Liam Dann: Life on hold as economic ‘Great Malaise’ keeps us waiting

OPINION

“Life is what happens to you while you’re busy making other plans,” John Lennon sang.

Lennon, who (thanks to the wonders of AI and Peter Jackson) has released a new song
week, was an advocate of living in the moment.

For those of us following the economic cycle of the past year, it hasn’t been easy.

For decades, economic commentators (like me) have complained about the inability of financial markets to unwind and correct in a slow and orderly manner.

Now it’s really happening. And my god, isn’t it painful?

The election process in New Zealand has nothing to do with the US Federal Reserve.

Central banks are carefully pushing down inflation pressure. The markets move sideways, rising and falling based on speculation and outright guesswork about the mood of the US Federal Reserve.

Economic data tells us that everything is going according to plan, that prices are rising at a more moderate pace, unemployment has risen to 3.9 percent and wage inflation is declining.

It feels like we have a soft landing in sight, but the finish line keeps moving. Six more months, twelve more, eighteen? Who knows?

No one is quite ready yet to declare victory in the war against inflation.

Meanwhile, our KiwiSaver and managed fund reports are about as fun to read as the post-match analysis of the Rugby World Cup final.

I don’t know if it’s catching on, but I’ve been calling this slowly grinding post-pandemic economy “The Great Malaise.”

Technically a medical term, malaise refers to a general feeling of discomfort, unease, or lack of well-being. Wikipedia tells me the word has been around in French since the 12th century.

There is of course nothing original under the sun.

It turns out The great malaise is also the title of an article that Alan Greenspan wrote in 1980 for an economics magazine called Challenge.

Greenspan, of course, went on to become one of the world’s central banking legends, serving as chairman of the Federal Reserve from 1987 to 2006.

Like all good central bankers, he is a controversial figure. He successfully led the last successful war against inflation.

But he also faced controversy for allowing money-losing regulatory policies that may have led us into the 2008 global financial crisis.

After testifying at congressional hearings investigating the GFC, The New York Times wrote: “Greenspan admitted that he had placed too much faith in the self-correcting power of free markets and failed to anticipate the self-destructive power of wanton mortgage lending.”

While Greenspan refused to take blame for the crisis, he “acknowledged that his faith in deregulation had been shaken.”

In 1980, Greenspan described a similar set of market conditions to those we face today: high inflation, low economic growth. But the malaise of that time really puts our current misery into context.

During Jimmy Carter’s presidential era, from 1976 to 1980, the Dow Jones drifted aimlessly, falling 0.7 percent during that period.

It was the death knell for post-war Keynesian policies and led to the beginning of the monetary reforms that are still in force to this day.

This is also the era many older Kiwis remember and worried about returning when inflation spiked in 2021 and 2022.

In the late 1970s and early 1980s, under the then National Government, we allowed inflation to fall and tried to beat it with a series of increasingly restrictive regulatory measures – that didn’t work.

It is now very clear that this will not happen in 2023.

So it’s encouraging to compare and contrast Greenspan’s Great Malaise with the current era.

The world’s central banks kept economies afloat during the darkest days of the pandemic. Yes, in retrospect they gave more impetus than was necessary.

But almost as soon as the vaccines arrived, they pulled the monetary tightening levers hard. The RBNZ was the first in the world to move.

They have made their intention known and now they have stopped allowing higher interest rates to take effect at a moderate pace, without causing a deep recession and high unemployment.

In other words, they kept their nerves in check. And we must hold on to ours.

It takes time for the policy to be transferred. It can seem like a painfully long time.

But two years of market malaise in the wake of an earth-shattering event like a global pandemic is not the same as the slump of the late 1970s.

We may have to wait another six to twelve months. But the policy works. In the meantime, maybe we should stop waiting. Psychologically it is never good.

The new government offers opportunities, the feeling that a limit has been set for an era and that a new era is on its way.

There was some evidence of this last week, when business confidence recovered.

The ANZ Business Outlook shows that sales confidence rose by 21 points to +23 in October.

These surveys are predictable, of course, but they always show that business is happier under National, with the promise of a more favorable regulatory environment.

But – as ANZ chief economist Sharon Zollner noted this week – that doesn’t mean the newfound optimism is “false”.

If companies follow through with this, it will be self-fulfilling to some extent.

The big macroeconomic wheels still have to turn before we can put the pandemic economy behind us.

But the wait will be a lot easier if we all – as companies, as employees and consumers – get on with doing things and living.