Mike's Minute: Still plenty of unanswered economic questions

Author
Mike Hosking,
Publish Date
Tue, 27 Oct 2020, 9:55AM

Mike's Minute: Still plenty of unanswered economic questions

Author
Mike Hosking,
Publish Date
Tue, 27 Oct 2020, 9:55AM

If you want to feel good about life in this country right now, read Tony Alexander's piece over the weekend.

He's one of my favourite economists. He paints a solid, if not rosy, picture over what's supposedly going on. Spending is good, spending intention is good, confidence is rising, housing is through the roof, even aspects of commercial property have good demand.

That will lead to a shortage of skills as job numbers rise. People are into building homes, which means demand for land, demand for planners, architects, builders, plumbers, suppliers of stuff those people use and install, and so it goes.

So, it's all good then?

Well, explain the CPI, the Consumer Price Index, or inflation. There isn't any. Well, there is a bit, 1.7 percent. but they're looking for over two percent.

Inflation, in really simple terms, means growth and demand. You don't want too much, but you don't want too little. We have too little, which then led in reportage to the question, does the Reserve Bank need to print a bit more money? Do they have to introduce the funding for lending programme sooner? Do they need to go negative on the interest rates?

But last week before we left for the long weekend ,there was talk of LVRs. Why? Because we were borrowing too much for housing.

If the bank needs to stoke the economy with more money or lower interest rates, doesn’t that mean we are going to borrow even more? And if we do, what are we spending it on? Where is the so-called inflation going to come from? And on the bigger side of the equation, when is all this borrowed money getting paid back?

Is Tony Alexander right? And we can have closed borders but a decent economy? Or is the CPI right and a few people do well, while others go nowhere fast and ultimately there is no real growth? And what does the Reserve Bank do if the tools they have aren't working? Or are they working too well, but in the wrong areas? Ah, the problem of blunt instruments.

Seems hard to believe that a country built on tourism and farms has one of those income streams crippled for the foreseeable future, and things somehow carry on. Is every unemployed hotel worker really going to build roads?

I can't help but think a lot of what we think is happening is a guess, a lot of what we hear by way of predictions is hope as much as knowledge.

I think for all we think we know, there is a hell of a lot more we don’t.