Thursday, 26 July 2007

Pursuit of price stability gives rampant instability: Go figure.

The Reserve Bank is tasked by law to preserve price stability. To fight inflation. These two things are not, however, the same thing.

Inflation is a curse; inflation steals wealth; inflation (as Milton Friedman used to point out) is always and everywhere a monetary phenomenon: monetary inflation happens as a result of printing money (and our Reserve Bank has been 'printing' about fifteen percent more each year for the past few years). It's a form of surreptitious theft. That's monetary inflation, which Alan Bollard's bank is exacerbating.

What Alan Bollard is concerned about is not the monetary inflation for which his bank is responsible, but price inflation (or deflation), those price movements either up or down that happen for good market reasons such as supply and demand and the introduction of new technologies and the discovery and extraction of new resources and the like. As I've argued before, removing monetary inflation would be a good thing (but not something in which the Reserve Bank is interested), whereas dampening down the free movement of prices is bad -- it distorts those important price signals which the market needs to function effectively.

Yet Alan Bollard will continue to ignore his own monetary inflation and pursue the illusion of price stability, hiking exchange rates to dampen down free price movements and the results of the inflated money supply and inflated government spending and the strangulation by regulation of land supply, and setting up what economist Steve Hanke calls a "death spiral" in which the higher the exchange rate the more "hot money" from the carry trade is attracted into the country, putting up prices and leading to another hike in prices leading Bollard to hike interest rates and . . .

Bad stuff.

But here's the irony: in this headlong and destructive pursuit of price stability, there are two prices whose instability is compounded: the price that's paid for the dollar, and the price we pay for money. That's right, the myopia over price stability has led to rampant instability in interest rates and mortgage rates and the exchange rate. The rationalistic "basket of goods" by which price inflation is measure may be made to appear stable, but the prices we actually pay for mortgages, capital and foreign exchange are all over the place.

Do you think there's something wrong with the economic theory on which the Reserve Bank Act is operating?


  1. You may care to have a look at this submission on monetary policy -

    Businessman Phil Verry has approved the forwarding of this innovative, and quite brilliant, submission for *supportive* purposes.

    He has spent many thousands on this, and rumour around the traps is he has patented it and want 20mil.

    The heads-up is way more than you deserve, I might add, and I expect you to be professional and maintain confidentiality of source.

  2. Thanks for this "Anonymous". It's an interesting proposal though at first glance i'm stuggling to get it. His analysis of the situation is fairly good though he doesn't fully clarify the role of the banks in expanding the money supply at will. I'll certainly have a longer and closer read through.

    It's good he has identified the overseas banks as sucking huge profits out of the country and that the OCR is dead as a tool of monetary policy. In fact monetarism is dead full stop. NZ has suffered hugely under this courtesy of Don Brash.

    You say this is "patented"? There have been many money systems developed over the last 3000 years but i haven't heard of that before.

    I've never met anyone in the money reform movement who wanted cash for their work.

    In terms of confidentiality, clearly this is available on the internet and through the submission process so what exactly do you mean by that.

  3. Yes it does take a while to digest and we can see a few problems with it. The opinion is that if it is workable it is definitely worth 20mil.

    The submission is not common knowledge yet - hard copy has only just been sent out. Support is being garnered from leading businessmen/women, and I don't want to be blamed for any retarded feedback that may come from pub economists on a blog.

  4. I'm informed that all submissions will be released on Monday. I just hope more notice is taken of the submissions made and a proper review in undertaken. In fact it gives me the idea to have a monetary policy conference where interested parties can present their ideas and discussion can take place.

    I recently attended the Assoc of NZ Economists conference but there was really little talk about the actual structure of monetary policy.

    Once they have been published, I'll be posting up interesting submissions on my blog for discussion.


  5. You're welcome. Let us know your URL in the comments here, perhaps.

    At least one person understood and appreciated it - all this moaning about the OCR here by all and sundry, and when something important and concrete is posted it's economists indeed. It is no wonder 99.9% of blogs and bloggers are not taken seriously!

  6. A quick reading leads to the conclusion that this scheme has the marks of yet another magic pill. Wish, wonder, believe and hope.

    It appears to feature central control again. Have the Kiwis not had enough of grand schemes, plans, regimes, regulation & government interferences already? It never works.

    This is patented? Really? Are you sure about that? That would probably doom the idea.

    What is the patent number?



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