

Like everyone these days, Adair Turner is concerned is about inequality.

Within any society, richer people have a higher propensity to save. If there is a dramatic increase in inequality, there can be a situation where intended savings are not matched by investment decision. This would normally create a deflationary impetus, except that rich put their money in the bank, and they lent it out subprime mortgages to people trying to make up for deficiencies of income.

Inequality will have to be eliminated to prevent this problem.

His concern about inequality comes from a Keynsian dislike of saving. I am concerned about inequality too, but saving is not the problem. Saving is essential for supporting capital formation. Without capital funded by real saving an economy cannot grow. If savers want to save more than entrepreneurs want to invest, interest rates will fall (provided central banks are not meddling) and more capital projects will be viable and the excess savings will be absorbed. So excess saving is not a serious problem. While poverty is a problem, it is foolish to say that there is too much saving.

Turner Turns (5) De-leveraging

Adair Turner explains that during the upswing, debt contracts fool us.

The mode of the frequency distribution of returns is getting all your money back. People start to believe that the mode is the entire distribution of possible returns. Prior to the GFC, banks lent money where there was not a reasonable expectation of return. Risks of default were neglected. Subprime lending is the worst example.

In the downswing, debt contracts exacerbate the problem. Irving Fisher’s article covered three problems.

1. Bankruptcy and Default
   Debt contracts do not respond to downturns in the economy, because they are non-state contingent. Adjustments occur in a jumpy fashion through bankruptcy and default. Real estate fire sales occur. Bankruptcy and default were missing from the DSGE models used by central banks.

2. Roll-over needs and Impaired Lending Capacity
   An equity contract goes on forever. It may decrease in value, but it does not have to be repaid. Debt contracts have a specific term and have to be rolled over. If banks stop lending, there is a problem.

3. Debt Overhang
   People feel shocked at their level of leverage and try to repay debt. Companies stop investing. Households stop consuming. These effects exacerbate the economic downturn.

The debt overhang is the reason why we have had such a slow and weak recovery from the GFC.

We do not know how to get rid of leverage in an economy. We just know how to shift it around, mostly from the private sector to the public sector. Excessive private debt is shifted from the private sector to the public sector or from one country to another. The rise of Chinese debt is the natural consequence of de-leveraging in the west, which was driving a deflation in china. We do not know how to get rid of leverage.

The accepted wisdom does not produce the optimal quantity of credit. The reason is that there is not one natural rate on interest. Natural interest rates are heterogeneous through time, and across sectors and categories of lending. In a real estate boom, shifting the interest rate from 5% to 5½% will do nothing. Increasing the interest rate to 10% will wreck the real economy long before the boom is slowed. There is heterogeneous interest rate elasticity of response.

This last paragraph explains why orthodox monetary policy does not work in New Zealand. When low interest rate cause a housing boom, the Reserve Bank of NZ pushes up interest rates. The carry trade responds by bringing funds to New Zealand to get the higher rates. This strengthens the NZ dollar, which creates problem for the export sector. This policy hurts the export sector long before it cools the housing market.

Turner Turns (4) Credit Misallocation

Adair Turner explains that during the last couple of decades, too much credit was produced due to problems with credit allocation.

Economic textbooks say that banks lend the savings of households to businesses to fund new capital projects. Banks choose between alternative projects to find the most productive. This view is misleading. In the UK, only 15 percent of bank credit goes to fund new capital projects.

1. Bank credit is lent to households to fund increased consumption.
   

   • Some may be logical optimisers rebalancing consumption over a lifecycle within a budget constraint. That is sensible.

   • Some may be impatient people trying to spend money now that they cannot afford to repay. Often these are the poorer people.

2. Most bank credit goes to purchase existing assets, often real estate. When the growth in credit goes into residential real estate, the only thing that can give is prices. The increase in price validates the decisions of borrowers and lenders. The net worth of the borrower is increased. This increases their incentive and ability to borrow more. Credit against real estate is a cause of economic instability.
   
   The iron law of banking is that every 15 years somewhere in the world, a commercial banking system goes mad lending to real estate. This builds up a problem when the cycle changes from growth to decline.

The GFC demonstrated that a society can produce too much credit. To much leverage is dangerous.

Turner Turns (3) Pre-crisis Orthodoxy

Turner describes the orthodox approach by central banks prior to the Global Financial Crisis (GFC)

• On their monetary theory side, low and stable inflation was considered to be desirable and sufficient as an objective. Low inflation indicates an economy in balance, so by definition, the right amount of credit would be created. Central banks did not have to pay attention to where the credit was going. The only concern was whether enough credit would be produced.
• On the financial theory side, debt contracts were considered to be essential Free markets will produce an optimal balance between supply and demand.

This orthodoxy was seriously exposed by the GFC. The crisis came about through too much of the wrong sort of debt. Both sides of the orthodoxy were wrong.

We actually have a system that can produce too much credit, if left to itself.

Turner Turns (2) Debt Contracts

Adair Turner explains that banks create ongoing debt contracts.

Economists have argued that an all-equity economy would be more smoothly operating. However, human beings cannot deal with the resulting uncertainty. They want apparent certainty, especially in wage and debt contracts. They prefer fixed flows of revenue to partnership shares in business projects.

A debt contract is non-state contingent. Payments are not contingent on a future state of the world or on the success of a particular business project. This is good for capitalisation, because it overcomes the problem of costly state verification, the difficulty of working out both ex ante and ex post whether a business project is profitable or not. Asymmetric information makes lenders powerless compared to the borrower.

Turner Turns (1) Credit Creation

The London School of Economics makes its public lectures available on MP3. Some interesting lectures are available. I have just listened to a talk given by Adair Turner at the London School of Economics called Creating Money – For What Purpose.

Adair Turner was the Chairman of the United Kingdom Financial Services Authority when the financial crisis broke in September 2008, and played a leading role in the redesign of the global banking and shadow banking regulation. He is now a Senior Fellow of the Institute for New Economic Thinking.

Apart from his accent, Adair Turner is an excellent communicator. This talk is a easy-to-understand summary of the latest thinking of economists about Monetary Policy. There is a basic flaw in this thinking, but it is good to understand how economists and central bankers are responding to the Global Economic Crisis. The comments are a summary of more detailed talks given at Frankfurt and Stockholm.

Credit creation by Banks
Turner began his talk by explaining the role of banks. He says,

Banks do not intermediate already existing money. The create money and credit ex nihilo de novo. When a bank makes a loan, it puts the loan on the asset side of its balance sheet. At the same time, it puts the money in the borrowers account. At that point, they have created money and credit. There may be constraints on how much due to the need for reserves at the central bank or to maintain equity.

The critical thing that created the credit is maturity transformation. If the tenor of the deposit and the loan was the same, nothing has happened. If both are instantaneous, nothing is achieved. If the borrower has a loan for a year that is available now, maturity transformation has occurred and money is created.

This is very different from the standard textbook explanation of money creation. It is good to get this clarified.

Turner says that the benefit of private credit creation is that is disciplined by the market, which allows credit to be allocated efficiently.

Orthodoxy says that if the interest rate is set to equal the natural rate of interest, the right amount of credit will be produced.

Felix Holt

I have just read Felix Holt: The Radical by George Eliot. I had not read any of her novels before. I chose this one because it is free on Kindle, whereas you have to pay a few dollars for some of her better known titles. I noted that one reviewer said it was her best novel. I cannot comment on that, but the others must be really good if they are better than this one.

Eliot describes and election in England just after the 1932 Reform Act was passed. I remember studying that period during school history. She really brings the election event to life.

The book tells the story of a woman who dreamt of a life of privilege, but once she got it, found it was empty. It describes two men who wanted to change the world. One, who was born in privilege, assumed that he knew what the world needed, but discovered that he did not know who he was. The other chose to serve the poor and suffering. He found peace, love and blessing.

This book points to the Kingdom of God.

George Eliot writes really well. Here is one little example.

Mr Johnson’s character was not much more exceptional than his double chin.

Anzac Day

I do not like war. I hate the terrible death and suffering. I also dislike the political propaganda that tries to turn something dreadful and awful into something to be celebrated. I particularly dislike the way that the media try to make war appear to be noble and good.

Yesterday was ANZAC day. 25 April was the first day of the Gallipoli campaign at the beginning of the First World War. I dislike the way that this day been captured by the military, and has changed from a day of grieving for lost family and friends into a celebration of the glories of war. Truth suffers in the process. Nothing is said about the folly of war. The disasters and evils that always accompany it are masqueraded as heroism and sacrifice.

Most wars are stupid, but the first World War was particularly stupid. It started when an Austrian archduke was shot by a Serbian in Sarajevo. Most Europeans could not tell an archduke from an archdeacon and no one cared about the Serbs or Sarajevo, but their political leaders decided they would have a jolly good old war anyway.

The politicians and kings started a stupid war and millions of ordinary young men paid full price for it. When the war finally ground to a halt five years later, nothing had been achieved, but 20 million people had died and another 20 million carried serious injuries.

The politicians and leaders never apologized for their mistake. Instead they turned the dead and injured into heroes. This distracted attention from their stupid decisions and made people feel better about an event that was really a terrible disaster. Calling the soldiers heroes makes it seem that what they had done was worthwhile.

I know that many were heroes, but the line between heroism and stupidity is a fine one. No doubt some were cowards. I presume that most just kept their heads down and avoided trouble. The hero story is not totally true, but it fulfils a political purpose.

The Gallipoli campaign was one of those stupid battles thought up by a politician in London that was never going to work in practice. The Australian and New Zealand troops ended up on stuck on a narrow beach in Turkey. The Turkish soldiers at the top of the cliffs were armed with machine guns and fighting to defend their homes and families. They were never going to lose.

Several months later, the Australian and New Zealand troops withdrew having achieved nothing for a terrible price. One hundred thousand people were dead and another two hundred thousand were injured. The most embarrassing aspect of the fiasco was that white Christian people were supposed to be superior to the Turkish Moslems.

The loss of so many young men was a terrible sacrifice, but sacrifice for what. We say now that they died for their country, but that is not true, either. The people of New Zealand had no interest in what happened in Sarajevo. Most did not know it even existed. The first time New Zealanders heard of it was when the Winter Olympics were held there.

The New Zealand soldiers went to defend the British Empire. When the British Empire called, the young men of New Zealand left their families and marched off to war without hesitation, on an imperialistic adventure. The thought of fighting for an empire is not very nice, so dying for your country sounds much better.

We can honour the bravery of the soldiers.
We can honour loyalty to their mates.

We should not honour their blind obedience to the arrogant and foolish political leaders told them to go and fight a stupid war.

Being Church

The Kindle Countdown deal on my book Being Church Where We Live finishes in a few hours.

Imperial Delusions

Bill Bonner is a “literary economist”. I admire his ability as a writer. He has some sensible things to say about economics too.

I have just started reading a complimentary copy of his book, The New Empire of Debt, written with his mate Addison Wiggin. This is what he says about empires.

At the peak, the imperial people come to believe that their system is superior, that their values are universal and that their way of life will inevitably dominate the entire world (New Empire p.10).

I have seen some great examples coming out of the Whitehouse recently.

Joe Carney condemning the planned presidential election in Syria.

A presidential referendum is a parody of democracy. It would nave not credibility or legitimacy inside Syria or outside Syria.

What about the presidential election being run in Afghanistan under the guns of 60,000 US troops. Is it legitimate, because two warlords from the northern alliance are standing.

Joe Biden sent to Ukraine to scare the Russians.

No nation should stoke instability in its neighbouring country. We call on Russia to stop supporting men hiding behind mask in unmarked uniforms sowing unrest in Eastern Ukraine.

Has he forgotten that neocon Victoria Nulands spend $5 billion dollars trying to change the government in Ukraine, then selected the new president. What is the CIA doing all over the world, not to mention Blackwater (Xe).

John Kerry on Ukraine.

You just don’t in the 21st century behave in 19th century fashion by invading another country on completely trumped up pretext in order to assert your interests.

Has he forgotten about Iraq, or Afghanistan.

Looking from the outside these comments seem like a joke, but inside the empire they make sense.

Things that are evil when you do them, are good when we do them.

Here is another imperial delusion

Imperial people believe that their society is so superior, that the rest of the world longs to be just like them, or is inevitably drawn to become like them whether they like it or not.

Bill Bonner gives an example.

The invasion of Iraq was based on the same sort of thinking: that even the grubby desert tribes want to be just like us. All we had to do was get the get the dictator off their banks and the men would start building shopping malls and the women would all start dressing like Britney Spears (New Empire p.10).

NATO

NATO is back in the news, pushing military forces up to the border of Ukraine. It is a strange beast that is not well understood.

NATO was established in 1949 by a treaty between the United States and the nations of Western Europe to defend against the power of the Soviet Union. With the collapse of the Soviet system, NATO should have been redundant, but it has been kept on as a way for the United States to project power while pretending to be something else. The US invasion of Afghanistan was branded as a NATO action to give it a cloak of respectability.

The reality is that NATO is a toothless tiger, because most of the nations of Europe have disarmed and do not have serious military power. When NATO supported the rebellion in Libya, the European nations ran out of weapons in a few days. The United States had to do all the heavy lifting. The European powers are militarily weak, so the most that they can do in most situations is to impose economic sanctions against people and companies.

In Revelation 13, John saw a beast coming out of the sea. This Beast looked like a lamb but was really a dragon (Rev 13:11), ie it seemed to be on Jesus side, but shifted over to the other side. I have suggested that this terrible beast could be the United States.

According to John, this Beast sets up an image of itself (Rev 13:14-15). This image of the Beast could be NATO. It behaves in the same way as the United States, and is really a mask for American power. NATO stands for North Atlantic Treaty Organisation. Daniel saw a powerful empire called the King of the North (Dan 11). NATO is linked to the King of the North.

The image of the beast does not use military power, but relies on police power to destroy all opposition.

…cause all who refused to worship the image to be killed (Rev 13:15).

This beast also relies on economic sanctions to achieve its objectives.

It also forced all people, great and small, rich and poor, free and slave, to receive a badge of servitude… so that they could not buy or sell unless they had it (Rev 13:16-17).

The NATO countries claim to target sanctions against the rich and powerful, but it is usually the poor who suffer most.

New Zealand Economy

Jesse Colombo has written an article in Forbes magazine warning that the New Zealand economy is in a bubble that will end in disaster. This grated a bit because the popular view among economists is that New Zealand is a rock star economy that is leading the pack. Politicians quickly jumped in to label Jesse Colombo as a doomster, who does not understand what is happening here.  However, he picked the subprime collapse, so he must be given some credibility.

I have some sympathy with Jesse Colombo’s view. The New Zealand economy is currently strong. The unemployment rate is 6%. The Treasury is forecasting real growth of 2.5% for the next couple of years.

Two things have helped the NZ Economy.

1. The Christchurch earthquake brought billions of insurance dollars into the country. Thousands of houses have to be rebuilt over the next two years. Many more need to be repaired. A huge number of commercial buildings are being rebuilt with insurance money. This is a huge boost to the economy.

2. International prices for dairy products are at record levels. This has really helped the New Zealand economy.

Despite this good news, there are two big worries about the economy.

1. As Jesse Colombo has pointed out, house prices are grossly overvalued. They have doubled in the last ten years. In Auckland , which is our the largest city, young people are paying more than half a million dollars for a do-up or an old dunger just to get into the market. Banks have been supporting the boom by providing mortgages for 95 percent and sometimes 100 percent of the purchase price. (The central bank last year introduced limits on loan to value ratios in attempt to cool the market). The central bank has kept interest rates very low for the last few years, but they are now beginning to rise. Household debt is very high, so many people are vulnerable to a decline in house prices or a big increase in interest rates.

2. The New Zealand economy is very dependent on the dairy industry. When I was growing up on a farm, the sheep industry was larger than the dairy industry. Over the last twenty years, a huge number of farms have converted to dairying. This has required an enormous capital investment, but returns have been very good, and farm prices have sky rocketed. Most of our milk products are exported to China. So we really have all our eggs in one basket. Last year, a faulty test that recorded botulism in milk powder stopped exports to China for a few days, until the error was corrected. Some categories of milk powder still do not have access to the Chinese market.

The New Zealand is very vulnerable to a biosecurity crisis that effects our exports to China. It would also be severely hurt by a collapse in residential real estate. So like most rock stars, New Zealand could easily fall off the edge.

Proving the Resurrection

Last night I listened to a television preacher giving seven reasons why the resurrection is true. It was good, but I wish that we lived as if Jesus is risen. The power that raised Jesus from the dead and seated him at the right hand of the Father is the same incomparable great power that is at work in us through the Spirit (Eph 1:19-20). If the Holy Spirit were free to do his stuff, we would not need any proofs of the resurrection. The world would see that Jesus is risen.

On Saturday, I heard a secular radio interviewer talking to a Christian author. After talking about his books, she turned to his Christian faith. Instead of being abrasive, as she would usually be with a Christian, she just said, “Help me with the resurrection!” It seemed like she would like to believe the resurrection, but the evidence is just not there. For a scientific mind, it is just too hard to believe. The Christian author did not seem to know what to say, so he parried with a question, “What is your problem with the resurrection?”

Actually, the resurrection is our problem. If the body of Christ was moving in the power of the Spirit and living as Jesus lived, healing the sick, casting out demons, cleansing lepers and raising the dead, it would be easy to believe that Jesus is risen.