Loose talk costs money

Just when it seemed things were looking up, the country receives two unwelcome oracles - one from its Reserve Bank, the other from the international Organisation of Economic Cooperation and Development. Both warn that further setbacks could be in store for the economy if the recession abroad widens to the United States and Europe.

There is no reason that it should, except that the American stockmarket seems once again too good to last; the Western European economies, about to adopt a single currency, are in a phase of confused monetary policies; and Britain, which is not adopting the "Euro," cannot quite believe its good fortune so far. In short, countries are almost talking themselves into a slump.

That does not diminish the seriousness of the threat. Psychology is a powerful force in commercial and economic behaviour. A business, no matter how healthy its order book, becomes wary of expansion if the mood all around is dismal. But psychological clouds should be kept in perspective. The danger assumed to lurk on Wall St is quite different from the crisis of confidence in Asia and emerging markets a few months ago.

That crisis, possibly settling somewhat now, has its roots in real structural weaknesses in rapidly developed economies. Those weaknesses are deep-seated in the culture of the countries concerned and will not be quickly fixed.
But if capital is allowed to take account of those risks, currencies will settle at the appropriate level, investment will return and growth will pick up, albeit never again at the unsustainable rates East Asia has known.

Despite the acknowledged need of more "transparency" in financial systems, there is not much sign yet that capital will be allowed to price the Asian weaknesses properly. The response in some places has been quite the opposite, contemplating greater controls on currencies and investment.
In the crucial Asian economy, Japan, the OECD expects deflationary forces to continue despite, presumably, the well-telegraphed fiscal stimulation this week.

It is easy, therefore, to remain despondent about the East but there is no reason to believe that the burden of maintaining growth should be too much for the western economies. Wall St has been riding for a fall, supposedly, for so long that some complacency could be in order. As long as recessionary fears loom, the United States Federal Reserve is likely to lower interest rates, as it did this week, boosting the stockmarket again.

New Zealand's Reserve Bank followed suit yesterday, in a big way. The loosening was the largest yet seen from the Governor, Don Brash, and while it spells lower interest rates it also speaks volumes about the risk of a serious global recession. Dr Brash sees no sign of inflation despite the dollar's depreciation, although he warns that conditions could change suddenly. Indeed they could. Monetary settings are now so loose that if talk of global recession turns out to be just talk, the Governor will have to act smartly.

The rest of us, meanwhile, can only maintain a healthy scepticism about all predictions of the moment and press on. The more that producers in the real economy defy the talk, the sooner it will sound groundless.

--Editorials & Opinion