Wednesday, August 13, 2008

Stop playing with Alan Bollard's YoYo

For nearly twenty years the Reserve Bank has pursued a policy of so-called 'price stability' -- setting interest rates at a level they think will keep the 'general level' of prices stable.

It hasn't worked.   There is no such thing as a 'general level' of prices, and the pursuit of general price stability has created just the opposite of stability.

Take the price of the New Zealand dollar. Go on, take a look.   Has this price been stable in recent time?  Not on your life.  In recent times it's been as high as eighty cents against the US dollar (making life difficult for exporters), and as low as sixty-four cents (making it difficult both for importers and for producers reliant on imported factors for their own production).  The YoYo-ing of the NZ dollar does little to help producers plan ahead with confidence, and little to help drive the prosperity of which we're in somewhat short supply.

So as the NZ dollar now starts to slide below seventy cents again, it's clear if we've had price stability anywhere it hasn't been in the price of the NZ dollar.

Let's take another example.  How about the price of borrowed money, so crucially important in driving prosperity -- has this price been stable?  Not half it hasn't. Since 1992, interest rates too have gone up and down like a YoYo -- up to 7.5% and down to 4.5%, up to 10% and back down to 4.5%, and then back up to 9.5%.  Meanwhile mortgages, the price you pay to repay your house, have been down to 6, up to 11.5, down to 6.5, up to 9, down to 6, up to 9.5 ...

So much for the 'price stability' of borrowed money (you can see a graph of the money madness here if you like that sort of thing).  The Reserve Bank's pursuit of the 'price stability' of a nominal 'basket of goods'  -- which is a fiction that mainstream economists use as a proxy for the non-existent 'general price level' -- has led not to rampant instability in the prices that are central to both production and prosperity.

Is this sensible, do you think?

In fact, the Reserve Bank-created YoYo, the result of their gormless fight for a nominal 'price stability,' has created instability in every important aspect of the economy. 

And when you look at some of the biggest ticket items in our own personal 'basket of goods,' which is very real to each of us, we can see that the Reserve Bank's intervention has either made the prices in our own 'basket' either more unstable, or has had no effect at all.

Take house prices, for example.  Would you call them stable?  Not only has the price you would pay for a house gone up and down like a YoYo in the last two decades, so has the price you pay to borrow the money to pay that price.  This instability is almost entirely the result of the Reserve Bank's pursuit of stability.  Go figure.

Take the price we pay to governments both central and local for the job they do in keeping us down.  These have been going up like a rocket in recent years, yet about these the Reserve Bank maintains a monastic silence, while tinkering in other areas to maintain their monetary model.

Take the prices of food and oil.  Have these been stable recently?  Stupid question, of course, but in trying to squelch the effect of these -- something even Alan Bollard should realise is something about which the New Zealand Reserve Bank can do absolutely nothing, and which have no impact on 'inflation' anyway -- Alan Bollard has been very stupid.  His tinkering to bring stability to prices over which he has no control has led to rampant instability in the prices over which he does have some control.

Thank goodness that for all the tinkering to keep prices 'stable,' some real prices are actually falling.  The price of things like cars,computers and clothing -- your basic consumer goods, have mostly been getting cheaper (mostly because of imports from places like Japan and China).  This has helped offset the price rises of the likes of food and oil, but according to the mantra of the Reserve Bank even falling prices are an affront to the grand goal of price stability.

It's just madness, isn't it?  If prices rise for good supply-and-demand reasons, the Reserve Bank moves to squelch these important price signals.  And if prices fall for good production reasons, they move to squelch those boons as well.  We can only 'win' on those rare occasions when increasing production equals increasing shortages.  Dumb, yes?

Fact is, the pursuit of a fictional 'price stability' has led to instability in every important price that you and I pay for goods and services.

No wonder that the real result of of Reserve Bank intervention is not stability, but boom and bust.

Here's my advice for Alan Bollard and his destructive YoYo: just leave us alone.  Or in French, Laissez Nous Faire.

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3 Comments:

Anonymous Anonymous said...

Laissez Faire was far far worse than the partially controlled economy that we've had since the 1930s. Half the time it was in crash mode compared to our modern economy that has only been in recession about 10% of the time.

8/13/2008 10:41:00 pm  
Blogger Julian said...

PC, This post is absolutely brilliant. I cannot add anything.
Julian

8/14/2008 09:11:00 am  
Blogger PC said...

Anonymous,

You are in error. History in fact records precisely the opposite to what you claim above.

Thanks Julian. Pity I couldn't add the graphs showing the YoYoing, but "dial-up hell" sadly made it impossible. :-(

8/14/2008 10:00:00 am  

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