Loose monetary policy not solely to blame for present economic conditions.

Martin Wolf in the FT wrote an interesting piece in the FT yesterday talking about loose monetary policy and not to wholly blame the central banks for the economic environment today. Below are some of the main points that he makes:

  • Deregulation of financial markets, free trade and China joining the WTO in 2001 lowered the global inflation rate.
  • Huge savings were prevalent in the global economy – especially in China and Germany
  • Balance global demand and supply = big investment in housing driven by financial liberalisation.
  • COVID – money growth exploded with expansionary monetary and fiscal policy.
  • Fiscal deficit of G7 countries jumped by 4.6%.
  • Monetary – quantitative easing and stimulatory level of interest rates
  • With supply chain issues, China’s lockdown and the Ukraine War, the dramatic increase in demand could not be met by a corresponding increase in supply. See graph
  • Inflation = higher interest rates = shock to banking system
  • Loose monetary not the blame for what has gone wrong in the global economy
  • Mistake to think that there is a simple solution to the failing of the banking systems

Things would not be wonderful if central banks had stood idly by. We cannot abolish democratic politics. Economic policy must be adapted to our world, not to the 19th century. Martin Wolf

Source: IMF

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Transport economics – evolution of containerships and TEU capacity

The principle of economies of scale is fundamental to maritime transportation economics as the larger the ship, the lower the cost per unit transported. This trend has particularly been apparent in bulk and containerised shipping. Since the 1950’s the size and capacity of the containership increased from 500 to 25,000 TEU’s (Twenty-foot equivalent unit) – see table belo

The TEU is referred to as the container which has been the driver of intermodal transportation and its homogeneity means the easy handling of the container between shipping, rail and road. Marc Levinson in his book ‘The Box’ outlined its importance:
‘The value of this utilitarian object lies not in the what it is, but in how it is used. The container is at core of a highly automated system for  moving goods from anywhere, to anywhere, with a minimum cost and complication on the way’. 

The global containership fleet 2000 – 2021
 The trend over the last 20 years is to increase the TEU capacity by building larger ships. The total number of ships in 2000 was 2,606, with the average ship being able to transport 1749 TEU’s. By 2020 the global capacity number of ships increased to 5337 vessels with an average ship being able to transport 4352 TEU’s – see chart. Those containerships that have a capacity of over 2,000 TEU operate in the long-distance trade routes and account for over 89% of the world’s container fleet. Shorter containerships up to 2,000 TEUs made up the other 11% and they operate as feeder services and in short sea shipping.

Of late there has been significant growth in the size of containerships especially the large (ULCS) and mega large containerships (MGX-24) with an overall capacity of between 10,000 – 23,000 TEU.  This equates to 573 ships and accounts for 36% of the total capacity of the container fleet – see chart below.

Fleet Capacity Breakdown by TEU size range.

The Box: How the Shipping Container Made the World Smaller and the World Economy Bigger 2nd Edition – (2016). By Marc Levinson

ALPHALINER – Monthly Monitor – January 2020

Can globalisation help tame inflation?

Supply chain disruptions and large fiscal deficits have been part of the cause of the inflationary problems that have been prevalent in the global economy. Increased aggregate demand from government spending accompanied by supply constraints have seen prices soar. The IMF blog looked at how we should go back on history and look at how globalisation in the past has offered an antidote to inflationary spirals.

In the 1970’s technology improved global supply chains with the introduction of the shipping container which reduced transport costs of goods. Policymakers like the former US Fed Chairman Alan Greenspan see the relationship between globalisation and innovation a transition to low inflation. This idea has been embraced by current Fed Chairman Jerome Powell who talks of not only technology but demographic factors that bring about sustained disinflation. Trade liberalisation had a part of play here with the role of the General Agreement on Tariffs and Trade (GATT) – now know as the World Trade Organisation (WTO) – providing the rules for much of world trade and presided over periods that saw some of the highest growth rates in international commerce – see graph.

Modern inflation targeting by central banks (1-3% in New Zealand) also brought inflation under control as countries established a process that would allow them to attract capital flows or to globalise further. New technologies will produce better growth and increase the potential capacity of the economy (Production Possibility Curve shifts to the right) but requires a lot of cross-border co-operation. Some countries pursue costly ‘friendshoring’ strategies of steering trade to friendly nations and regimes while attempting to hobble rivals. In particular big economies look to protect strategic vital and strategic resources thereby preventing global economic growth. All of this may seem an easy solution to tame inflation but the reality is there are many variables that influence the inflation figure within countries.

Source: IMF Blog: In defense of globalisation

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Globalisation and geo-political tectonic plates

Below is another very good CNBC video which tackles the issues of globalisation and can it bring countries together? It goes right back to the 15th century and the Age of Discovery and mentions when globalisation really began in 18th century Britain with the industrial revolution. However more recently with more populist governments countries has become more protective of their industries of which the US China trade war being an example. This year the war in Ukraine has pushed international relations to breaking point.

2023 will most likely see a significant slowdown in the global economy and the reliance on global trade to function. IMF Chief Economist Pierre Olivier Gourinchas talks of ‘geo-political tectonic plates’ where rising commodity prices, supply chain problems, a refugee crisis and higher central bank interest rates have all pushed the plates (countries) further apart to form trading blocs.

The rise of China and other emerging markets has been the success of globalisation but it has also led to protectionist measures and rebalancing of power. Therefore as a country’s power increases there is a need to adjust the way we deal with this imbalance i.e. some countries economic development has not been matched with their financial and global institutional firepower which is patly due to the dominance of the US dollar. This is ironic as the US economy’s share of global output has declined. Worth a look especially when teaching trade and protectionism – see also the table on pros and cons of globalisation.

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The Paradox of Aid – dumping in developing countries.

Although a few years old now the video below is a good example of dumping – where the exporting country is able to lower its prices below that of the domestic price in the market it is selling into. Useful to show when teaching barriers to trade.

The U.S. spends approximately $37 billion dollars a year on foreign aid – just under 1% of our federal budget. “The Foreign Aid Paradox” zeroes in on food aid to Haiti and how it affects American farming and shipping interests as well as Haiti’s own agricultural markets. The fact that the US dump rice exports on the Haitian market below the equilibrium price severely affects the revenue of local farmers. Should there be a trade-not-aid strategy for developing countries? Below is a very good video from wetheeconomy

The trade-not-aid strategy is based on the idea that if developing countries were able to trade more freely with wealthy countries, they would have more reliable incomes and they would be much less dependent on external aid to carry out development projects. International trade would raise incomes and living standards as poor countries would be able to export their way to economic development.

Globalisation to regionalisation and its impact.

With the global economy experiencing supply chain pressures, inflationary problems, higher interest and geopolitical tensions are we seeing a move to more regionalisation rather than globalisation?

Part of this change has come about from the decoupling of the American, European and Japanese economies from China. This ultimately alters trade and investment flows around the global economy and will mean lower economic growth and less liquidity. For instance consider the restrictions on technology including complex microchips being placed by the US on China. Janet Yellen the US Treasury secretary referred to ‘friendshoring’ which means relocating production to countries that fall within the US economic sphere of influence. Apple’s recent announcement that it would begin sourcing sophisticated chips from North America is the signal that many global firms have been waiting for to begin reducing their exposure to China.

Furthermore as well as the impact of decoupling of trade with China, a shortage of labour will also add to production costs and will result in slower rates of growth. Labour force participation rates have dropped as there have been less migrant workers coming into countries. This scarcity of labour will put further pressure on wages and ultimately inflation. To counteract the latter interest rates will continue to climb and this will lead to further problems:

  • The cost of financing economic expansion will become more expensive.
  • Firms that have lived off 0% interest rates and negative real rates (nominal interest rate – inflation) will face increasing problems on their balance sheets

In the medium term interest rates are determined by inflationary expectations and rates tend to move lower in periods of disinflation and higher in periods of inflation. The risk for all central banks and policymakers is if the rate of inflation goes above that of expectations there can be a further tightening cycle.

Response to shocks – GFC and COVID-19

The GFC and COVID-19 saw the primary policy response of an expansionary monetary policy (near 0% interest) due to insufficient aggregate demand. The result of this policy has changed the economic landscape. Today things are quite different:

  • insufficient aggregate supply,
  • persistent supply shocks,
  • higher inflation,
  • higher interest rates
  • slow growth.

After years of loose fiscal, monetary, and credit policies and major negative supply shocks, stagflationary pressures are now putting the squeeze on a massive mountain of public- and private-sector debt. Recession (negative GDP for two consecutive quarters) seems on the cards.

Source: The Real Economy Blog

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Brexit and the costs of leaving a free trade area.

This is an excellent video from the FT about Brexit. It goes into detail about the costs of leaving a free trade area and how Brexit has impacted small business and investment in the UK. Below are some quotes from the video – useful for the barriers to trade topic.

A French company will buy from Germany because they’ll probably be able to get the same product easier and without any of the extra costs that we’re having to apply to get it out of the UK

We couldn’t ship anything to the EU, nothing. It’s 27 countries, they all have different borders, they all have different rules.

Signing a free trade agreement with New Zealand or Australia has ups and downs of the UK economy, and is probably very, very marginally positive. But it’s nothing like losing a free trade agreement and losing the frictionless trade you had with your biggest trading partner that’s only 20 miles away across the channel.

We lose 4 per cent of our GDP by Brexit. We gain 0.08 per cent by the government’s own estimate through this trade deal with Australia.

The topic Barriers to Trade on elearneconomics has fully integrated flash (cue) cards linked back to the key notes that assist students to understand economic vocabulary, improve their skills, develop knowledge and build their confidence.

New Zealand and Global Economy update.

New Zealand Economy

As we approach the external exam season it is important that you are aware of current issues to do with the New Zealand and the World Economy. Examiners always like students to relate current issues to the economic theory as it gives a good impression of being well read in the subject. Only use these indicators if it is applicable to the question. Indicators that you might want to mention are below.

  • New Zealand’s gross domestic product (GDP) expanded by 1.7 percent in the June 2022 quarter, above market expectations.
  • Coming from record low interest rates the RBNZ has recently increased the OCR by 50 basis points (0.5%). They did consider 75 basis points.
  • A current account deficit of $7.1 billion was recorded in the June 2022 quarter, compared with a deficit of $8.8 billion in the previous quarter (in seasonally adjusted terms)
  • Annual inflation remains high globally, with annual inflation within the OECD averaging 10.3 percent in August.

Global Economy – October 2022

Notice that global interest rates are on the rise as the countries tackle the current inflationary problem. Within OECD member countries, annual inflation ranged from 3% in Japan to 80.2% in Turkey. Global inflation is expected to moderate next year but likely to remain above inflation targets in many economies – RBNZ 1-3%. However with the tight monetary conditions expected to remain in place until mid 2023 GDP growth will be subdued.

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Wordle but now there is Tradle

From the OEC site comes Tradle which operates just like Wordle and is a daily challenge. From the dollar value and composition of a country’s exports you have to try and find which country the data relates to. You have 6 chances to get the correct answer and for each wrong answer they indicate how many kms away the country is from your choice and in which direction. Good lesson starter for the day. You can also go onto the OEC site to look at country profiles – very useful.

Ukraine and food protectionism

Useful video from the FT which looks at exporting countries of primary goods and the introducing of greater protectionist measures as global food prices increase. There have been various reasons for these prices – supply chain problems – labour shortages – rising energy cost – drought – and of course the Ukraine War. Ukraine and Russia provide a significant amount of global wheat and plant oils. The VoxEU.org economic policy group stated that export limits imposed during the 2008 financial crisis pushed food prices up by an average of at least 13 per cent. Restrictions on food shipments can also damage the trading reputation of nations that enforce them and rob local farmers of lucrative access to markets when prices are high. Business leaders and policy makers warn that escalating restrictions could lead to a trade war, which will impact the world’s poorest people the most.

Strong US dollar is a problem for other economies

This year the US dollar has appreciated by 10% against other major currencies. The main reason behind this is the US Fed increasing interest rates in tackling the inflationary pressure in its economy – since the beginning of the year the Fed Funds rate has increased from 0% to 2.25-2.5%. This increase in interest rates has been quicker than other major economies which has led to the strengthening of the US dollar. This stronger dollar makes US exports less competitive and imports cheaper as the US dollar buys more of the other currency. However even if a country doesn’t trade with the US it can still be impacted by the US dollar when pricing goods and services. The problem lies in the invoicing of fuel and food which is usually quoted in US dollars – an IMF paper suggested that approximately 40% of invoices are in US dollars – see Figure 4 below. Furthermore they also found prices for businesses doing trade between two distant countries can be much more sensitive to the value of the US dollar than the relative levels of the tow local currencies.

With the US Fed focused on inflation further interest rate increases on the cards which could lead to further strengthening of the US dollar. To counter this action other countries central banks could increase their interest rates ahead of time to protect their currency.

IMF – July 2020

The graph above reveals that the share of global exports invoiced in dollars is much larger than the share of exports destined to the US. This difference indicates that the dollar plays an outsized role in the invoicing of global exports; the patterns for imports are quite similar. The right panel of Figure 4 establishes that the dollar’s leading role reflects more than its use for the invoicing of commodity exports: once exports of commodities are removed from both the invoicing and export shares, the dollar share of invoicing (23%) still exceeds – by a sizeable margin – the share of exports destined for the US (10%). Figure 4 also reveals that the euro’s share in global export invoicing is an impressive 46%. While this appears as a very large number, recall that a currency’s vehicle currency role can be gauged only by comparing its share in global invoicing to the share of global exports that involve the jurisdiction issuing the currency. This comparison reveals that the euro’s share in global export invoicing is not much larger than its share, 37%, of exports destined to EA countries.


Strong dollar is a major headache for other countries. FT 30th July 2022

IMF – Patterns in Invoicing Currency in Global Trade. Emine Boz, Camila Casas, Georgios Georgiadis, Gita Gopinath, Helena Le Mezo, Arnaud Mehl, Tra Nguyen. July 2020

The Supply Chain explained

The supply chain has been stretched to the limit over the last two years and there have been a number of reasons for that. From a lack of containers to surges in global economy activity, as consumers shifting from buying services to buying goods, the freight time and cost have increased significantly.

From the IMF – good video explaining how the supply chain works and the problems faced after two years of lockdowns. Has the supply chain got too complicated?

Russia: Goods and services trade with New Zealand

The NZ Parliamentary Library produced some data on the New Zealand’s trade with Russia. The most recent figures for the December 2021 quarter are:
Exports of goods and services to Russia – $75 million
Imports goods and services from Russia – $14 million

Total dairy exports to Russia were $168.9 million for the year ending June 2021. Of this total, butter represented $147.9 million, comprising 5.5% of New Zealand’s total for this commodity – Russia was New Zealand’s 4th largest butter destination in 2021.

Trade with Russia 2019 – 2021

Exports are mainly made up of dairy whilst imports are mineral fuels and oils – crude oil (well over 90%) and Russia was a moderately important source of crude oil imports (16% of New Zealand’s crude imports in 2020). With Marsden Point oil refinery coming offline in April, Korea and Singapore will in future become the main source of refined fuel. The last significant crude oil shipment from Russia was in January 2021. As at 31 March 2021 New Zealand’s total investment in Russia was worth $14 million, a decline from $48 million as at 31 March 2020. During the same period total Russian investment in New Zealand increased from $29 million to $40 million. The graphic on the right (click on it to expand) shows the origin of imports into New Zealand in 2020. Note that Russia has 0.53% of all imports into NZ.

The largest economic impact on New Zealand of the invasion would therefore be mainly indirect, through higher import fuel and commodity prices, instability of financial markets, and the impact on global economic activity.


  • Potential impacts of the Russian Invasion of Ukraine on the New Zealand economy, February 2022. New Zealand Foreign Affairs.
  • New Zealand Parliamentary Library – Monthly Economic Review March 2022.

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Economic Theory v Economic Reality

Invariably I get the question in class “Does this economic theory actually happen in the real world?” We then proceed to discuss upward sloping demand curves, trickle down theory, the GFC and the fact that few economists saw it coming and how Japan ran a massive stimulus programme but inflation was stagnant.

Most theories in economics rest on the premise that people, companies, and markets behave according to the abstract, two-dimensional illustrations of an introductory economics textbook, even though the assumptions behind those diagrams virtually never hold true in the real world. To understand economics you have to understand human nature.

Below is a table that I found in James Kwak’s book “Economism”. It takes theories found in most introductory economics textbooks and suggests what actually might happen to these theories in the real world.

For more on secondary school economics courses view the key notes (accompanied by fully coloured diagrams/models) on elearneconomics that will assist students to understand concepts and terms for external examinations, assignments or topic tests.

China and the economic centre of gravity

Very good FT video with Martin Sandbu and James Kynge discussing the fact that although the Chinese economy has grown at an alarming rate over the last 40 years, will it become the global superpower? Some of the main points:

  • Global economy is now becoming more regionalised
  • From 1979 to 2018 China’s GDP growth rate averaged 9.5%
  • 2,000 years ago everyone was poor – centre of gravity of global economy followed population size
  • Key change in the mid ’90s, when China began to allow the sons and daughters of farmers to migrate from the village to these big factory towns.
  • Liberalised global trade in 1980’s helped China access markets
  • China still very much a developing nations – ranks 61st in terms average per-capita income but got an excellent infrastructure.
  • China’s middle class approx 400m but that means approx 1bn of the population are poor
  • Middle income trap – getting from poor to middle income is a very different process from getting to middle income to high income.
  • Economy needs to change from a growth model based on accumulating labour and capital to a growth model led by technological development and technological progress.
  • China is either a global leader or at least close to the cutting edge, wind and solar power, online payment systems, digital currencies, aspects of artificial intelligence, 5G telecoms, drones, ultra-high-voltage power transmission.
  • Three major trading hubs – EU, US and China – with trade being more regionalised. China reluctant to lose export markets in EU and US as they are big drivers of exports
  • Three trading blocs will lead to protectionism and decoupling of supply chains. unless the EU, the US, and China can sort out their differences.

Maritime supply chain problems – mindmap

The maritime supply chain has been stretched to the limit over the last year and there have been a number of reasons for that. From a lack of containers to surges in global economy activity, as consumers shifting from buying services to buying goods, the freight time and cost have increased significantly. Below is a mindmap that looks at the major problems faced by the maritime supply chain last year.

Africa’s resource curse lingers on.

Africa may have enormous natural reserves of oil, but so far most Africans haven’t felt the benefit. In Nigeria, for instance, what’s seen as a failure to spread the country’s oil wealth to the country’s poorest people has led to violent unrest. However, this economic paradox known as the resource curse has been paramount in Africa’s inability to benefit from oil. This refers to the fact that once countries start to export oil their exchange rate – sometimes know as a petrocurrency – appreciates making other exports uncompetitive and imports cheaper. At the same time there is a gravitation towards the petroleum industry which drains other sectors of the economy, including agriculture and traditional industries, as well as increasing its reliance on imports. It is estimated that for every extra dollar in foreign currency earned from exporting resources reduces non-resource exports by $0.74 – Torfinn Harding of the NHH Norwegian School of Economics and Anthony Venables of Oxford University.

Economists also refer to this as the Dutch Disease which makes reference to Holland and the discovery of vast quantities of natural gas during the 1960s in that country’s portion of the North Sea. The subsequent years saw the Dutch manufacturing sector decline as the gas industry developed. The major problem with the reliance on oil is that if the natural resource begins to run out or if there is a downturn in prices, once competitive manufacturing industries find it extremely difficult to return to an environment of profitability.

According to the UN a country is dependent on commodities if they are more than 60% of its physical exports – in Africa that makes up 83% of countries. One of the major concerns for resource rich countries is the wild fluctuations in commodity prices which can lead to over investment – Sierra Leone created two new iron-ore mines in 2012 only for them to close in 2015 as prices collapsed. However the amount of jobs created in the mineral extraction industry is limited – across Sierra-Leone of 8m people, about 8,000 work in commercial mines. A major problem in these countries is that when there is money made from resources it tends to go on government salaries rather than investing in education. infrastructure and healthcare etc.

Norway – has a different approach.
In Norway hydrocarbons account for half of its exports and 19% of GDP and with further oil fields coming on tap Norway could earn an estimated $100bn over the next 50 years. Nevertheless there is a need to wean the economy off oil and avoid not only the resource curse that has plagued some countries – Venezuela is a good example as approximately 90% of government spending was dependent on oil revenue – but also the impact on climate change. Norwegians have been smart in that the revenue made from oil has been put into a sovereign wealth fund which is now worth $1.1trn – equates to $200,000 for every citizen. This ensures that they have the means to prepare for life after oil.

Source: The Economist – ‘When you are in a hole…’ January 8th 2022