Janine Starks is a financial commentator specializing in banking, personal finance and fund management.
OPINION: How will New Zealand emerge from the cost of living crisis and impending recession?
This is a big question, and it depends on the ideological position of the government and what we support.
Europe versus America in the 2008 global financial crisis is a different, but thought-provoking, case study.
Our own government needs to start saying very clearly what ideology it intends to follow.
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As individuals with different salary levels, family sizes and mortgages, we all have a unique vision of how the next two years will affect us.
But we are where we are.
Inflation is high, but not galloping. Employment is high. Trying to limit salary rounds right now is a game of toothpaste in the tube. Pass.
The goal is to get ahead of the curve and shift expectations, so that the next cycle is less. This round must be paid.
You will hear spiraling and loss of control noises. A few twists are bound to happen I’m afraid because the goal is to quickly peak and change the slope of the spiral. Wages simply have to rise, otherwise we end up with a spiral of social costs. There is a human price that balances everything.
Inflation rarely stops overnight, so don’t expect pressure on wages either. This is all part of a normal but major structural shift in the economy and is destined to be a two to three year chapter in a decade long story. Some countries have made better local decisions than us, but this cannot be resolved now.
The European and American duology
If there was ever a time in recent history when the “macro” actions of our government and reserve bank were going to affect our personal finances, we have arrived.
Thinking back to the global financial crisis of 2008, when the banking system suffered massive bailouts, governments printed money to finance it. Known as QE or quantitative easing, each central bank created a bond on its own balance sheet and produced e-money on the other side of the accounts.
The increase in money supply went unnoticed by ordinary workers because inflation did not occur. Yet he did. It manifested itself in the form of house prices and stock prices that rose dramatically over the next 10 years. Asset owners boomed and people without savings couldn’t see the inflation.
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When the pandemic hit, we thought we could get away with this kind of bailout again. This time it was not the banks that we were saving, but the companies, the workers and their jobs. It was more altruistic.
The 2008-2014 money print was a button down from the 2020-2021 bazooka. The money went into different hands.
Asset price inflation has taken hold again, but inflation has spread more widely, thanks to ongoing supply issues with sick workers and the war in Ukraine. Good consumer price inflation is here and it causes much bigger social problems. Efforts to cool it seem destined to end in recession for many countries. Negative growth for two quarters constitutes an economic recession.
In 2008, the United States and Europe had very different ideologies in how they dealt with the ongoing decline. The United States won.
America has passed into crisis. It took what is called a “Keynesian” approach (after economist John Maynard Keynes). If you stop unemployment and stimulate consumption and demand, the economy will grow. The idea is to stop a negative confidence spiral, where lower spending, job losses and bankruptcies lead to slower growth and lower tax levies.
Former US President Barack Obama used major stimulus packages and big investments in key industries. The US recession was short-lived and the economy grew.
On the other hand, the Europeans have become “Austerions”. It was a new label for austerity (to be tight with money). Nobel laureate Paul Krugman was behind this one. They wanted to reduce the size of the European welfare state because it was considered unaffordable.
The European Central Bank, the International Monetary Fund and the European Commission, the trio known as the Troika, have all backed him. Some countries like Germany did well, but Ireland, Greece, Spain and Portugal found themselves in dire straits. Growth in the UK stalled in 2010 with austerity plans.
Austerity has also had a domino effect within their healthcare systems. Suicide rates have increased in some countries, hospital capacity has been reduced, people with chronic diseases have not been able to access the best medicines and there has even been an increase in HIV in Greece caused by increased consumption of drugs.
The social consequences do not repair themselves at the same speed as economies and have a horrific toll at the individual level.
Europe is structurally mangled, with unemployment taking the place of a currency that cannot depreciate and appreciate between countries. It is far from being the United States of Europe. War is upon us and it is very likely that we will see a repeat of poor performance in another recession.
What will New Zealand choose?
It is up to the political ideology of the government to decide how much influence it puts on Keynesian, neoliberal, Austerian or monetarist policies if we enter a recession.
As can be seen from the European experience, the trajectory and depth of a crisis can be very different. An intellectual case can be made for most theories, but not all results will be equal.
There are good reasons to support responsible growth-oriented government spending. Correcting our long-term underinvestment in the health system will also be crucial. Our debt levels will need to be taken care of more slowly over time.
A period of recession in New Zealand seems inevitable, but the trajectory is clearly not.
Janine Starks is the author of www.moneytips.nz and can be contacted at [email protected] She is a financial commentator with expertise in banking, personal finance and fund management. Opinions are personal and general in nature. They do not constitute a recommendation for anyone to buy or sell a financial product. Readers should always seek specific independent financial advice tailored to their own circumstances.