Fonzie (Henry Winkler) in the infamous shark-jumping episode.
If this economic cycle was a Netflix series I’d probably have ditched it by now.
What kind of maniac scriptwriter would throw in a banking crisis at this point?
It has jumped the shark,
as we used to say about TV shows back in the days when people cared about important issues – like Fonzie staying cool.
But we don’t get to ditch this economy and try our luck with some new sci-fi or fantasy. We have to live in it.
Policymakers now have to make decisions about what to do next with no idea of how the increasingly convoluted script is going to play out.
At face value, for inflation, this banking crisis stuff is kind of good news … I said “kind of”.
A little bit of a financial meltdown might not be a bad thing for the rebalancing of the world.
Unfortunately, we don’t get to decide how much crisis we get. Will it get much worse? Or is that it?
Financial meltdowns are definitely disinflationary. They suck confidence and demand out of the economy.
In the end, they cost jobs.
So, put simply, the events of the last week have done some of Reserve Bank Governor Adrian Orr’s work for him.
You should already be seeing some savings at the petrol pump this weekend.
The oil market is a barometer for expectations of global economic demand.
Prices have fallen 10 per cent in the past week and are now trading at normal pre-pandemic levels.
So that’s definitely good news in the inflation fight.
We’ve also seen global debt markets retreat. The cost of borrowing has fallen and expectations for further central bank rate rises have been dialled back.
If you believed market pricing last week there will now be no more hikes in the US or Australia this year.
And in New Zealand, we’re only going to see one more 25 basis point hike.
The trouble is, things are so uncertain that there’s no especially good reason to believe market expectations.
Sentiment might all change again next week. A new piece of data could put inflation back in the top spot as public enemy number one.
That means both a possibility the Reserve Bank needs to change its interest rate strategy and a possibility it needs to hold the course.
It all comes back to the impossibility of knowing whether the banking sector is under control yet.
The collapse of Silicon Valley Bank and the near collapse of global giant Credit Suisse has sparked memories and ignited old fears from the Global Financial Crisis.
That was a slow-motion train wreck.
From an initial credit crunch in 2007, there was a series of bank collapses through 2008, all of which threatened a full-blown market collapse.
And all of them were headed off and contained by regulators. The markets were reassured and reassured again … until Lehman Brothers exploded and then all bets were off.
How can any economist, journalist, commentator or otherwise self-appointed expert know if there are more banks out there hiding liquidity issues?
We know that inflation is still too high and hiking interest rates works to reduce it.
But we also know that the last time central banks hiked rates on anything like this scale was 2006 and 2007 … and then we had the GFC.
In fact, this hiking cycle is much more aggressive.
I guess we’re supposed to have faith that post-GFC lessons and tougher regulation improved culture and behaviour in the finance sector.
But after almost 15 years of low-interest rates and low inflation, should we?
History tells us that humans have a habit of letting bad habits creep back in.
Even history isn’t what it used to be, thanks to the crazy three years of the pandemic we’ve just been through.
In case anyone needed reminding, the pandemic was the biggest multi-year disruption to the global economy since World War II.
The lockdowns, the unprecedented economic stimulus and the actual Covid waves made economic behaviour deeply abnormal.
We don’t even have a stable starting point from which to make economic forecasts.
Historic stuff like this week’s GDP slump is considered unreliable by most economists because it was still being distorted by Covid effects.
So we don’t yet know quite what we’ve been through and we certainly can’t see what is coming.
That leaves a very narrow, present-tense window for making decisions.
In cricketing terms, it would be a case of just playing the ball in front of you.
Unfortunately, here in New Zealand, we’re on a pitch that has been badly affected by rain.
The shocking weather events this year mean we can’t see which way the ball in front of us is going to turn.
The immediate economic fallout was probably negative as activity stopped dead for a few days in Auckland and slowed for weeks in some cyclone-affected regions.
But then it will be inflationary as storm damage flows through to higher prices for fruit and vegetables and more demand for construction products and services through the clean-up and rebuild.
Even longer term, it has to be a cost to the economy because we’re going to have to pay for it.
Good luck picking the timing on all that.
The Reserve Bank makes its next interest rate call on April 5, which, the way things are going, could still be several plot twists away.