Economic Confusion

Our leaders seem to be confused about the state of the New Zealand economy.

The Prime Minister says the economy is fragile, but he has the policies to turn the economy around. He says that too many people are unemployed and that he will get them working again. His Finance Minister wants to introduce tax cuts so that household can afford to increase their consumption.

The Governor of the Reserve Bank of NZ says that the economy is still over-heated, causing inflation, so interest rates will have to remain high for a longer to cool it down. He says that unemployment will have to increase. He says that household consumption will need to be reduced to remove inflationary pressure.

The only certainty is confusion.

Economy

As I ponder the state of the New Zealand economy, I cannot help but see trouble ahead.

• The central bank, realising that it had kept interest rates too low for too long, raised the official cash rate from 0.5% to 4.75% in less than a year, and warned it could as high as 5.5 percent. This is the sharpest increase in New Zealand history. I can’t see how this will not cause economic pain.

  When the interest payments on their mortgages are adjusted to the new level, many people will be shocked by the cost and will struggle to make ends meet.

  Economists assume that interest rises will reduce inflation, but when the rates that businesses pay on their overdrafts and other borrowings will rise sharply. The increased costs will prompt them to raise the prices of the things that they produce and sell, feeding into further inflation. I can’t see how this will not produce severe economic stress, especially in the construction industry.

• People are assuming that the Covid threat is over, but I can’t see how we can avoid another round, possibly with a mutation that is more virulent. (Why would the spiritual powers of evil not push on with such an effective weapon).

I realise that the people of New Zealand are not ready for future pain. They already feel like they have been through more than enough. The politicians are not prepared. They are making big claims in order to win the next election, but none of them have any idea about how to deal with what lies ahead.

The worst thing is that Christians are not prepared either. Christian prophetic leaders are prophesying good times, not preparing God’s people for hard times.

My first thought was that God would not let dark times come if his people are not ready.

But then I realised that he has been squeezed out of New Zealand. Our choices have given a place to the spiritual powers of evil. They have power to set the direction of events in our nation.

Big Banks Again

Frank Partnoy a law professor at UC Berkley has a disturbing article in the Atlantic Magazine called the Looming Bank Collapse. The article is worth reading. Partnoy reminds us that the underly cause of the 2009 Global Financial Crisis (GFC) was default on home mortgage debt. Big banks had sliced and diced mortgages into collateralised debt obligations (CDOs) that were sold on to a variety of financial institutions.

At the time, the experts at the US Treasury and the Federal Reserve claimed that this strengthened the financial system because the risk was carried by those organisations that could afford to carry it. Of course, that claim proved to be a joke. The risk had been chopped up and shifted around so much that no one no who was carrying it, and in the end, taxpayers found themselves carrying most of the risk.

Frank Partnoy suggests that a similar situation has emerged with collateralised corporate. The big banks have been slicing and dicing some fairly dodgy corporate debt into Collateralised Loan Obligation (CLOs) with the same techniques that they used for house mortgages. The value of outstanding corporate debt CLOs is now greater than mortgage-based CDOs prior to the GFC. The experts say that this is good because the risk has been shifted around and is now held by financial institutions that are best placed to carry it. We have heard that one before.

The other so-called advantage of CLOs is what the insiders call “default correlation”. They rely on avoiding it The idea is that even during a recession, different industries and regions will perform better than others. The CLOs are supposedly constructed in a way that should spread the regional and industry coverage to ensure that a negative event will only affect some of the loans. Remember when they used to say that the house prices have never fallen right across the United States at the same time. Same story.

Default correlation might be a useful tool in normal times when even if some businesses are struggling, others will be prospering. Unfortunately, that does not apply during a global pandemic when businesses in most regions and sectors are badly affected, so we will soon see how bad default correlation can bite.

I am not sure how serious this problem is, but it sounds ugly. Frank Partnoy ends his article with a dire warning for the big banks.

It is a distasteful fact that the present situation is so dire in part because the banks fell right back into bad behavior after the last crash—taking too many risks, hiding debt in complex instruments and off-balance-sheet entities, and generally exploiting loopholes in laws intended to rein in their greed. Sparing them for a second time this century will be that much harder.

And the ordinary taxpayer will pay the price.

Treasury Estimates

The NZ Treasury released its estimates today for the effects on the economy of the Covid19 virus and associated shutdown.

The scenarios considered vary depending on how long the country is kept in each level of the shutdown. I thought scenario 1 looked most realistic; it assumes that Level 4 will last a month, then Level 3 for a month followed by Level 1 or 2 for ten months. The worst case is scenario 4, which assumes Level 4 for three months and Level 3 for 3 months. That does not seem plausible, but I presume it was put in there to make the others seem more acceptable.

Two figures stood out to me. First, if the best scenario applies, quarterly real GDP drops from 64 billion dollars in the March 2020 quarter to 54 billion dollars in the September quarter, when the economy has had quite a few months to recover. That is a drop of 14 percent, which is a huge hit on the economy. It takes out quite a few years’ worth of economic growth at a time when the population has grown rapidly, so the effect on real GDP per capita will be even worse.

The Treasury notes that this number is just an estimate, but I would have preferred that they gave more information about the assumptions on it was based, and an indication of the plausible range for their estimates. It makes a big difference, whether the estimated decline between March and September is between 12 and 16 percent, or whether it is between 9 and 20 percent.

But you cannot eat GDP, so these figures probably do not mean much to many people. However, the other figure that I noted really brings it home.

Under their best-case scenario, the Treasury estimates that unemployment will be 13 percent of the workforce in the September quarter 2020, well after the finish of the lockdown. The New Zealand workforce consists of about 1.5 million people, so 13 percent unemployment means 195,000 people without work. That is a huge amount of pain. Many of those who lose their jobs will be able to collect unemployment benefits, but many others will be the partner of someone who is working, so they will not qualify for a benefit.

My initial response to the estimates is that the Treasury is overconfident about how quickly the economy will recover. I will be interested to see what other economists say about this. It depends on how much account the Treasury has taken of the effects of business closures rippling through the economy.

Treasury seems to be assuming that the world economy will only decline by about 3 percent in the best case, and 6 percent in the worst case. That also seems to be a little optimistic.

• The Chinese economy was already slowing sharply before the virus struck, and it is uncertain how quickly it will recover.

• The US financial sector is very shaky. The collapse in the value of shares and bonds means that many debtors have had to stump more for collateral for their loans. It is not clear that all will be able to do it. Many large corporates have burnt up their cash reserves and are finding it difficult to find credit. There are huge risks around derivatives linked to the price of oil. The Federal Reserve is trying to shore the financial system up with more credit, but it is still not clear that they will be successful.

• As they recover, the nations of the world are like to pull back from dependence on international trade and try to be more self-sufficient. That will increase the cost of producing everything that people need and make life more difficult for exporting nations.

I suspect that as we go out of the shutdown, the New Zealand economy will face stronger headwinds than the Treasury is assuming. The world is not just dealing with a health crisis; it is also facing a financial crisis.

Shutting Down the Economy

The New Zealand government has put the people of the nation under a lock-down. People cannot leave home, except for exercise, going to a pharmacy or supermarket and essential work. All non-essential businesses have been shut down. We are now nearly a week into a four-week shutdown. However, there is no guarantee that the shutdown will end when the four weeks are complete.

Although unavoidable, I suspect that the harm done by the economic shutdown could be more serious than the health crisis brought about by coronavirus.

Many small businesses are already struggling due to the collapse of the markets into which they were selling. Some are only just keeping ahead of their expenses on a week by week base. The worst-hit are tourism and hospitality-related businesses. These businesses are operating in a very competitive sector with very little to come and go on.

While businesses are closed and earning no income, they will still incur costs. They will have to pay the rent on their buildings and the costs of many of the services that they buy regularly, such as electricity, communication and IT services. Hire purchase payments for vehicles will have to be made. Interest on any debt will have to be paid. Some of these expenses might be deferred, but they will have to be paid eventually out of future earnings that could be significantly reduced.

Like governments all around the world, the New Zealand government will try to keep things going with additional support payments and the central bank will make credit available to banks so that they can lend to businesses. Unfortunately, additional credit will not be enough to keep some businesses to keep going. Most will already have significant debt, so providing them with an additional loan is not really a solution. More debt will just add to the burden that will make it difficult for them to get going again. What they need is more paying customers, but that will not happen in the short-term.

The wage subsidies will help some businesses, but others will struggle to make up the difference between the subsidy and the normal wages, if they are unable to operate. Unless the virus is stamped out quickly, the shutdown might have to go on much longer than expected.

The economic decline could drag on for much longer than many people expect. Many businesses that have had to shut down will not be restarted. Some small business owners will not have the emotional energy to take on more financial commitments to get started again in an uncertain economy. They will choose to get out before their situation gets worst.

Many big businesses also have very tight cashflows. Those who do will struggle, because many of their outgoings and expenses will continue, while no money is coming in. Those operating on very tight margins may find it is too hard to keep going, especially if the shutdown goes longer than initially expected. Many will try to shorten their supply chains, but this will make their inputs more expensive, as specialisation declines, which could reduce their profitability.

Greek Economy

I were the King of Greece,
I'd push things off the mantelpiece (AA Milne).

Tomorrow the people of Greece vote in a referendum on the tough terms of European rescue package. After doing a bit of study, I found that things are not quite as they are portrayed in the media. Here is some background information about the Greek economy.

1. GDP
The Greek economy is not just tourism and olive oil. 15 percent of the world merchant shipping is owned by Greek shipping magnates. Greece exports cement, ships, petroleum, electronic goods, pharmaceuticals and agricultural products.

2. Decline
The Greek economy has been hit hard by the GFC. Between 2010 and 2013, the GDP declined by an average of 6 percent. This has exacerbated the debt problem.

3. Exports
Exports have continued to increase from 2010 to the present.

4. Unemployment
The unemployment rate in Greece is 26 percent. More than fifty percent of youth under 25 are unemployed.

5. Pensions
Greece has been criticised for its generous pensions, but they have been significantly reduced in the last few years. The main problem is the inefficient system for managing pension funds and payments.

6. Aging Population
The cost of pensions is high because the aging problem has hit Greece earlier than other countries reflects and the aging population. 20 percent of the population is over 65.

7. Taxation
Greece has a problem with collecting taxations, but that is not the full story. The GST rate is 26 percent. The rate on food is 6 percent. The highest income tax rate is 42 percent. The problem is that the oligarch families that control most of the economy are able to evade taxation. For example, income from shipping is tax free. The bosses of energy and construction companies and football clubs avoid tax.

8. Budget Deficit
The Greek government have always spent more than they earned in taxes. Between 1995 and 2015, the average budget shortfall was 7.1 percent of GDP.

9. Military spending
Greece has always had high levels of military spending. Although it is now down to 3 percent of GDP, it got as high as 7 percent of GDP. I presume this is partly the legacy of Greece the military junta that ruled Greece from 1967 to 1974. I presume the military elite dominate of part of the economy.

10. Normal People
The people of Greece are no different from people all over the world. Some are wise, some are foolish. Most work hard, and only a few are lazy. Many would just like a decent job. The Greeks are not an evil people that need to be punished.

Worth Repeating

God gave his system of justice and economic blessing in the Torah. His is a radically different approach, with no central government, where leaders and judges emerge out of local communities, where problems of poverty and inequality are dealt with in local communities, where defence is initiated by local communities and there is no centralised standing army, and no taxation to support it.

Christians seemed to have missed this, because they cannot see the trees for the dead leaves of legalism. They are so scared of slipping from grace into legalism that they prefer to stay away the Torah. They are forced instead to either look in vain in the gospels, or go back to nature for teaching about political and economic systems.

Christians who are interested in politics and government only go to the Torah to find scriptures that support modern systems of government, such as democracy or monarchy. This distortion prevents them from seeing the magnificent system of justice and law, and the wonderful economic system that God gave to his people.

Power Shift (3) - Economy

The financial crisis was not that bad in New Zealand (People are still walking their dogs).

The reason the economy did not get as bad as people expected is that God held back the economic tide. He had planned to shake the nation into revival and blessing, but his people were not prepared. Most were so entwined with the world that any serious shaking would have swept them away, so God held the crisis back.

This turning back of evil has lulled us into a false sense of security, but our complacency is based on a misunderstanding.

We did not come through the financial crisis unscathed,
because we are strong.
God withheld the shaking back
because we are weak.

That may not happen again. In recent years, a power shift has taken place in New Zealand, as we have given greater authority to the forces of evil. We have unwittingly handed control of our culture, our society and our economy to the forces of evil. Our nation has gone so far down the wrong road that they now have a much freer hand.

By casting off restraint,
we have left evil unrestrained
and constrained the Holy Spirit
in his authority to protect us.

The forces of evil are now flexing their muscles. They watched the world financial crisis and are thinking, “We can do better than that”. They are planning a strike against New Zealand that will devastate our economy and plunge us into a crisis that cannot be constrained by the hand of God.

The timing is uncertain, because the enemy is not as powerful as we think. He is struggling to get his capability together, but he will eventually succeed. The devil’s depression will be deeper and darker than anything that this generation has seen.

God has been voted out of New Zealand and no longer has the same authority to work evil for good. His ability to hold back evil is severely constrained, so he will not be able to shape the next economic crisis for his purposes.

Preparation is urgent. There is no time for mucking around, trying to get things perfect. Getting prepared is more important than getting things right.

Worry about the Economy?

I am worried about the economy. The economic signs and statistics seem to be pointing to a recovery. People are heaving a sigh of relief. “If that is depression, its not too bad. We can cope”.

The reason that I am worried is that some prophecies about economic crisis suggested that crisis would strike when things are coming right. Just when people are saying, “Everything is fine”, the economy will collapse.

I do not have a revelation about this, but if God is going shake our economy, we have not seen it yet. It will come at the very time when we stop worrying about it. That seems to be happening now.

I wrote the words above about a month ago. After reading them again yesterday, I saw a couple of interesting newspaper articles.

The New Zealand economy is on the cusp of a fragile recovery," said Shamubeel Eaqub, the NZIER's chief economist (New Zealand Herald 1 Sept 2009).

Goldman Sachs JBWere has called time on the recession and expects a steady rise in economic growth over the next 18 months (Stuff 1 Sept 2009).

For most New Zealanders the recess has been nowhere near as bad as predicted. Only three in ten New Zealanders believed the recession had turned out to be as bad as expert or the news media predicted (The Press 4 Sept 2009).

I also listened to John Paul Jackson’s warning of the Perfect Storm.

Last night I had a dream. I am not sure if it was a revelation, or just emerged from the thoughts that were swirling around in my mind.

I had joined with some other people for a picnic by beside a railway line. When a train came by, a tanker waggon swung out an hit a rock that knocked it off the track. The locomotive and the passenger cars remained on the track, so the people within them were unharmed. They were able to roll on, leaving the tanker waggon lying on its side beside the track.

While we were still picnicking, a passenger train came by. Once of the passenger cars struck the tanker waggon, and the entire train toppled on its side beside the track. I rushed ahead of the people that were with me, and entered into one of the carriages. Some of the people had escaped, but others were trapped where they set. I had to lift debris from the collapse carriage off, so they could free themselves. The train was totally wrecked, but all the passengers eventually escaped.

I wondered if the dream related to the economy. Maybe the crash that people believe they have escaped will be quickly followed by another crash that will be far more serious. Will people come to new life after this crash?

DANG (14) - Running the Economy

A common answer is that we need the government to run the economy.

Even if the economy does need running (and that is not proved), the evidence that governments can run an economy successfully is fairly sparse. There are plenty of counter examples of government stuffing things up. Those in power usually end up lining their pockets at the expense of their people.

According to the book of Deuteronomy the state of the economy fluctuates according to the righteousness of the people. A decline in the economy is a warning to turn back to God. By attempting to prevent economic downturns, the state is attempting to hold back the tide of sin. In the end it will fail.

Rather than relying on the government to boost the economy is unnecessary. It is easier and more effective to love God.

Safe Job

According to television reports, growing economic uncertainty is leading to an increasing number of young people signing up with the army. The young man interviewed said that he was looking for a secure job. His mother told the interviewer that she was glad that her son had found a job that is safe.

People must be really worried about the economy, if being shot at by Pashtun tribesmen in Afghanistan is considered to be a “safe job”.

Do we Need the Government? (7) - Running the Economy

A common answer is that we need the government to run the economy.

Even if the economy does need running (and that is not proved), the evidence that governments can run an economy successfully is fairly sparse. There are plenty of counter examples of government stuffing things up. Those in power usually end up lining their pockets at the expense of their people.

According to the book of Deuteronomy the state of the economy fluctuates according to the righteousness of the people. A decline in the economy is a warning to turn back to God. By attempting to prevent economic downturns, the state is attempting to hold back the tide of sin. In the end it will fail.

Rather than relying on the government to boost the economy is unnecessary. It is easier and more effective to love God.

Bright Light and Sonic Boom

Last week a meteorite hit the atmosphere over southern New Zealand. The loud sonic boom was heard over much of the South Island. Observers saw a bright light in the sky breaking into pieces, making me think of a bright light being snuffed out.

Was the loud boom meant to wake us up?