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!

UPDATE:

• 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:
  
  
  
  • Money and Inflation: The Tendency to Deny Reality; and
  
  
  • The Fallacy of Inflation Targeting.
    


• 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.