Some reasons the Reserve Bank might be nervous

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The signs of a new capitalist crisis of overproduction and its attendant financial crises and world recession are accelerating. US inventories are increasing significantly, German industrial production is declining, car industry layoffs are hitting all parts of the globe.

In response, Central Banks have been cutting interest rates in the hope this will stimulate the economy and soften the expected downturn.

The NZ Reserve Bank cut what is called the Official Cash Rate from 1.5% to 1% – a bigger than expected cut. But because interest rates are so low historically, the impact of the cuts left available to central Banks are modest at best.

Yields on government bonds bought by financial capitalists have been falling as investors seek a “safe” haven in the more secure government securities in the face of the approaching crisis.

Gold prices also rose for the same reason topping $1500, the highest level in six years.

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Global capitalist stability is exacerbated by the erratic economic policies being pursued by US President Trump to shore up US economic hegemony. Similar economic nationalism involving tariffs and currency war is attributed with at least deepening the Great Depression in the 1930s.

The Financial press has highlighted a couple of signs of distress in the system

The Financial Times reported August 6:

The inversion of the US yield curve, a measure investors view as the surest predictor of an impending recession, on Monday became deeper than at any point since the onset of the financial crisis a decade ago, as the US-China trade war spread to the currency markets. The difference between the yield on three-month Treasury bills and the benchmark 10-year bond, which has turned negative or “inverted” before every US recession of the past 50 years, widened to minus 32 basis points at its worst, after Beijing allowed its currency to weaken against the dollar past the symbolic Rmb7 level…..The last time the US yield curve was this deeply inverted was in April 2007 when credit markets were showing the first signs of what would become a global financial crisis.

CNBC reported August 7:

Global economic uncertainty has investors so fearful of the future, the world’s cache of government bonds that trade at negative rates has ballooned to a new record high.

About $15 trillion of government bonds worldwide, or 25% of the market, now trade at negative yields, according to Deutsche Bank. This number has nearly tripled since October 2018.

Historically, people give the government their money, instead of spending it, with the promise of being paid back, with interest. Now, governments are essentially getting paid to borrow money, as people become increasingly desperate for a safe haven for their wealth. The cycle becomes self-fulfilling as negative rates raise further concerns about the economy.

Bonds are supposed to pay the owner of capital something to pry the money out of their hands. But no … ” said co-founder of DataTrek, Nicholas Colas.

This is a sign of the capitalist system everywhere running out of tools to prevent or even moderate significantly, the next cyclical economic downturn with its attendant fiscal crisis and surge in unemployment. We need a system of democratic socialist planning, not a boom and bust perpetual growth machine that threatens life on the planet.

Capitalism is a system of growth – on average, over time. That’s what makes it so successful for so long – despite the attendant imperialist wars and economic depressions. Globally, it has averaged 3% a year for 150 years. That means doubling output every 25 years. We can’t double output in the next 25 without wrecking the earth. Capitalism must be replaced by a socialist democracy where economic decisions are planned for the welfare of the earth and its people – not profit.

17 COMMENTS

  1. Arguably NZ’s biggest export is now immigration visas for jobs like cafes and investment like restaurants on the back of fake degrees, while the second biggest is profits, what could possibly have gone wrong with neoliberalism here?

  2. Despite what you think of Trump, he is right about China.
    They have been screwing the scrum for decades.
    Unfortunately for thexample proletariat, they have racked up vast oceans of debt in doing so and their time of reckoning comes ever closer.

    • As with scrums screwing is in the eye of the beholder and generally depends on which team you support. However, as with scrums some knowledge of the rules does help. Perhaps you are referring to Trumps labelling of China as a currency manipulator. If so you are wrong. What they have done is stopped manipulating their currency which used to be a goodwill gesture towards the USA. They would buy lots of Chinese currency to keep its value up against a rising US dollar. Since Trumps escalation of additional tarrifs they have decided that a deal is not going to happen and they are now leaving the Yuan to find its own level as the $US continues to rise. So it would seem that really the US front row is to blame…

    • Also on the subject of scrum screwing, its a bit like “how could anyone outpush the USA without cheating?” Well its quite simple. Theyve found a better technique. In their system, all the big banks are owned by the State not private individuals so whereas all Western money comes into existence as privately issued debt, in China it is created for government corporations to spend into infrastructure, education, research or whatever. If these corporations hit tough times they usually arent wound up because of the resulting loss of jobs and security. Its no skin off the noses of the State. They spend money into existence which decreases the accumulation of wealth in tiny groups. Its not perfect but its way superior to the Western banking system. Its more stable and keeps people happier. So if thats your idea of scrum screwing I’d say take another look. It’s actually the US buckling under pressure and we can only hope that the superiority of public money is recognised and becomes our system as well.

      https://dissidentvoice.org/2019/08/neoliberalism-has-met-its-match-in-china/

      • Spikeyboy, your link is from Ellen Brown, an American who puts out a blog in various media about once a month. She is always worth reading and is generally right on the ball. She has written an important book, ” The Web of Debt” in which she condemns the present Banking system. Spread the word.

    • USA has been screwing the world for decade upon decade, relying on their status of being the world’s largest economy in the spirit of “whoever has the gold makes the rules”.
      Although they claim to be the spirit of the democratic world, it does not stop them interfering in other country’s politics (including our own), instigating and supporting coups, imposing trade sanctions and economic blockades that hurt the poorest people and propping up ruthless dictators.
      Exactly what China does.
      The main difference is that the Chinese government doesn’t try so hard to hide what it is doing.
      USA uses a subliminal message that “you can trust us guys because we are white, like you, and you can’t trust those little yellow buggers”.
      Not that they ever say that, of course, but you look down deep into their messages that is what they really mean.
      But when it comes down to the basics, is there really much difference between China and USA in the way they want to dominate the world?
      It doesn’t seem so.
      They are both as bad as the other.

  3. ‘We can’t double output in the next 25 without wrecking the earth.’

    Too right. Indeed, many would argue that industrial humans have already wrecked the Earth and it is only a matter of time before the damage already done manifests in very unpleasant forms, such as complete disappearance of Arctic ice, complete disappearance of corals, massive crop failures due to extreme weather events induced by planetary overheating, record-breaking heatwaves and droughts etc.

    Needless to say, industrial humans could not have done all the wrecking we now observe without the encouragement of governments, which adopted (and still adhere to) the notion of infinite (economic) growth on a finite planet.

    The notion of infinite growth on a finite planet is clearly absurd, and has been seriously questioned since the 1950s. It came under significant attack via Limits to Growth, 1972, but the attack was neutered by the establishment.

    Around the time of LTG Professor Albert Bartlett began presenting his lecture which explained the mathematics of growth, especially of population, resource consumption and energy. He noted the long term impossibility of continuous growth and some of its dire consequences.

    According to the website

    https://www.albartlett.org/index.html

    he presented the lecture 1,742 times.

    The YouTube version of the lecture has been viewed at least 5 million times.

    https://www.youtube.com/watch?v=F-QA2rkpBSY

    Over many decades countless individuals and organisations have pointed out the impossibility of continuous growth and the consequences of continuing to adhere to the defective growth model: all have failed to slow the juggernaut or even have any noticeable impact on governments.

    So now we are hitting the wall, somewhat later than some expected, largely because of the rise of fracking and tar sands extraction of oil. Nevertheless, the system is hitting the wall much as predicted long ago.

    Of course, governments will almost certainly attempt to stave off economic collapse by further interest rate manipulation, and perhaps even by further direct subsidisation of resource extraction (especially of oil).

    The system may well stagger on for a few more years in its present form, thereby exacerbating the environmental collapse we are now witnessing and ensuring even worse living conditions in the not-too-distant future.

  4. If you wonder why there are so many people from China in NZ, it is because it is expensive to study there, education and health care is no longer free in China as it was under communism.

    Likewise in India, Medical costs are one of the primary causes of poverty in India. Around 63 million Indians fall into poverty each year because of health care bills, and 70 percent of all charges are paid directly by patients. Free education in India is only until children reach 14 but many use private education The approximate ratio of public schools to private schools in India is 7:5.

    NZ has sold it’s passports and visa’s whereby with one visa, an entire overseas family can get residency and access to free education and health care in NZ often from day one, with a 2 year visa and a low wage.

    Once citizenship or permanent residency is achieved, which only takes a few years (or 11 days in Thiel’s situation), then the new NZ passport holders doesn’t have to live or pay taxes in NZ, and there seem to be zero laws stopping any one operating a satellite family situation, once everyone gets a passport or permanent residency which is very easy.

    Aka the more educated work members go overseas to work for higher wages, leaving the children and elderly members living in NZ who can access social services.

    So NZ has created this bizarre situation to destroy the NZ social system and wages here. It’s quite frankly, crazy and has become a group think situation where nobody is wondering why health care spend per person is falling in NZ and our jobseeker is up when there are 250,000 work permits given out to overseas nationals to get residency off.

    This is an interesting, article from a fairly socialist perspective, on the rise of China vs US…

    “Beginning in 1980 the Chinese government initiated a dramatic shift in its economic strategy: Over the next three decades, it opened the country to large-scale foreign investment; it privatized thousands of industries and it set in motion a process of income concentration based on a deliberate strategy of re-creating a dominant economic class of billionaires linked to overseas capitalists. China ’s ruling political class embraced the idea of “borrowing” technical know-how and accessing overseas markets from foreign firms in exchange for providing cheap, plentiful labor at the lowest cost.

    The Chinese state re-directed massive public subsidies to promote high capitalist growth by dismantling its national system of free public education and health care. They ended subsidized public housing for hundreds of millions of peasants and urban factory workers and provided funds to real estate speculators for the construction of private luxury apartments and office skyscrapers. China ’s new capitalist strategy as well as its double digit growth was based on the profound structural changes and massive public investments made possible by the previous communist government. China ’s private sector “take off” was based on the huge public outlays made since 1949.

    The triumphant new capitalist class and its Western collaborators claimed all the credit for this “economic miracle” as China rose to become the world’s second largest economy. This new Chinese elite have been less eager to announce China ’s world-class status in terms of brutal class inequalities, rivaling only the US .”

    https://www.globalresearch.ca/china-rise-fall-and-re-emergence-as-a-global-power-2/29644

    It is hard to know where that is going to go, we have so much uncertainty now with US, China and UK… Europe, Russian and so forth, but NZ has done many things wrong, sold or given away the silver ware in terms of assets, stopped investing in quality education from Kiwis that have long term ties here, to create higher paid citizens, and gone down the Natz low wage economy which long term can not function with a generous by world standards social welfare system, growing population and satellite family system operating with people who can access NZ welfare who not only were not born in NZ and by family related visas, don’t have to pay any taxes here or the taxes collected is marginal.

  5. Mean while as of Friday close Austrlaias ASX lost $100 billion dollars so that will get the big four Australian banks out of bed on a Saturday, and Adrian Orr.

  6. This has always been self-evident to anyone who has even a very basic grasp of mathematics – which is why there is exactly zero excuse from anyone with a basic high school education for allowing it continue unabated. Also remember that “growth” isn’t even meant to be linear under the capitalist model, it is supposed to be exponential – e.g. a 3% annual “growth” in GDP/Population/revenue is always compounding on all previous increases in growth that have come before. Utterly unsustainable, obviously, and it is going to catastrophically collapse on a scale that is also exponentially “growing” the longer it continues. We collectively deserve what is coming.

  7. Orr is playing smart, knowing domestically we are going to have invest in some major capital projects when the bump comes around again, soon.
    He’s forcing depositors to think again about where to invest their money, bank deposits are about $330b. Look for a better return. He knows this government will need to grow some balls and create an investment vehicle for some of this non productive putea to enter into the productive sector, soon.
    Secondly, he’s cutting the Aussie banks lunch effectively, by diverting the capital from them to look elsewhere therefore reducing the profit making machine and their gambling with other people’s money problem they have.

    Its a pragmatic move though many might not like it but its the kinda Socialism by Stealth I prefer than a manufactured crash and a tax slash and burn like the last government did at the last crash and only a few got a feed.

    This will encourage domesticated grow instead of the tax stimuli given to a few and then offshored.

  8. It is and will hit home too all of us who are protected by wealth or by modern practices.
    If the capitalist system hangs on then those with real cash and influence will have more options than the great unwashed who as always will bear the brunt of any catastrophe.
    The ” environmental refugee ” will become a household reality that no one can hide from.
    We all are going too have too confront our greed , comfort , laziness , arrogance , ignorance and hatred as economic and climate change disasters impact on every single human being and our children.
    The pressure is building behind the dam of human frailty.

  9. “…We need a system of democratic socialist planning…”

    So some infallible person is going to be the supreme planner where everyone will have their needs taken care of and nirvana will be reached!? Unfortunately history shows that every time this system has been tried it leads to death, disaster and immense human suffering. Maoist China, Cambodia, USSR, and Venezuela being the latest example of the utter failure of this system.

    You have to describe how to avoid this outcome if you want to adopt it because the current system with all its faults is orders of magnitude less damaging to humanity.

  10. So all those pundits that thought Winston Peters is/was ‘a spent force’ – think again as he knew that night on the podium with our new ‘kinder, gentler’ PM Jacida Adern that the new Global Finanial Crash of 2019/20 ‘resession’ was coming and that was why he agreed to side with Labour as a coalition partner; – do you remamber that speech?.

    https://www.tvnz.co.nz/one-news/new-zealand/happened-jacinda-ardern-says-honour-and-privilege-form-next-government-winston-peters-goes-left

  11. This fails to understand what economic growth actually is. It is not merely increasing out put like making more cars. It is about getting more value from the same level of inputs.

    • Wrong Gosman. Increases in “productivity” or “efficiency” still requires the same expendable wealth of consumers of said products. Making things ever cheaper (e.g. a trend in technology) does not increase GDP since said product is sold at ever decreasing prices (i.e. increases in productivity are by definition deflationary).

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