Monday, 14 July 2008

Let's all have inflation to go

Some people still think the Reserve Bank fights inflation. Poor saps. Here's the history of NZ's inflation, in a graph. Just take a look at what happens to inflation once a) the gold standard was 'suspended' in 1914, and b)when the Reserve Bank is established in 1934. Now, we're all aware that correlation is not causality, but seems to me that the fans of central banking have some explaining to do.

UPDATE: I should have let you know the context for the graph. It was prepared by Bryce Wilkinson from Wellington's Capital Economics Ltd, and referenced in this February article by Frederic Sautet: 'The Disastrous Effects of Central Banking: Let’s Get the Story about Inflation in New Zealand Straight.'


  1. I can't help noticing that that graph seems to contradict you a little. After the 1989 Reserve Bank Act inflation tailed off considerably, so the Reserve Bank seems to have had some beneficial effect then.

    Now I don't understand economics much, but I really can't understand why they abandoned the gold standard in the first place, it kept inflation at basically nil by the look of that graph. Maybe people didn't even consider the concept of inflation when they abandoned it because they hadn't seen it much in their lifetimes?

  2. Mr Dennis, the problem without a gold standard is that the government can print money, basically debasing the currency. Previously the paper money was exchangeable for gold, so the government couldn't just print more money without having more gold. More gold means higher productivity, i.e. increase in wealth, bigger cake.

    Without such guarantees, who determines how much money the government prints per year?

  3. The thing that matters is the growth in the price level (actual inflation), and the variability of that growth - not where the price level itself sits.

    Look at how smooth that line is, and the more controlled level of the growth in the line following the Reserve Bank act. Given the measurement errors in the CPI (which usually overstate "inflation") this graph actually makes me a lot happier with the Bank's performance than I was earlier

  4. The thing that matters to whom, Matt.

    "The price level" is a proxy for the value of our money.

    That inflation of the money supply has diluted the value of money by fifty times between 1934 and 2007 is not cause for celebration, nor is it cause for celebration that it's been diluted by between eight to fifteen percent year-on-year for the last two decades.

    That is the thing that matters, matt. That it's actually theft, I would expect you to understand.

  5. ""The price level" is a proxy for the value of our money."

    Money has no intrinsic value, it is a means to an end. If we doubled the amount of money and all prices could move then all prices would double - I agree that it would unfairly hit savers and reward borrowers, but if everyone saw it coming the interest rate (which is also a price, as is wages) would adjust to allow for this.

    The pain comes in because prices cannot adjust very easily in the short term. The best thing we can do in the face of this is make sure that variability in the price level is at a minimum - looks like the Bank has done an ok job at that.

  6. For goodness' sake, it doesn't just "unfairly hit savers and reward borrowers," it steals real capital and resources from one group and gifts them to another.

    It redistributes real wealth from savers and wage-earners to a vast gang of dishonest bidders and dishonest buyers, a gang that bids and spends dollars created out of thin air in competition with their earned dollars.

    It rewards short-term risk-takers, and punishes prudence.

    It destroys real capital, and replace it with counterfeit credit.

    It impoverishes wage earners, rewards the imprudent, and undermines economic freedom.

    The interest rate doesn't 'adjust' for any of this at all -- what it does is misallocate these stolen resources through the capital structure -- it creates an intertemporal distortion of the capital structure -- it displaces people's genuine time preferences regarding the interest rate with a phony rate set by a phony methodology, which distorts their preference ratio for consumption wrt investment -- and always and everywhere produces serious malinvestment, the likes of which we see flushed out at the end of each business cycle, if the central bankers allow it to happen.

    Reducing the "variability" of this process doesn't make it go away.

    It just allows people to pretend there's nothing to worry about.

  7. This brings me to ask a question. What is Libertarianz plan for de-fiatising money? Closing down the printing presses should be as easy as pie; but the very moment taxation is abolished, and the restrains of trading in NZD are removed, the Dollar will lose all value, and all savings in NZD will be rendered non-existent.

    (This is not an objection, but a question).

  8. "Reducing the "variability" of this process doesn't make it go away.

    It just allows people to pretend there's nothing to worry about."

    I agree with many of the concerns you raise - however they all stem from inflation itself - not from the current level of prices.

    The variability of the general price level is another issue on top of the concerns you have raised. The variability of the general price level hides relative price signals and makes markets in-efficient. Furthermore, as some prices are difficult to change it fully distorts the price signal, leading to a mis-allocation of resources.


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