Forum Archive Index - January 2001

["G Stolwyk" <stolwyk@wave.co.nz>]

 

Hugh,

 

As the economy improves, demand rises till, at a certain point, the Reserve Bank could step in and raise interest rates.

 

H: Why ? Is it because the rapidly rising inflation and production costs are making us uncompetitive with the rest of the world?

 

G: Another reason: rising demand can ultimately result in a balance of payments deficit.This is because this country imports a vast quantity of consumer goods and raw materials.

 

If this continues, then finally the $NZ falls, making goods and services more expensive. If this happen to coincide with low prices of primary exports, then the economy could rapidly deteriorate.

Even now, I think that while the average person can afford a cheap car, the country can't!

 

H: I feel that by raising interest rates at the wrong time, demand can be suppressed to such an extend that the economy could stall! Perhaps dr. Brash could tell us something about this?

 

G : Absolutely! He has had some experience in that field! Timing of monetary and fiscal measures are very important!

 

A good example of the latter can be found in Australia, where the introduction of GST made a major impact on the demand in building materials.

One may see the situation improve as that country has a reasonable growing population and a richer economy.

 

H: We don't want to discuss the many facets of an economy; suffice to say that the investor has to acquire some knowledge of the parameters which will affect an investment! 

 

G : We also have commodity cycles; as many are influenced by the demand of strong overseas economies, we may want to know something about these as well.

 

 Commodity cycles for wood can be difficult: producers of pulp can make good profits while at the same time producers of papers can barely break even and resort to shut downs.

 

At the same time, Indonesian suppliers make full use of their cheap currency and export at very low prices! 

 

H. After a slump in log prices in Asia in 1998, prices never fully recovered. Observers say that the storms in Europe and Siberia coupled with heavy logging of rain forests are delaying a recovery. There is also some substitution by other materials.

 

G: In the past, investors were concerned with a rise and fall of gold and gold shares. Speculators would now go broke at the prevailing gold prices! Gold has become a commodity!

 

H: A rise or fall in interest rates can affect the value of shares and bonds.

Some sectors of the economy can raise prices to outstrip any inflation; others can't.

 

G: The investor should know something about any prospective investment and associated risks! Government policies, overseas economic events, commodity cycles and uncertainty, can all affect an investment! 

 

H: Some shrewd investors tend to invest at the bottom of a cycle or just prior to an upturn in the economy.

To do this, they need intelligence; sometimes the signs are false! It is all part of the life of an investor!   

 

Gerry