Thursday, 7 June 2007

Sacrificed again on the cross of "price stability"

Another interest rate rise (now the highest in the OECD), another rise in the exchange rate, another higher hurdle for exporters and producers, another sign that this pathetic addiction to "price stability" is crucifying everyone except those foreign investors enjoying our over-inflated interest rates.
In the quarterly monetary policy statement issued along with today's OCR review, the bank says previous tentative rebalancing of the economy toward exports and away from domestic demand appears to have stalled because of the high dollar.
See. So just what the hell is he doing this for, and why?
The bank has been nudging the OCR up by a quarter of a percentage point every six weeks since early March, blaming resurgent domestic demand, climbing house prices, labour shortages and government spending for fuelling inflation pressures.

This time it also fingers soaring dairy prices, warning their boost to farm incomes will add to inflation pressures.
It's undoubtedly true that government spending is partially responsible for fuelling inflation, a responsibility shared by the Reserve bank's expansion of the money supply. But the banks' reasons for concern represent a flawed view of the economy -- one that discounts the restrictions that governments place on producers, particularly on house builders -- and a flawed view of economics, a view that aggregates all income without distinguishing the nature of those who receive it.

Farm income is production income -- capital -- money that for the most part will go to increase production despite labour shortages. But Bollard is doing his best to wipe out that windfall by making new production more difficult. We're all being penalised for the amazing success of our country's farmers, and the near-religious fervour for "price stability" blinds everyone to that fact, and instead of rising up in protest everyone whimpers sheep-like under Alan's financial lashing.

And galloping house prices, as we've seen before, are more to do with the restrictions that urban planners and 'green-plated' government regulations have between them placed on land and on the cost of new building. Ignoring these serious dislocations and pursuing "price stability" in spite of them is just flat out dumb. There's no other way to describe it. We all lose as producers are strangled and exporters are priced out of world markets. The irony here is that Bollard appears to share that same concern even as he exacerbates the problem, and commentators are happy to ignore that his fingerprints are all over the murder weapon .
Dr Bollard re-airs concerns about the high exchange rate, repeating his comments in April that the dollar is at exceptionally high and unjustified levels - in what is considered to be a further attempt to head off the spike in the Kiwi dollar that commonly follows an interest rate rise.
The dollar's "exceptionally high and unjustified levels" has one chief reason: Alan Bollard. Higher interest rates attracting foreign money. The dollar is already up on average 0.6% against all currencies but the Australian --and Alan's whimpering won't change that.
"Had we not increased the OCR this year [says Bollard], it is likely that the inflation outlook would now be looking uncomfortably high.".

He warns that it will take a "sustained period of slower growth" in domestic activity to alleviate inflation pressures.
Talk about dumb. We're all being crucified on this pathetic cross of price stability, and the crucifixion could be so easily averted, and prosperity embraced: Just stop meddling. Free up urban land; abandon the green-plated building regulations; reduce government spending; stop inflating the money supply (which is what inflation actually is) and let prices rise and fall just as prices are supposed to.

Just let us alone!

  • We all need to know more about inflation, and not just Alan Bollard, since inflation of the money supply is one the most devious taxes that government's inflict upon us. Frank Shostak at the Mises Blog has two brilliant recent pieces that rip the scab off the inflationary wound and show the raw scar beneath. A poor metaphor perhaps but consider it an invitation to read (or re-read) the brilliance of Shostak's explanation and analysis of:

  • The Australian has noticed Shostak's commentary. A recent piece noted:
    Dr Frank Shostak has a warning for investors. The [Australian] Reserve Bank's monetary policy is "out of control" and that means inflation is heading up, interest rates are set to rise and the share market is only being supported by excessive money supply.
    He believes the Reserve Bank uses incorrect definitions of inflation and even money itself. As a result, he says, the bank is actually causing inflation, rather than combating it. "The Reserve Bank claims that it does not print money, but merely accommodates demand, but printing money is exactly what it is doing."
    See RBA Policy Causing Inflation. The analysis is just the same for NZ's Reserve Bank. Remember, just because you don't see inflation directly, doesn't mean it isn't there.
UPDATE: Perhaps it's time to re-release Bob Jones prescient 1996 book, Prosperity Denied, one of the best short arguments against this sheep-like addiction to "price stability." This brief excerpt shows you just how prescient it is:
Over the 1994-95 period Auckland's median house price increased by 36 per cent [these days we might say"just 36 per cent"] . . . the Reserve Bank responded by repeatedly increasing interest rates, thereby causing an across-the-board economic squeeze.
All sounds all too awfully familiar, doesn't it. The Bank treated those price rises as some sort of "economic disaster Richter scale," restraining and tightening the entire New Zealand economy as a direct result of a change (then) in some Aucklanders' residential tastes, and an increase (today) in governement meddling in the supply of housing and land. The result, said Jones, is that

the commercial fisherman in Timary, the plumber in Westport, the home-mortage seeker in Wairarapa -- all other New Zealanders -- are obliged as a direct consequence of a change in residential [status] by a small number of Aucklanders ... to pay higher interest rates. This in turn adverselly affected their personal incomes, adversely affected business development confidence and investment decisions and any new job-creation intentions. Thus a relatively small number of Aucklanders [experiencing a problem very easily fixed] ... unwittingly cost thousands of jobs and reduced the income of every other New Zealander.
For that we all have to thank the Reserve Bank and the all-hallowed Reserve Bank Price Stability Agreement set up by Ruth Richardson, and now maintained by Michael Cullen. (Note, by the way, that tenses have been changed to improve the immediacy of Jones' comments.)
The higher interest rates [set by the Bank] drive up the exchange rate,
attracting foreign investors in our money markets and thereby driving the
exchange rate even higher. This influx of money in turn necessitates yet further
tightening by the Reserve Bank, and so the vicious cycle feeds off itself.

Today we have the highest real interest rates in the western world, as a
direct consequence of a foolsih government action, ironically aimed at achieving
low costs. All of this should be deja vu to New Zealanders recalling the
1983 Muldoon price freeze.

Some might argue that the Muldoon technique was worse insofar as the
monetarist method still allows the market, at a price, to call its individual
shots. Perhaps so, but the overall effect is identical in its economic
repression... Regardless, there is little to be gained in weighing the
respective eveils, because whether by shooting or by hanging, the negative
outcome of a death sentence is identical.
Words just as accurate now as they were when first written. Time to bite the bullet and condemn the Reserve Bank Price Stability Agreement to oblivion instead of us.


  1. I just put up a post about this unbelievable stupidy, but as usual you've covered it far better, PC.

  2. Please don't blame Bollard. He is required by law to keep inflation below 3% and interest rates are his only means of doing this.

    Every time someone attacks Bollard they are drawing attention away from the real problem, which you did eventually mention. That is taxes and other laws that discourage productive activity.

  3. "Please don't blame Bollard. He is required by law to"

    Yeah, yeah, he was just following orders; just like every other bureaucrat since we came down from the trees who chose their job and gets paid damn well to do it damn poorly.

    So how about we point the finger at everyone we can think of who is to blame for this clusterfuck (and if you can't yet see the connection between them, then give it a little more thought):

    John Maynard Keynes and the neo-Keynesians; Milton Friedman; Ruth Richardson; Bill Birch; Michael Cullen; the entire bloody town planning profession; Mike Lee, Dick Hubbard and Bruce Hucker; Nick Smith; Simon Upton; the Green Party; Bill Porteous; James Hardie; the inventors of dryframe timber; and of course Otto von Bismarck.

    Feel free to add to the list.

    Every time someone attacks Bollard they are drawing attention away from the real problem, which you did eventually mention. That is taxes and other laws that discourage productive activity."

    Specifically excessive taxes, excessive govt spending, excessive welfare (esp. WFF), excessive regulation and, in particular, the Reserve Bank Price Stability Agreement.

  4. I have to agree with Nigel - you are attacking the wrong person. In addition, I think your logic is confused. You can't simultaneously criticise the RBNZ for existing, AND complain about it setting its rates too high at the same time. In fact, the ideal cash rate would be somewhere above the lending rate of your local loan shark, in which case inflationary money supply would be priced out of the market.

    Likewise, you cannot simultaneously condemn the monetary supply system AND plead on behalf of homeowners and businesspeople reliant on the very cheap credit that RBNZ printing presses provide. Do we want an economy based on real money, or invented money backed by future theft ie. taxes?

    I think it is you who are confused about money supply, not Bollard. You are happy to reject the principle of fake money, but not its supposed benefits, and you are prepared to whine when Bollard decides to up the cost of it. The reality is that the gravy train is not sustainable, and rates may have to rise for a while longer before the price of credit stabilises.

  5. I agree that the whole monetary policy framework needs an overhaul but the RBNZ has a fixed mandate which they adhere too. Ok they don't seem very smart and Bollard was a mile behind the curve but the don't set the rules.

    But you really need to clarify your understanding of the money supply. You keep repeating that the RBNZ mans the printing presses and is responsible for the money supply increase.

    It isn't.

    This is a fact which you can check by simply analyzing the money supply numbers. The same goes for Aus, the UK and the US and so on. In fact the Fed has now stopped reporting M3 because it is out of control.

    But it isn't the central banks printing money, it is the private banking system.

    The sooner everyone realises this the sooner we can have a proper debate about money in our society.

  6. Setting the price and then printing the money as demanded is getting the whole process arse about face.

    In a free market, the supply of money would increase with the pool of capital and go straight to those who increased the pool of capital, not those who had some plan to increse it some time in the future.

    Financial institutions that were not printing the money but acting as intermediaries between borrowers and lenders (and for equity, entrepreneurs and investors) would essentially bid for the capital of those who consumed less than the produced (in just the same wasy as banks seek to get funds on deposit now - by offering higher rates).

    They would then relend it to those whose business plans offered returns that could cover the rates the banks had offered plus a credit margin.

    It's true that low reserve ratios give rise to a money multiplier effect by private banks but it's the state that puts in place the legislative framework that gives them fiat money and that protects them from being bankrupted by their competitors when they do so. It's also the state that mandates price stability via interest rate targeting.

  7. Sustento: Please clarify what you mean by the private banking system printing money? I've never seen a Westpac dollar or an ANZ peso - they all use those funny green bits of paper with the Queen on them last time I checked.

    Just as it is wrong to blame the RBNZ for the system, it is equally wrong to blame the private banks. They are just intermediaries to consumer demand for credit.

    To be honest, I see a lot of complaining over the monetary system, but no workable alternatives to what we have now. Currency is just an IOU note printed on special paper, and an ideal economy would consist solely of an exchange of private notes. However nobody uses private IOU notes because the government ones are backed up by big guns. Short of an international treaty to abolish the major government currencies, it is economically best for New Zealand to have its own currency to better reflect the value of its economy.

  8. "I have to agree with Nigel - you are attacking the wrong person."

    You think I should attack everyone in that list, and all in one short post? Surely it's enough that I've attacked them all already in other posts? ;^)

    But do you really think that Bollard and the RBNZ have nothing to answer for? That really would be bizarre, no? You think Alan is just a helpless tool?

    "You can't simultaneously criticise the RBNZ for existing, AND complain about it setting its rates too high at the same time."

    Well, yes I can, although what I'm specifically doing here is saying the Reserve Bank Price Stability Agreement shouldn't exist. That's a different thing to what you're saying.

    As far as what interest rates should be, as long as the RBNZ has carte blanche over the money supply and the cash rate no one really knows what interests RATES (note the plural) really would be in a free market, do we? We just have no idea.

    However the reasons given for raising interest rates are more than laughable -- as Bob Jones pointed out in similar circumstances, by ignoring the difference between real earnings and and influx of printed money, they will tend to wipe out the very benefits that real earnings would normally bring.

    In any case, the RBNZ themselves boast that they try to approximate what rates would be in a free market, so why I wonder don't they just let the free market set the rates and they just tender their resignations? We'd all be better off if they did.

    "Likewise, you cannot simultaneously condemn the monetary supply system AND plead on behalf of homeowners and businesspeople reliant on the very cheap credit that RBNZ printing presses provide."

    Well, yes I can. If I interpret your objection correctly (and it seems to me to be more than a little confused), you seem to think that there is some magic quantity of money that the economy needs in order to function correctly.

    It doesn't. As Carl Menger pointed out, any amount of money is suitable -- what's important (in a negative sense) is not the quantity itself, but changes in the quantity.

    It's these changes in themselves that are artificial creations of the central bank, and it's these changes that are actually what is meant by inflation and deflation, not the rising and falling prices that result from the changes in the money supply, and which changes the RBNZ is vainly trying to massage away.

    That's not just vain, it's destructive.

    But you say I'm "confused" about the money supply. One thing I am confused about is the so-called "benefits" of fake money.

    Perhaps you could tell me what those benefits are supposed to be, and what they have actually turned out to be in practice -- and which of these supposed benefits I've you've supposed me to have embraced?

  9. Hey PC, if you dont like what Bollard did, and cant sugestany other monetary poicy tools that would cut demand, do you think that fiscal policy levers would be more appropriate to cut aggregate demand?

    like cutting benefits...heh

  10. There was a brilliant Austraian economist called George Reisman who solved all this centralist bank mumbo jumbo. Read his book, "Capitalism." There be your answers.

    I understand that Ludwig von Mises was another who saw through the canard of the fiat money fraud.

    Bollard has made a complete bollocks of it. Of course he should be blamed. A sane, honest man of integrity would not have taken the job. All Bollard can achieve here is cause great harm to other vulnerable people. What a prat.

    Then again, as Paul Homes pointed out, he was appointed by a big govt loving keynesian- a socialist school teacher at that- so we know what his politics will be about. Paul also mentioned that Bollard dresses in ill-fiting shiny suits and has a tendancy to wear patterned shirts with patterned ties (that clash). Poor taste and ignorance- can't trust such a one!

    He's another grey toady bureaucrat, a functionary. Nothing decent to defend there really.

    Acts like a prat, looks like a prat, is a prat. Needs a good kicking!


  11. Blair,

    Money, as in notes and coin, can only be created by the Reserve Bank under law. However, money in the wider sense is created by the banking system in the form of debt. The % of actual notes and coins in the economy is around 2% so to all extents and purposes we can say that most of the money supply is simply debt, an obligation which is swapped around banks via deposits and loans which are basically book keeping entries.

    When a bank lends you "money" all it does it do a book keeping entry.

    So we have a fiat money system where money is not backed by any commodity and doesn't even exist except as a bunch of electronic obligations.

    The point is that the RBNZ does not create money (other than a small amount of cash). Therefore they have no control over the money supply other than changing the OCR.

    There are 3 main issues here:

    One is that CPI is a lousy measure of inflation. We have huge deflation in consumer goods and massive inflation is asset prices. CPI masks this. If you take it apart it's a dog's breakfast.

    Second is that the banking system needs to be restrained because the continual expansion of the money supply is causing serious problems in the economy which will end with a big bang.

    Third is that the banking system sucks out huge profits from their ability to create money at will. It wouldn't be so bad if the banks were in local ownership but this money is heading offshore.

    I hope that clarifies things.

    There's not much point looking for solutions to a problem that not many people understand.

  12. Today's behaviour shows the Bollock for what he is- a lackey. He is a fool. The man should resign before he really hurts people.

    He won't though. He's a-hanging onto that greasy pole for as long as he can.


  13. Cullen and co gave Bollar this power, so the buck stops there IMO.

    I'm rather confused as to why Mulholland in the linked post thinks you would be pleased about govt intervention. After how long blogging still only the hardcore understand what a libertarian is.


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