Friday, 22 June 2007

"Price stability" isn't working

After at least two "interventions" in the foreign exchange market in as many weeks, NBR reports Kiwi at 22 year high against US dollar. So that worked, didn't it.

Bollard says the "fundamentals" show the dollar shouldn't be soaring so; but the fundamental fact is that Bollard himself has set it soaring with interest rates high enough (he thinks) to dampen housing prices that have been made high by over-regulation -- interest rates high enough to send manufacturers offshore. Fundamentally, Bollard has lost it, and repeated calls for legislative quick fixes show that.

We don't need mortgage levies, capital gain's taxes or a tax grab on rental property owners. What's needed is an immediate lessening of regulation on land supply and construction, an immediate removal of the planners' stifling ring-fences around NZ's major cities, and immediate rejection of this absurd and destructive obsession with "price stability."

As Frank Shostak explains, "the policy of price stability always leads to more instability." I think Alan Bollard is slowly being taught that lesson, don't you? An article in the forthcoming Free Radical explains this apparent paradox; says M.A. Abrams, it comes about through a complete misunderstanding of the nature of monetary inflation:
In an economically progressive community (that is, one where the real costs
of production per unit are falling and output per head is increasing), any
additions to the supply of money in order to prevent falling prices will be
hidden inflation; and in a retrogressive community, (that is, one where output
per head is diminishing and real costs of production are rising), any
contraction of the supply of money in order to prevent rising prices will be
hidden deflation. Inflation and deflation can occur just as well behind a stable
price level as when the price level is rising and falling

Thus, in the case where [economic progress] due to increased saving is
corrected by additional money for consumers, the result is to prevent any
[increase in the efficiency] of production; and where a fall in prices due to
improved knowledge is corrected by additional money, the result is to force a
transition to less [efficient] methods. In both cases the fruits of
progress are rejected because of a determination to keep prices stable
Moreover, in both cases the correction of the attempted advances has involved
the abandonment of some of the higher stages of production where certainly some
of the factors used are highly specialized and these will therefore become
unemployed as a result of the transition.
It's time to cut the Reserve Bank Stabilisation Act loose. That's one thing that could be done immediately.


  1. Now, why would we expect that getting rid of the reserve bank act's price stability target wouldn't let to something much much worse? Yes, it's RMA restrictions on housing growth that are driving prices upwards and forcing the RBNZ to increase interest rates; but, there are nevertheless worse targets than price stability. For example, the "get the incumbent re-elected" target which would have the Bank pump up the money supply in the lead up to an election and knock it back post election. The price stability target is a nice second best solution that keeps central banks from being used for worse things. 'Cause the relevant alternative isn't getting rid of the Fed, or adopting Selgin and White's free banking, or adopting a Friedman money growth rule, or adopting a gold standard if that's what you like; the relevant alternative is a politically controlled reserve bank used toward political ends. Take your pick.

  2. the relevant alternative is a politically controlled reserve bank used toward political ends.

    Which is what we have now. Bollard was politiclly bullied into rate increases some months ago. What we are seeing now is the inevitable blowback.

  3. It is howlingly funny. The guy knows he's doing wrong, but he needs to keep the lie alive and his over-masters happy. He needs to keep his hands gripping on to that greasy pole (slippery civil servant career).

    I'm expecting some serious trouble eventually. Hopefully a lot of kiwis will experience some real pain. They deserve it. Maybe then they'll learn something important about their beloved egalitarianism and the stupidity of their foundness for socialism.

    There should be some real bargains ready to snap up if you can be bothered!

    In the end though, it's about time kiwis gave up on their bullshit (like how "we live in the most beautiful country in the World" and like "kiwis can do anything, we are as good as anyone else in the world- look at the All Blacks" etc. etc. etc.) and started facing reality for a change. the whole show is in disarray.

    Prediction. Within the next decade the Chinese govt is going to start flexing its muscle. Expect to see several million new residents arrive from Asia. You'll be able to forget about Maoris this and that, and Pacific Island culture and all that. Asian values will swamp the lot. I'd be surprised if many of the new arrivals even spoke good english!

    You kiwis are just giving your own stuff. As is well said, nature abhors a vacuum, especially one created by mistake by the willfully ignorant.


  4. Anonymous: To the extent that Bollard is subject to political influence, it sure isn't pushing him to increase rates. Inflation was above the band set out in the policy targets agreement for 5 quarters before he acted, which (to my mind) was really pushing the "medium term" definition specified in the agreement. I don't see any political pressure for increased rates.

    Hitman: I think you're barking up the wrong tree in seeing a strong inflation-fighting central bank as the close friend of egalitarianism and socialism. Sure, it's not what a Rothbardian or Randian or free-banker would prescribe, but it's not what a hard core old-school Keynesian would want either. And, the effects are going to be closer to what libertarians would want than we'd get with a completely politically controlled central bank.

  5. I agree there is no overt evidence of Cullen's influence to be seen by the man in the street...senior bankers know otherwise.

    Also let's not forget that it was Cullen who instigated the change in the RBNZ Act to allow the RBNZ to intervene in the currency market, and it was Cullen who expanded the RBNZ inflationary target.

  6. Crampton is correct that Bollard is way behind the curve, a good year I would say.

    Even the US bond market is creaking and that spells major problems for the markets.

    Submissions on the monetary policy framework review are due by July 19th. I suggest everyone puts something in and then debates their proposals.

    Its about time we had a serious dialogue about money and banking. There are so many misconceptions around this subject that it is hard to get reasoned argument on it.

    One thing is for sure though, NZ has suffered under its inflation targeting framework. Its time the Reserve Bank Act received a good seeing to.

  7. Crampton

    You wrote; " I think you're barking up the wrong tree in seeing a strong inflation-fighting central bank as the close friend of egalitarianism and socialism."

    Did I claim that a strong inflation-fighting central bank was the close friend of egalitarianism and socialism? NO!

    What I reckon is that you shoud read very carefully WHAT I ACTUALLY DID WRITE.

    To clarify things a little. I regard the present system as fraudulent and a destroyer of wealth. The Reserve Bank is not a strong inflation fighter. It is a component part of the trouble.

    I also reckon that kiwis have an unhealthy obsession with egalitarianism and socialism. I'm expecting to see some real economic pain for kiwis as they see their "assets" reallocated to the better, the more productive, the smarter, the insider and the wealthier. There will be some good bargains to snap up- starting right about next week!

    The rather charmless kiwi faith in egalitarianism and socialism is resulting in kiwis losing that which they claim to love- that beautiful country and that wonderful lifestyle! It is funny really. They are tied up in a type of intellectual short circuit. The feedback is destructive yet none care to turn the noise off!

    BTW I do not consider the bank as a strong inflation fighter (which it certainly is not).



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