Archive | Economy

Migrant inflow up as exit count adjusted down

Statistics NZ has created a highly confusing, and moving, picture of migration with its new formula, which became the official formula last month.

But the long & short of it is that emigration has risen sharply and immigration continues to decline.

Image above: The new series in figure 1 shows the final estimates from May 2015 to August 2017, and provisional estimates from September 2017 to December 2018, for the outcomes-based measure of migration. An experimental outcomes-based series is shown from December 2001 to June 2017 to give a longer time series.

The count for the year to December – a provisional estimate – is a net inflow of 48,300, ± 1,800, compared to 52,700(± 200) for the previous 12 months.

The ± symbol occurs a lot in these statistics, as initial figures are revised over the following months, to be finalised after 16 months.

That’s happened with the figures for the year to November, originally issued as a net inflow of 43,400 (± 1,500), now revised to an estimated 48,000 (± 1,200). Statistics NZ’s population insights senior manager, Brooke Theyers, said: “This is driven by changes in estimated migrant departures, from 100,600 (± 1,200) to 96,200 (± 1,000) for the year ended November 2018. Migrant arrivals remained relatively unchanged.”

For the December year, migrant arrivals were provisionally estimated at 145,800 (± 1,700) and migrant departures at 97,500 (± 1,400).

Mrs Theyers said that, compared with total border crossings, the number of migrants is very small: “Of every 50 people crossing our border, typically 49 are short-term movements and only 1 is a migrant arriving or departing.

“Of the 14 million border crossings in the December 2018 year, 81% are currently classified with certainty. The remaining 19% represent 2.6 million border crossings, so a small change can affect the migration estimates.

“The migration estimates become more certain after each subsequent month. In December, 1 in 4 arrivals are classified with certainty. This increases to 9 in 10 after 4 months. Therefore we expect the monthly revisions to become relatively small after about 5 months, as we can calculate the duration of stay/absence more definitively.”

Net inflow 270,000 over last 5 years

Mrs Theyers said the last 5 years – 2014-18 – had the largest net migration gains ever in New Zealand’s history, with an estimated 270,000 more migrant arrivals than migrant departures. An estimated 700,000 migrants arrived and 430,000 migrants departed over this period.

Most migrants arrived on work, visitor or student visas. However, by definition, they stayed for at least 12 months after extending their visa or transitioning to other visa types, including residence visas: “Even though many migrants arriving only stay for a year or 2, it’s important to count them as migrants and not short-term visitors. They are part of our resident population, which has implications for infrastructure & service provision.”

Using the new measure, annual net migration has gradually fallen from the record peak of 63,900 in the year ended July 2016, reflecting an increase in migrants leaving – in particular, non-NZ citizen departures.

Earlier story:
25 January 2019:
November net migrant inflow down 40%, annual rate down 19% as new measure kicks in

Attribution: Statistics NZ.

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US debt races to new heights

The US national debt whizzed through the $US22 trillion mark this week. It takes about 30 seconds to add another $US1 million to the total.

The US Treasury’s count is running about $US3 billion ahead of the US Debt Clock website’s, reaching $US22.01 trillion on Monday. The Debt Clock made the record $US22 trillion mark overnight and was up another $US9.8 billion this morning.

Treasury records show the national debt was $US19.95 trillion when Donald Trump became president on 20 January 2017.

The US Debt Clock website shows the US federal budget deficit is approaching $US870 billion.

The country’s gross domestic product is approaching $US20.9 trillion and its gross debt:gdp ratio is at 105.35%.

Links: US Treasury, debt to the penny
US Debt Clock

Attribution: US Treasury, Debt Clock.

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6 takeouts from Orr’s ‘nothing much to say’ analysis

Reserve Bank governor Adrian Orr, at today’s monetary policy announcement release.

Reserve Bank governor Adrian Orr’s unsurprising announcement today that the official cashrate would stay at 1.75% told me this:

  • The NZ economy is weak
  • Downturns elsewhere in the world could weaken it further
  • Costs might still increase
  • Businesses could speed the rise in inflation by passing on costs quickly
  • The Reserve Bank needs inflation to get up to 2% to show the bank’s performing properly, and
  • Government spending on hospitals, housing & transport infrastructure will prop up the internal economy.

Migration & banks’ role not discussed

Mr Orr gave migration a one-liner: “Net immigration continues to ease, slightly reducing aggregate demand.” And he didn’t mention one other powerful force: Commercial banks’ performance, which has the power to raise or lower housing expectations & business intentions.

He did say in the monetary policy statement, on housebuilding: “A range of capacity-related constraints mean that many construction firms cannot expand production enough to keep up with demand. Firms report that labour shortages, credit constraints & a lack of land with suitable infrastructure are limiting further growth in the sector. These constraints are expected to limit residential investment growth in the near term.”

He also mentioned in the policy statement there was a risk of economic slowdown, and therefore the chance the bank would cut its cashrate in support: “There is a risk that economic growth could slow down further over the next year if a global slowdown reduces demand for our products. Should that happen, we could lower interest rates to support employment and ensure inflation remains around 2%.”

Since its November statement, the Reserve Bank has lowered its projection for gdp growth in the medium term, based on a lower growth assumption for potential output. Some of this decline is attributed to the fall in residential investment.

Some of the projection figures:

  • The annual rate of gross domestic product (gdp) growth reached its lowest point in 5 years in the September 2018 quarter – 2.6% versus 2 sharp drops to 1.8% in the first & fourth quarters of 2013.
  • The Reserve Bank projects in its latest monetary policy statement that the gdp growth rate will rise to 3.1% through to the September quarter this year, then ease steadily through to the March 2022 quarter, all the way down to 2.1%.
  • The bank does see gdp growing steadily, in small steps. Assuming gdp (production) of $63.6 billion this quarter (in 2009 money terms), the bank projects growth of $5.1 billion through to the March 2022 quarter – an 8.1% rise over 3 years.
  • It expects New Zealand’s net foreign liabilities to hold at around 53-54% of gdp over the next 3 years. And it expects the labour force participation rate, which was at 65.1% (seasonally adjusted) in 2000 and reached 70% in the September 2016 quarter, to have topped out at 71% in the September quarter just gone and to sit at 70.9% for the rest of its projection period. It expects average hourly earnings to have risen by 2.8% in the December quarter, to rise 3.8% in this quarter, and rises then to sit mostly in the low 3%/year range.
  • The bank & CoreLogic project that CoreLogic’s house price index will continue its decline from a peak increase of 15.1%/year in the December 2016 quarter to a rate around 2%. Since that peak, the index rises were 12.8%/year in the March 2017 quarter, dropping to 6.4%/year in the following quarter, to a projected 3.2% in the December 2018 quarter and to 2.6% this quarter. Looking forward, they see 3 bigger rises in the next 3 quarters this year (4.3%, 4.7% then 4%), then index rises mostly around 1.9-2.1%/year through to 2022.

The release statement:

Apart from the possibility of a cashrate cut to combat a decline in international trade, Mr Orr said he expected the rate to stay at 1.75% through this year & next.

In his media release he commented: “Employment is near its maximum sustainable level. However, core consumer price inflation remains below our 2% target midpoint, necessitating continued supportive monetary policy.

“Trading-partner growth is expected to further moderate in 2019 and global commodity prices have already softened, reducing the tailwind that New Zealand economic activity has benefited from. The risk of a sharper downturn in trading-partner growth has also heightened over recent months.

“Despite the weaker global impetus, we expect low interest rates & government spending to support a pick-up in New Zealand’s gdp growth over 2019. Low interest rates, and continued employment growth, should support household spending & business investment. Government spending on infrastructure & housing also supports domestic demand.

“As capacity pressures build, consumer price inflation is expected to rise to around the midpoint of our target range at 2%.

“There are upside & downside risks to this outlook. A more pronounced global downturn could weigh on domestic demand, but inflation could rise faster if firms pass on cost increases to prices to a greater extent. 

“We will keep the official cashrate at an expansionary level for a considerable period to contribute to maximising sustainable employment, and maintaining low & stable inflation.”

Link: Monetary policy statement

Attribution: Bank release, monetary policy statement.

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Countdown to 5 million population is on

Statistics NZ expects New Zealand’s resident population to reach 5 million late this year or in 2020, based on recent trends, after hitting 4.9 million at the end of September.

New Zealand’s population growth is trailing close behind Australia’s 2 biggest cities – the Australian Bureau of Statistics said Melbourne’s population reached 5 million in September and Sydney’s was 5.2 million, although research by the independent Population Australia has Sydney above 5.6 million. Australia’s population rose by 1 million in 31 months to 25 million, reaching that mark on 7 August.

Statistics NZ said in a release yesterday: “It took 30 years to move from 3 million (in 1973) to 4 million (in 2003). But it is likely to take only about half that time to increase by another 1 million – about 16 years. In 1908 the country had just 1 million people living here.”

How fast is New Zealand growing now?

According to Statistics NZ’s population clock, New Zealand’s population is increasing by one person every 5 minutes & 26 seconds.

Population growth reflects both patterns of migration & ‘natural increase’ (the difference between births & deaths). In the year ended September 2018, the population increased nearly 90,000. Over two-thirds of that was from net migration, and the rest from natural increase, with 27,000 more births than deaths.

This 1.9% growth for the September 2018 year was down from a high of 2.1% in 2016.

Those rates are strong compared to the much slower 0.5% in 2012, which was driven by natural increase during a period when the net migration flow was outward.

Statistics NZ’s latest provisional estimate of annual migration in the year ended November 2018 was 43,400, plus or minus 1500. This was the first official release of estimates using the ‘outcomes-based’ measure, which replaces the previous ‘intentions-based’ method of measuring migration.

The organisation says the outcomes-based measure is more accurate and this will flow through into other data uses, including official population estimates.

But it recognises that migration is highly variable, both month to month and over the years: “While annual net migration has been high in recent years, there have been other periods when many more people left New Zealand than arrived here. For example, from the mid-1970s there was an annual net migration loss that went on for many years.”

One other feature apparent in Statistics NZ’s monthly migration figures is the level of churn – more NZ citizens leaving than returning, and far more non-citizens arriving. Total departures jumped from 82-88,000/year in 2009-10 to 100-102,000/year in 2011-12, then fell below 90,000/year for the next 5 years, dropping to 73,000 in 2014. In the year toNovember 2018, however, exits jumped from 89,000 to almost 101,000, led by a rise in departures of non-citizens.

How many new Kiwikids are born each year?

Statistics NZ said while net immigration had dominated population growth since 2013, births had been relatively steady at about 60,000/year for the last 6 years, despite a decline in birth rates. In other words, the number of births/1000 people has been falling, but the growing population means total births remain at relatively high levels, after reachinga recent peak of almost 65,000/year in the period 2007-10.

New Zealand’s total fertility rate in 2017 was down to 1.8 births/woman, its lowest recorded level. 

Despite a much smaller population almost 60 years ago, there was an even greater number of babies (over 65,000) born in 1961–62, when the birth rate/1000 people was higher. In 1961, the total fertility rate was 4.3 births/woman, more than double the replacement level of 2.1.

What’s the effect of our growing & aging population?

As New Zealand’s population grows & ages, generally slightly more people die each year (almost 33,000 in the year to September 2018) partly offsetting the population growth from babies & new immigrants.

Statistics NZ said the number of deaths/year exceeded 30,000 for the first time in 2011: “Deaths are likely to increase, despite increasing life expectancy, because of the growing population, especially in older age groups.”

Since the early 1950s, life expectancy for both men & women has increased by more than a decade. Based on death rates in 2015–17, life expectancy at birth is 80 for men & 83 for women.

When will we get to 6 million?

Further ahead, Statistics NZ said: “Our population projections are an indication of the overall trend, rather than exact forecasts year by year. They are not predictions – the actual population growth could be lower or higher than median projection, depending on factors including highly volatile migration.

“The latest 2016-base projections indicate that New Zealand will probably reach the 6 million mark in the mid-2040s. However, it could be as soon as the 2030s, particularly if migration remains at historically high levels.

NNZ population clock
Births & deaths: Year ended December 2017
New Zealand abridged period lifetable: 2015–17 (final)
How accurate are population estimates and projections?

Earlier stories:
25 January 2019: November net migrant inflow down 40%, annual rate down 19% as new measure kicks in
13 September 2018: Melbourne sees still higher land prices & shrinking house lots as population hits 5 million

Attribution: Statistics NZ release.

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Fed keeps withdrawing securities, and US debt level keeps soaring

The US Federal Reserve’s open market committee voted yesterday to maintain its federal funds rate target range at 2.25-2.5%, and to continue to withdraw $US50 billion/month of Treasury & mortgage-backed securities from the market.

In a release from Fed chair Jerome Powell, the committee said the labour market continued to strengthen and economic activity had been rising at a solid rate: “Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier last year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Although market-based measures of inflation compensation have moved lower in recent months, survey-based measures of longer-term inflation expectations are little changed…

“The committee continues to view sustained expansion of economic activity, strong labour market conditions & inflation near the committee’s symmetric 2% objective as the most likely outcomes. In light of global economic & financial developments and muted inflation pressures, the committee will be patient as it determines what future adjustments to the target range for the federal funds rate may be appropriate to support these outcomes.”

Debt:gdp ratio carries on soaring

While the Fed sat on its hands on interest but continued tightening on credit, the US Congressional Budget Office said on Monday it projected that federal debt would grow to equal 93% of gdp (gross domestic product) by 2029.

The office said that, as the effects of fiscal stimulus wane, projected economic growth would fall back below the historical average.

You can see the extraordinary jump in debt arising from quantitative easing that began in President George Bush Jr’s last year and continued through the Obama years.

President Donald Trump could reasonably feel aggrieved that firm measures weren’t taken sooner to limit the GFC-inspired deficit. However, he’s exacerbated the problem. His tax cut had a brief positive impact and he’s carried on lifting the debt level.

AsI write this, the US Debt Clock shows US national debt just $US31 billion short of $US22 trillion. That will take just under 13 days to click over, at $US1 million every 36 seconds.

Monday’s report is the latest in the office’s series of regular reports on Government finances. It projects a federal budget deficit of about $US900 billion this year and annual deficits of $US1 trillion-plus starting in 2022.

“Over the coming decade, deficits (after adjustments to exclude shifts in the timing of certain payments) fluctuate between 4.1-4.7% of gdp, well above the average over the past 50 years. The office’s projection of the deficit for 2019 is now $US75 billion less – and its projection of the cumulative deficit over the 2019–28 period $US1.2 trillion less – than it was in spring (the first quarter of) 2018. That reduction in projected deficits results primarily from legislative changes – most notably, a decrease in emergency spending.”

The Congressional Budget Office said the race to increase debt would take the deficit from 93% of gdp in 2029 to 150% in 2049, and added: “Moreover, if lawmakers amended current laws to maintain certain policies now in place, even larger increases in debt would ensue.”

Since President Lyndon Johnson achieved a surplus in 1969, the only other president to record surpluses was Bill Clinton (his second term, 1998-2001). The Balance website gives details of each president’s performance, and background factors to the whole deficit picture.

What does it matter to us?

It matters to the whole world in a variety of ways.

The first impact point is that the $US remains by far the largest currency for international trade. China & Russia have conducted some transactions between them in local currency, and China is likely to shift further from US influence if it can.

But, as the US gathers Western support against Chinese technological transgressions (the reports last year by the US Trade Representative and White House Office of Trade & Manufacturing were the basis; they were highly slanted reports, relying on assertion & allegation without presenting fact; but this month’s allegations of criminal activity sound like they rely on fact), international trade stands to become further distorted by ideological & hegemonic stances underlying the tariff wars.

As those issues move to the foreground, the health of the currencies we trade in will become more important, and the health of the $US at the moment is precarious.

Congressional Budget Office, 28 January 2019: The budget & economic outlook: 2019 to 2029
The Balance, updated 24 January 2019: US budget deficit by president
US Debt Clock

Attribution: Federal Reserve, Congressional Budget Office, The Balance, US Debt Clock.

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November net migrant inflow down 40%, annual rate down 19% as new measure kicks in

If you mix 2 different methods of measuring migration – and even if you use only the new measure – New Zealand suffered an extreme decline in its population gain in November. Statistics NZ’s calculations for that month, out today, are the first where it measures everything by the outcomes-based measure, which fully replaces the intentions-based method.

The last figures using the old measure were a net inflow of 6668 for the month of October and 61,751 for the year to October – a drop of 14.7% from the migration peak inflow of 72,402 in the July 2017 year.

The new method starts with a provisional estimate, which is updated over 4 months. A feature of the new figures is the initial lack of precision, hence ± appears everywhere.

Migrant arrivals were provisionally estimated at 144,000 (± 1,300), migrant departures at 100,600 (± 1,200).

The provisional estimates of net migration, this November & year to year November, and the previous, using the new method:

Month: 2672 (4465), down 40.2%

November year: 43,416 (± 1,500), 2017:53,831, so a 19.3% fall assuming the numbers remain precisely as they are today.

Using either measure, therefore, the outcome is a very big drop in the net migrant inflow since the July 2017 peak.

Under the outcomes-based measure, annual arrivals have been in the range of 140-144,000/year for the last 4 years. In 2010-12, arrivals were around 94-95,000/year.

Departures jumped from 82-88,000/year in 2009-10 to 100-102,000/year in 2011-12, then fell below 90,000/year for the next 5 years, dropping to 73,000 in 2014. This year, however, exits have jumped from 89,000 to almost 101,000, so the big change in net inflow is the emigration rate.

Note: This is a basic story. I’ll write a fuller version once I’ve been through all the figures. If you want to see what all these statistics look like at the official end, click the link below.

Link: Statistics NZ, November migration details

Attribution: Statistics NZ release & tables.

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Fed disobeys Trump tweet, lifts funds rate

The US Federal Reserve disobeyed the Commander-in-Chief this morning and raised its funds rate target range another quarter percent, to 2.25-2.5% – the fourth rate hike of the year.

That’s up from a range of 1-1.25% in November 2017.

President Donald Trump had tweeted yesterday: “I hope the people over at the Fed will read today’s Wall Street Journal Editorial before they make yet another mistake. Also, don’t let the market become any more illiquid than it already is. Stop with the 50 B’s. Feel the market, don’t just go by meaningless numbers. Good luck!”

The background

The Fed supposedly makes its decisions independently, although its members are nominated by the president. Today’s decision was very independent. Confronting the central bank’s open market committee as it made its interest rate decision overnight NZ time, US sharemarkets slumped early in the week but rebounded ahead of the Fed decision, made on Wednesday afternoon local time.

The Wall St Journal ran an editorial on Tuesday laying out reasons for the Fed to pause from its recent pattern of quarterly rate increases, a view Mr Trump obviously concurred with. The newspaper also ran a story that day questioning a basic of Trump ideology (he’s an interest rates low, asset prices high kind of guy). In that story, the Wall St Journal said Mr Trump’s tax cuts had boosted growth & jobs (specifically, it lifted a quarterly gdp return which Mr Trump could highlight to show he was improving the economy), but questioned the cost, saying: “The deficit has ballooned, and most of the benefits went to corporate profits rather than employees.”

Against the background of petulant ‘Me-me-me!’ criticism, the Federal Reserve’s debt is money owed – money issued in repayable securities.

The US Debt Clock website shows US national debt racing towards $US22 trillion – it’s about 7½ days from rolling past $US21.9 trillion. Through its quantitative easing programme, the Fed built up treasury stock of about $US4.5 trillion in its attempts to maintain economic equilibrium in the wake of the global financial crisis that began 11 years ago, and its method of reducing that debt mountain is to cancel bonds instead of rolling them over. It’s now cancelling up to $US30 billion/month of Treasury securities & $US20 billion/month of agency mortgage-backed securities as they mature, instead of rolling them over – hence Mr Trump’s Twitter reference to “Stop with the 50 B’s”.

Through that programme, the Fed has reduced its debt mountain by about $US400 billion. But a quarter-percent raise in the interest rate will add $US55 billion/year to the national debt, apart from its other impacts.

In today’s statement, the Fed made no mention of its debt reduction programme.

The Fed release on its decision:

“Information received since the Federal open market committee met in November indicates that the labour market has continued to strengthen and that economic activity has been rising at a strong rate. Job gains have been strong, on average, in recent months, and the unemployment rate has remained low. Household spending has continued to grow strongly, while growth of business fixed investment has moderated from its rapid pace earlier in the year. On a 12-month basis, both overall inflation & inflation for items other than food & energy remain near 2%. Indicators of longer-term inflation expectations are little changed, on balance.

“Consistent with its statutory mandate, the committee seeks to foster maximum employment & price stability. The committee judges that some further gradual increases in the target range for the federal funds rate will be consistent with sustained expansion of economic activity, strong labour market conditions, and inflation near the committee’s symmetric 2% objective over the medium term. The committee judges that risks to the economic outlook are roughly balanced, but will continue to monitor global economic & financial developments and assess their implications for the economic outlook.

“In view of realised & expected labour market conditions & inflation, the committee decided to raise the target range for the federal funds rate to 2.25-2.5%.

“In determining the timing & size of future adjustments to the target range for the federal funds rate, the committee will assess realised & expected economic conditions relative to its maximum employment objective & its symmetric 2% inflation objective. This assessment will take into account a wide range of information, including measures of labour market conditions, indicators of inflation pressures & inflation expectations, and readings on financial & international developments.”

Federal Reserve Board & Federal Open Market Committee release economic projections from the December 18-19 FOMC meeting
Wall St Journal, 18 December 2018: The Trump Tax cuts boosted growth & jobs, but at what cost?
Wall St Journal, 18 December 2018: As Fed begins meeting, Trump again calls for no rate increase
US National Debt Clock
Market Watch, markets page

Earlier stories:
2 December 2018: The debt clock pounds on, Trump & Xi use different decks of cards, Lagarde wants illusions to come true
1 December 2018: US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations
3 August 2018: Fed to pull $US40 billion/month out of market

Attribution: Fed release, Wall St Journal, Twitter, US Debt Clock.

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The Build Act is new US anti-China weapon

In the hubbub over the US-China trade war, one element of it skipped my notice: an act passed through both chambers of the US Congress which will heighten tension, reduce environmental safeguards & politicise aid.

The Build Act (full title, the Better Utilisation of Investments Leading to Development Act) is overtly political in its requirement for projects to serve a US foreign policy purpose.

This will be done through a new organisation, the International Development Finance Corp (IDFC), which will replace the Overseas Private Investment Corporation (OPIC), set up in 1969.

Sarah Brewin, an agriculture & investment advisor to the International Institute for Sustainable Development, wrote about the enactment of the policy change in an article for the Independent Media Institute, which appeared on EcoWatch last week.

Her key paragraph:

“The Build Act requires the IDFC to develop guidelines & criteria to ensure that each project it supports has ‘a clearly defined development & foreign policy purpose.’ The requirement that all projects serve a foreign policy purpose, combined with weakened environmental protections, could see the IDFC supporting environmentally damaging projects if they are seen to be in US foreign policy interests – for instance, if it was thought that if not financed by IDFC, the project would instead be financed by a ‘strategic competitor,’with debt, influence & diplomatic relations accruing to that competitor rather than the US.”

The Build Act advances President Donald Trump’s view that human activity is the cause of climate change, while also advancing his anti-China cause.

EcoWatch, 4 December 2018: A US-China investment war is quietly emerging, and the environment will be the ultimate casualty
Reuters article, 4 October 2018: Congress, eying China, votes to overhaul development finance
International Institute for Sustainable Development

Attribution: EcoWatch, Reuters.

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The debt clock pounds on, Trump & Xi use different decks of cards, Lagarde wants illusions to come true

I did a longer count on Sunday morning to see if my 36 seconds estimate of how long it takes the US Debt Clock to add $US1 million to the country’s national public debt was correct. From 8.55am, my estimate put the tick over to a total $US21.8 trillion at 9.14am. It was right on time.

While this is a game that can amuse a small mind, it’s also a deadly serious game.

The US Federal Reserve will feel obliged to lift its funds rate at least once in its next 3 scheduled meetings and has warned of a possible 3 raises in 2019, but…. And it’s a big but.

Inconvenient for Trump’s power game

President Donald Trump doesn’t want to add $US55 billion/year to the interest bill through one quarter-percent raise, let alone 2 or 3 of them. But his primary target at the moment is to get a trade deal with China, primarily requiring a step back from technology transfer which US officialdom has deemed illicit.

The answer to the question, which will be posed in Buenos Aires this afternoon NZ time as Mr Trump & China’s president-for-life, Xi Jinping, sit down to dinner, will require an answer from the Chinese leader: How long does he want to be president for life?

If his answer is (1), a short time, he can acquiesce to every Trump demand, or even just that main one.

If his answer is (2), a long time, he can tell Mr Trump there is no way he can acquiesce, because he would be out of office, and probably out of breath, around the time his plane lands in Beijing. For that answer he needs a backup plan that saves face, puts a convoluted timeframe in place for technology change, reduces some US tariffs and involves at least some US oversight of change plus agreement allowing a better deal for US exports to China.

Even if China isn’t breaking US & Word Trade Organisation trade agreements, Mr Xi is in no position to disagree. His country’s trade position is worsening, China is spending reserves propping up malfunctioning businesses, and he doesn’t have a tariff response to match Mr Trump’s.

One Xi option: distractions

Mr Xi can look to alternatives while simply smiling with his lips pursed, as he does in all his photos with Mr Trump. He can widen China’s South China Sea military presence by adding drills in the North Pacific Ocean, where the only notable dot of land between China & California is Hawaii, and increasing investment in the South Pacific, perhaps along with some military presence.

If he relaxes the debt arrangements for Belt & Road investment, China will be able to advance that programme more rapidly. African nations are an open target and less of a focus for the US.

There is thus scope for Mr Xi to ease tension and create distractions, probably in timeframes to suit himself so long as he indicates a confirm response on addressing technology transfer.

For Mr Trump, that leaves the question of the growing US debt, which he needs to address while avoiding tipping the stock markets into reversal. He can do that by agreeing a China trade deal that sees more industrial activity in the US, lifting trade & stock positions on the one hand while at least slowing the rise of national debt on the other.

As Trump talks proprietary, Lagarde talks propriety

International Monetary Fund manging director Christine Lagarde was plainly focused on these issues when she sent out a release this morning NZ time calling for “decisive & collaborative action” by Group of 20 leaders “as global growth moderates and risks increase”.

She didn’t name anybody, certainly didn’t propose any specific
solutions, but did throw a couple of figures into the air to show effects if the trade war spreads.

She said the IMF estimated 0.75% of global gdp could be lost by 2020 (that’s a year away) “if recently raised & threatened tariffs were to remain in place and announced tariffs were implemented”.

On the other hand, she said, “If, instead, trade restrictions in services were reduced by 15%, global gdp could be higher by 0.5%. The choice is clear: there is an urgent need to de-escalate trade tensions, reverse recent tariff increases and modernise the rules-based multilateral trade system.”

For Mr Trump, Ms Lagarde’s recipe is easy: Mr Xi accedes to his primary demand, in some form, and US trade will be rising in crucial markets ahead of the 2020 presidential election.

For Mr Xi, it’s harder. He needs to turn China’s domestic markets around but also reduce depletion of reserves, and he can only do both of those by agreeing some sort of external change. The trick will be to turn the technology transfer dispute into a win, which he can do by negotiating terms that appear favourable.

He can put some pressure back on Mr Trump by delaying change, and thereby delaying the impetus of business growth back home, which Mr Trump will be focused on heading to November 2020.

Ms Lagarde also had her eye on an issue which the 2 trade giants have been setting aside, “the excessive level of global debt – about $US182 trillion by the IMF’s estimate”. That debt total is international, public & private, and disguised because much of it is in the form of derivatives. A small tumble could quickly escalate into a worldwide collapse.

Her solution is one the “highly indebted emerging-market & low-income countries” she spoke of on one side of the balance sheet are unable to dictate, and one derivative marketeers are unlikely to support wholeheartedly while they’re making mega-returns from scalping their clients.

She said: “It is important, particularly for highly indebted emerging-market & low-income countries, to rebuild buffers and reverse procyclical fiscal policies. Increasing debt transparency, such as on the volumes & terms of loans, by borrowers as well as lenders, is as important as supporting debt sustainability.”

Ms Lagarde recommended 5 policies to the G-20’s members:

  1. Fix trade – priority No 1 to boost growth & jobs
  2. Continue to normalise monetary policy in a well communicated, gradual, data-driven manner – and with due regard to potential spillover effects
  3. Address financial risks, using micro- & macro-prudential tools to tackle problems related to leveraged lending, deteriorating credit quality & high exposure to foreign currency or foreign-owned debt
  4. Use exchange rate flexibility to mitigate external pressures, avoiding tariffs & other policies that could weaken market confidence, and
  5. Eliminate legal obstacles to the participation of women in the economy. This is key to tackling high & persistent inequality, and would add to the growth potential of all G-20 countries.

Realistically, what chance?

The first of those policies is less about trade, more about a power struggle deep into the 21st century. The big players will treat innocent bystanders like roadkill.

“Normalising” monetary policy is about handing to future politicians the gloss the incumbents want for themselves. Few will heed Ms Lagarde’s call. The debt mountain will grow.

Bankers can adopt more conservative practices – but what happens when competitors don’t? Or if a bailout is a prospect?

A large financial player – say, one of the world’s big banks – can adjust a small country’s exchange rate at will. Ms Lagarde is talking about exchange rates floating on the tide, untainted by sharp practices. Wholesome, unmanipulated. In short, an illusion.

And last, Ms Lagarde is talking about unravelling the deeply embedded misogyny that ensures inequality is the norm in much of the world. Her recommendation is to be rational, but she’s talking about upending centuries of religious & cultural dogma that it’s been convenient for males to uphold.

As Mrs Brown of Irish TV programme fame would say: “That’s nice.”

US Debt Clock

Attribution: IMF release.

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US debt level pushing fast towards $US22 trillion, and a look into Fed deliberations

On my way through a selection of economic articles & announcements this week, I looked at the US Debt Clock website a couple of times, and pondered how long it would be until the US clocked up $US22 trillion of national debt.

In addition, the US Federal Reserve open market committee issued the minutes yesterday from its 8 November meeting, showing there was considerably more discussion about future interest rate strategy than blunt headlines of up versus hold indicated.

According to the St Louis Federal Reserve Bank in its latest quarterly calculations, also out yesterday, total US public debt at 30 June was $US21.195 trillion – a long way off $US22 trillion, but rising fast.

After a debt crisis in early 2013, the legislated debt ceiling was raised to $US16.699 trillion in May 2013. President Donald Trump again suspended the debt ceiling on February 9 this year, through to 1 March 2019.

The Committee for a Responsible Federal Budget estimated public debt would hit $US22 trillion in March 2019, but it could happen earlier.

Total public debt went through $US21 trillion on 15 March 2018 and was closing in on $US21.8 trillion this morning. It’s quite hard to run a stopwatch on it, but the debt rises by $US1 million about every 36 seconds. At that rate it should hit $US22 trillion in 84 days – 23 February 2019.

This is a debt picture which makes US President Donald Trump – and plenty of others – keen to hold interest rates down. The US Federal Reserve had begun to raise its federal cashrate, increasing the target range for the federal funds rate to 2-2.25% in September but holding it at that level on 8 November.

US national public debt:gdp.

The St Louis Fed showed federal debt (total public debt) as a percentage of gross domestic product, seasonally adjusted, was 103.84% at the end of the second quarter of 2018, down from 105.23% in the previous quarter and 105.26% in the fourth quarter of 2016.

Debt caution evaporates

Despite those high ratios, now that Barack Obama’s out of office the Republicans don’t seem to have the same caution about rising debt as they used to. They’ve been aided in this reinterpretation of sound policy by having a new president who’s built his business empire on debt, and is keen to lift spending in some sectors, particularly the military budget.

Among interpretations of the Fed open market committee’s November minutes, one view was that the US central bank would hold back from raising its funds rate, which gave the US sharemarkets a boost.

The minutes show the committee went well beyond a yes/no on specific rates, holding a debate on various aspects of policy, including the levels of reserves it would require in an environment where banks had built up reserves as a precaution, making money market rates less sensitive to small fluctuations in the demand for & supply of reserves.

Fed staff also briefed the committee on alternative policy rates. The minutes showed no decision following that discussion, except to continue the discussion on options for long-run implementation frameworks.

The overall federal debt level, and the absence or re-imposing of a debt ceiling, weren’t factors leading the discussion.

Fed surveys strategy options

An examination of market behaviour & market movers’ expectations didn’t disclose any favouring of one policy likelihood over another: “On balance, the turbulence in equity markets did not leave much imprint on near-term US monetary policy expectations. Respondents to the open market desk’s recent survey of primary dealers and survey of market participants indicated that respondents placed high odds on a further quarter-point increase in the target range for the federal funds rate at the December open market committee meeting.

“That expectation also seemed to be embedded in federal funds futures quotes. Further out, the median of survey respondents’ modal expectations for the path of the federal funds rate pointed to about 3 additional policy firmings next year, while futures quotes appeared to be pricing in a somewhat flatter trajectory.”

Later in the minutes, the committee noted: “Almost all participants [staff, advisors & committee members] reaffirmed the view that further gradual increases in the target range for the federal funds rate would likely be consistent with sustaining the committee’s objectives of maximum employment & price stability.”

That read like a ‘We can keep raising the rate and blame somebody else, or blame everybody’ response – perhaps handy, knowing that President Trump wants no rate rise.

The discussion points that followed represented up, down & no change, giving Fed chair Jerome Powell the ability to acquiesce with the president’s preference, or push ahead with lifting the funds rate to a level where it’s closer to the long-term average and allows for easing if conditions worsen: “Consistent with their judgment that a gradual approach to policy normalisation remained appropriate, almost all participants expressed the view that another increase in the target range for the federal funds rate was likely to be warranted fairly soon if incoming information on the labour market & inflation was in line with or stronger than their current expectations.

“However, a few participants, while viewing further gradual increases in the target range of the federal funds rate as likely to be appropriate, expressed uncertainty about the timing of such increases. A couple of participants noted that the federal funds rate might currently be near its neutral level and that further increases in the federal funds rate could unduly slow the expansion of economic activity and put downward pressure on inflation & inflation expectations.”

There was also concern that the committee was signalling intentions – that it would raise rates at stipulated intervals or frequency – and that it would be better to be vague, basing rate changes on new data rather than a programme seen as being set in place.

Quantitative tightening

One aspect of the Fed deliberations that’s been emphasised less is the now-continual withdrawal of maturing Treasury securities from the market at the rate of $US30 billion/month, and agency debt & mortgage-backed securities at $US20 billion/month (assuming that much in each category matures in a month).

Fed view on China

Among global considerations, the US Fed committee’s markets had this to say on China: “In China, investors were concerned about the apparent slowing of economic expansion and the implications of continued trade tensions with the US.

“Chinese stock price indexes declined further over the inter-meeting period and were off nearly 20% on the year to date. The renminbi continued to depreciate, moving closer to 7.0 renminbi/$US – a level that some market participants viewed as a possible trigger for intensifying depreciation pressures. Anecdotal reports suggested that Chinese authorities had intervened to support the renminbi.”

Half-pie view on affordability

The committee minutes surprised me on one issue which is international – the relationship between house prices & interest rates: “Real residential investment declined further in the third quarter, likely reflecting a range of factors including the continued effects of rising mortgage interest rates on the affordability of housing.

“Starts of both new single-family homes & multifamily units decreased last quarter, but building permit issuance for new single-family homes – which tends to be a good indicator of the underlying trend in construction of such homes – was little changed on net. Sales of both new & existing homes declined again in the third quarter, while pending home sales edged up in September.”

The first surprise was the lack of comment on mortgage rates rising despite minimal movement in the base federal funds rate. The second surprise was that the Fed should see higher borrowing costs as affecting “affordability” – presumably the affordability of paying for what’s already bought – without comment on whether this would also bring pressure on house prices, which is a second segment of the affordability question.

Comments on volume alone, without factoring in price movements, leave the question open on whether supply will slump, thus maintaining price levels, or suppliers will agree to lower returns.

This issue is playing out in Australia at the moment, particularly in Sydney, where oversupply based on investor (and especially foreign investor) ambitions & high immigration is being followed by a sharp decline in values.

Different price/mortgage issues will arise in Auckland as immigration declines further, barring of foreign investors takes effect and supply of townhouses & standalone homes rises.

US Debt Clock
Federal Reserve open market committee minutes 8 November 2018
St Louis Federal Reserve Bank, total US public debt
St Louis Federal Reserve Bank, federal debt as percentage of gdp
The Balance, 1 August 2018: US debt ceiling & its current status

Attribution: Federal Reserve, St Louis Federal Reserve Bank, US Debt Clock, The Balance.

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