Shrinkflation

Yes, we know it's very real.

Prof Keen Explains Inflation

This is a good explanation of what is coming, and how those in charge lack the intellect to deal with it.

This is my way of explaining what he's describing: I want to cut down a tree in my backyard, but my axe handle is broken. I can choose to use the axe with the broken handle, and take a long time, or I can buy a new handle. The new handle costs $20 now, when it used to cost $10. Adjusting interest rates won't make the handle cheaper as energy is used to make all axe handles, and so no matter what I do, I am faced with paying more or going without and taking a long time to cut down that tree. Because all economic output consumes energy, if you restrict the flow of energy, prices rise and consumer behaviour has nothing to do with it.

Some will point out that we have had no shortages of fuel, the stock has always been there when needed. That is correct, but why the price of energy rose is due to the reserves being depleted. When Trump surrendered he appears to have done so after being told that the world had about 90 days of oil reserves left. The world had been running by topping up using reserves. Thus, we saw no empty tanks at gas stations, but in the background the feedstock was running low. 

Now we are faced with trying to rebuild refining capacity in the Gulf, and trying to get shipping back to normal. This may take a year or two. In the wake of that, we may be about to experience a major collapse, along with the AI bubble and all the other bubbles.

Auckland House Prices

If you've been watching the news from the US you'd have noticed statements by Janet Yellen, Chair of the Federal Reserve. The US is heading into an inflationary cycle and Fed rates will be rising.

This impacts house prices in New Zealand. The NZ banks fund their lending by borrowing overseas. Currently the cost of that money is very low, with competing major economies offering deposit rates that are zero or close to zero. Therefore New Zealand is an attractive destination for that money looking for a safe haven.

But with US Fed rates rising, money will start heading to the US as the US Dollar is still the safe haven everyone prefers. That means NZ banks will be faced with the higher cost of obtaining funds, and they'll pass that on to the NZ borrower.

It is prudent therefore to avoid debt over the next few years, at least until the impact of Trump policies is fully understood. Home owners could look at fixing their home loan rates, say, for five years if the mortgage is a large one. Reduce credit card debt.

If buying a house right now, maybe look to keep saving, deferring the decision to buy. As rates rise houses will come on the market that are being sold by owners heavily indebted and unable to afford repayments. Yes, house prices could even fall in this scenario. Prices are already plateauing in most of the country and small interest rate rises have already been announced by banks. Expect this trend to continue.

Auckland House Prices

More news about house price rises in Auckland. I'm still amazed that this issue has not been presented accurately by the media. Is this because they also own houses in Auckland?

The situation is this - inflation is out of control. Residential housing was dropped as a link to the CPI (Consumer Price Index) some time ago. If it was still there we'd be seeing inflation like that of the mid-1980's, not this silly 0-2% we have reported now. 

It's monetary inflation, the banks are pumping cash into the system. It's ever increasing flows of cash chasing the same stock of housing. It can't go on as incomes will not be able to service the debt. New Zealand is headed for a bust.

New Zealand, What I Think Is Going On

Two things making the news right now, ever increasing house prices, especially in Auckland, and the plunging milk price paid to dairy farmers. 

Is it Chinese buyers bidding up house prices? Well I think, only partly, in a broader sense it's everyone buying houses, not just the one ethnic group of immigrants and investors.

What I think is going on is monetary inflation, or something akin to that, with money brought in by the banks, not just investors. If you look around the world most developed economies offer very low returns, while others such as Greece are actually bust. In NZ returns are much higher, so the banks look to shift their funds from low interest countries to places like NZ, and the result is funds available for lending to everyone. That means more money available chasing the same number of houses, equalling a general rise in house prices.

We are all recipients of this, particularly when we sell our houses at inflated values. The safety valve of sorts is that a large proportion of those sale proceeds heads to Australia, particularly the Gold Coast.

There is no easy fix here. If NZers are stopped from house trading then the result for the NZ economy will be dire. The house price inflation is just about all that is holding things up. To a certain extent NZ is like a drug addict, hooked on the banks supply.

A possible solution would be controls on the inflows and outflows of foreign exchange. A return to the seventies. It may have to happen.

Then we have the milk export price farmers receive. Something not pointed out but I think is relevant; what happened to world population, did they suddenly stop eating? Hmm? No they didn't, so the drop in NZ milk export price must mean global supply has increased. 

What did you think New Zealand, did you think the rest of the world would be prepared to sit there paying for your milk rather than make it themselves and much cheaper? The big buyers, like China, aren't sitting round twiddling their thumbs, they're setting up farms at much lower cost than in NZ and producing milk at home and in South America, Africa, Asia, even the USA. 

Further complicating this is the ban by Russia on imports from the EU. Dairy makes up a large proportion of that volume and now the EU are dumping their output anywhere they can find a buyer, directly competing with good old NZ.

Here yet again, is another lesson NZ fails to heed. Don't put all your eggs in one basket. NZ gets carried away on the latest big thing, and forgets we need a balanced, diversified and developed economy, making products with real value, middle and high tech, the lot. If we fail to develop, then we're going to see more boom and bust.