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HDPA: Global market tumble shows Reserve Bank is being irresponsible

Author
Heather du Plessis-Allan,
Section
Opinion,
Publish Date
Thursday, 15 August 2019, 8:09PM
The Reserve Bank's suggestion Kiwis take on more debt is a risky bet. (Photo / Getty)
The Reserve Bank's suggestion Kiwis take on more debt is a risky bet. (Photo / Getty)

I think the Reserve Bank is being irresponsible encouraging people to take on more debt at the moment.

Just take a look at what's just happened to stock markets. The tumble we've seen around the world hasn't come out of nowhere. 

It's happened because we've just seen the biggest warning that a recession is on its way.

Over at the US bond market, the spread between the yield on the two year treasury note and the yield on the ten year note  has inverted. 

When you get an inversion like this, it's considered a pretty reliable indicator of a looming recession.

Does it always happen? Not every single time, but it's reliable enough to freak the markets out. 

Does it mean it's going to happen tomorrow? No. The length of time before a recession rocks around can vary, but on average for the last thirty years, you'll get one in a couple of years.

Given that we've got plenty of signs a recession's coming  including the Bank of America yesterday increasing the chances of a recession happening in the next year, should you be taking on debt? No.

Yet this is what the Reserve Bank wants you to do. 

Last week, after the Official Cash Rate was cut, I asked Reserve Bank chief economist Young Ha about whether the bank wants more people taking on debt. 

This is what he said: "Why not? The economy is doing well but things are slowing. We have a mandate and a commitment to basically keep the economy close to full employment and inflation at two per cent over the medium term.

"We think there are some headwinds coming and we'd like to see more stimulus come through. More spending, more investment, stronger growth, more jobs."

To quote Yuong Ha, 'why not'? Because in a recession, what happens? Jobs are lost. That makes it a lot tougher for people to service their mortgages, so next the house is lost too.

Right now, we should be clearing debt. 

It looks to me like the Reserve Bank is betting the house here. Either we take on more debt and spend our way out of a recession, or, if it does't work, we take on more debt, stretch ourselves, and lose the lot.

Ask yourself this: in a global market, can New Zealand spend our way out of a recession?

Chances are not. So, betting the house is a bet that looks too risky.

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