Thursday, December 08, 2005

Questions, rhetorical & otherwise, about Reserve Bank meddling

In just under an hour, Alan Bollard will announce the Reserve Bank's new Official Cash Rate.
  • Am I the only one who wonders why the announcement of a bureaucrat should be listened to with so much interest? Why should he have so much power? And why is his 'basket' of goods and services by which he measures inflation necessarily an accurate reflection of things as they are?
  • Has anyone met the "average consumer" who regularly purchases this basket?
  • Surely Bollard realises that a rise in interest rates will encourage even more foreign investment in New Zealand, and so give heightened support to a dollar already at record highs? How important is 'price stability' when its pursuit threatens the existence of New Zealander's exporters by pricing them off the world's stage, and New Zealand's producers by raising the price of their borrowing?
  • Does anyone else wonder at the sanity of strangling the backbone of our economy -- producers and exporters -- in order to deal to "the profligate household sector"? Is that sane? And, given that many household borrowers are fairly well insulated from Reserve Bank interest rate hikes, will another Reserve Bank interest rate hike deal to them anyway?
  • And why should they be 'dealt to' anyway? Why is the 'price stability' of Bollard's 'basket of goods' such an important thing, and should New Zealand producers and exporters be sacrificed on the 'cross of stability'? Don't prices in a free market rise and fall naturally as a way of clearing markets? Is that such a bad thing? Don't free markets, when they're left free, exhibit over time a gentle 'deflation'? Why is that a problem?
  • How "profligate" is the household sector? Why is it "profligate" to pay what you can afford? And just whose money is it anyway?
Here's some sense on the upcoming announcement from Westpac:
Westpac says it expects this week's hike to be the last of the cycle, although, it says, the Bank is not likely to relax for months.

"The RBNZ's campaign to give housing a king hit will continue with a further hike on December 8.

"But the stakes are getting higher: the RBNZ risks getting an unwitting grand slam over all aspects of the economy as it targets the last pocket of resistance with the tenacity of a pit bull.

"The economy is slowing, and has been since 2004. Consumer spending growth is slowing, residential construction has contracted in 3 of the 4 last reported quarter, investment in other fixed capital is losing pace and increasingly being dominated by the public sector.

"Net exports are mired in red ink. Business and consumer sentiment are very weak. Horticulture, fishing, forestry, manufacturing, and tourism are already in technical recession.

"Only the government is set to remain a strong growth industry in 2006," Westpac said...
Linked Articles: RBNZ could deliver 'grand slam' to the economy - Westpac
Cue Card Libertarianism - Banking

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5 Comments:

Blogger Rick said...

Well here's the thing..

Don't prices in a free market rise and fall naturally as a way of clearing markets? Is that such a bad thing?

We don't have one of those. Our gov places higher value on full employment than on inflation. So does the electorate. And they've got it. The Employment Relations Act and unionists, stuttering ones and all, keep wages 'sticky downwards' in contradiction to the market economy you dream of.

This policy disorganises the economy and is paied for by inflationary policy- which is naught but a universal tax on us all. The price system we know, the lives we lead, the jobs we have...entire industries have become dependent on and propped up by inflationary policy. Industrial organisation and decades-long plans are predicated upon its continuence.

If we're to let go of inflationary policy we need to first reform the labour market. Even so, the fallout will be rather apocoalyptic. Especially if you're the sort of libertarian who falls on the more impatient side of gradualism...

12/08/2005 11:03:00 am  
Blogger PC said...

"We don't have one of those."

No we don't, on that much only we agree. We have what Mises called a 'hampered market.'

"Our gov places higher value on full employment than on inflation."

You appear to be labouring under some monetarist delusiion, Rick -- not the only one, I might add.

"This policy disorganises the economy and is paid for by inflationary policy...entire industries have become dependent on and propped up by inflationary policy..."

Can I suggest a brief acquaintance with the news, Rick? Or perhaps with reality. I can highly recommend both.

12/08/2005 12:16:00 pm  
Blogger Rick said...

Once again you have turned me around (only...not!) by the power of your carefully explained critique.

Big M for Monetarist if you please. Have some respect.

12/08/2005 12:31:00 pm  
Blogger Kimble said...

1. It is questionable how much power he actually has, as is the impact on the economy of expected changes to monetary policy.

2. Inflation is an important economic statistic, but I would never base my decisions on the accuracy of the number.

3. High inflation also causes trade imbalances and makes NZ goods relatively more expensive than our low inflation trading partners.

4. I agree that it doesnt make much sense to use interest rates to target a specific region, but I think what the RBNZ is wanting to do is cool the whole NZ economy a little.

5. Prices can rise and fall, but do they always? Wages are very sticky and supply contracts can make input prices sticky also.

12/08/2005 01:05:00 pm  
Blogger PC said...

Kimble, you said, "I agree that it doesnt make much sense to use interest rates to target a specific region, but I think what the RBNZ is wanting to do is cool the whole NZ economy a little."

Better read that Westpac asessment again, Kimble.
============================
Rick, you said, "Big M for Monetarist if you please." Small 'm' is all monetarism deserves. "Have some respect." I have none.

12/08/2005 01:14:00 pm  

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