Wednesday, 9 July 2008

Good economics teaching

Here's what good economists do: they correct the myths and misapprehensions of the likes of Alasdair Thompson of the Employers and Manufacturers' Association, who maintains that central bank tinkering with the money supply "means little to the real economy of physical production and employment." Contrary to "Mr Thompson's assertion that money and credit do not matter as long as central banks step in to maintain confidence," economist Peter Lyons points out, "The availability of money and credit, if poorly managed, can create major distortions in economies."

[Thompson] argues that despite the nefarious dealings of money men the actual ability of an economy to produce goods and services is little affected...
What he has failed to appreciate is that the damage of easy credit policies in other countries on the New Zealand economy has already occurred. The full realisation has yet to become apparent.
The main effect of loose monetary policy and lending practices in other countries on the real economy of New Zealand has been a major distortion in resource allocation...

Specifically, it's distorted what Austrian economists call the 'intertemporal structure of capital' -- that is, how the production of capital goods is structured over time -- a field of study which mainstream economists completely ignores, and which, as Mr Lyons acknowledges, is the most susceptible to the meddling of money suppliers. He continues:
The availability of money and credit in an economy as determined by a country's monetary policy has a major effect on the real economy. The New Zealand dollar is overvalued against our major trading partners because of our high interest rates compared to other countries...
An analogy would be to compare the New Zealand dollar to Wile E. Coyote clinging to a branch on a cliff face. The branch is the Official Cash Rate set by the Reserve Bank. When the branch finally snaps the New Zealand dollar will fall. The branch will snap at the first hint that the Reserve Bank is about to lower short-term interest rates.

Thompson's assertion that as long as central banks prop up demand and keep issuing credit out of thin air then everything will be rosy in the garden is illusory. Thank goodness for good economists like Mr Lyons. Parents of St Peters' students should be grateful they have such an insightful chap teaching their youngsters.

1 comment:

  1. Apart from the fact that the Govt "ate the economy" to give us our overvalued exchange rate, that rate keeps a lot of people very happy in the good times.. lots of shopping opportunities and overseas trips. But when the rate goes down, watch out!



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