Thursday, 19 November 2009

Tinkering with the Reserve Bank? Let’s talk abolition, Phil [update 4]

I see Phil Goff is coming out against the Reserve Bank, which means the twenty-year political armistice over the economy’s comptroller of interest rates and monopoly issuer of monies is now defunct.

It’s clear enough that the arguments behind the Reserve Bank are a bust.  We haven’t had “price stability,” instead we’ve had bubble after bubble, and bust after boom. We haven’t had dollar stability, instead exporters and importers have both seen a dollar that rises and falls more than sailors in a whorehouse.  We haven’t seen protection of the dollar’s value, instead we’ve seen dilution of the dollar’s value over the years of the Reserve Bank’s existence by around fifty times. [See this blog’s archives for posts on all those problems.]

Rather than maintaining the value of the hard-earned dollars of the poor, the Reserve Bank is “the prime destroyer of currency and, therefore, one of the greatest threats to the freedom and well-being of a citizenry.” *

To paraphrase what Richard Rahn says of the US Federal Reserve (the equivalent of our Reserve Bank), “if those members of Parliament who voted for the creation of the Reserve Bank in 1934 had been able to know what the results of their handiwork would be for the next 65 years, given the empirical data, it is unlikely the closely contested bill would have passed.”

Perhaps then I could persuade Mr Goff and his supporters of the merits not of tinkering with the Reserve Bank, but abolishing it. To that end, Yaron Brook from the Ayn Rand Center explains how interest rates would be determined if they were not controlled by a central bank.

UPDATE 1: Goff Announces End To Monetary Policy Consensus

    “Reserve Bank policy targets don't work, Labour leader Phil Goff said today as he ended a 20-year political consensus on monetary policy.
    "’Our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible,’ Mr Goff said in a speech to Federated Farmers in Wellington.
    “The battle against inflation was no longer the most important priority . . .
“’Today I am announcing the end of the consensus around the policy targets and tools of the Reserve Bank. Labour wants to see a step change in our export performance.’”

This is simply an abject call for devaluation, for flat-our currency debasement, the position of every would-be populist politician since Caesar started clipping gold coins.

Phil says “the battle against inflation is no longer the most important priority?” But the battle against inflation has never been begun. NZ’s money supply has been pumped for decades – which is what inflation really is. Indeed, NZ’s M2 money supply had been increasing at a year-on-year rate of around 20% at the height of the recent boom, and was still increasing at a year-on-year rate at May this year of 10.7%. A process that leaves every dollar in your pocket worth less every year.

Phil doesn’t want this dollar dilution reined in.  He wants it increased.

What Phil is really calling for is more inflation in order to devalue our currency properly. Year-on-year monetary inflation of more than ten percent isn’t enough for him – a rate of expansion that tells you the fight against inflation has been over for a long, long time.  Because in truth, “the fact that prices are stable, or have even rallied in some sectors, indicates that inflation is already spreading across the economy.”

Yep, the fight against inflation has been over for a long time.  All they’re arguing about now is what they’re inflating for: whether to continue issuing gobs of counterfeit capital to “expand credit” and “kickstart” industry; or to inflate the currency with the stated purpose of devaluation.

It’s a fight between Tweedledum & Tweedledummer.

UPDATE 2: Matt Nolan at The Visible Hand reckons you should just ignore Phil when he says that he’s still interested in “monetary policy independence.”

      “Forcing the RBNZ to target near term growth and the exchange rate destroys the purpose of Bank independence in the first place.  Ignore him when he says he ‘wants to put money in peoples pockets’ – as by cutting interest rates he is just transferring money from borrowers to savers.”

Mind you, Matt still goes on to spout the mainstream mantra that “Monetary policy should target stable inflation expectations, that is all” – apparently blithely unaware of the problems with targeting so-called “price stability,” not least with stealth inflation – so just take what the rest of what he says with a pinch of salt.

UPDATE 3: You don’t think there’s already inflation around? More here from Reason magazine on the stealth inflation already being experienced around the traps: Where’s That Inflation? [hat tip Jeff Perren]

   "On his blog Free Advice in September, the Pacific Research Institute economist Robert Murphy argued that inflation is already here but economists are missing the signs. ‘From [December 2008] until August 2009, the unadjusted [American] CPI level has increased 2.7%, which translates to an annualized increase of just over 4%,’ Murphy wrote. He acknowledged that “ten-year yields [on Treasury bonds] are…low’ but added that the price of gold has increased enormously. ‘Why do we assume that TIPS [Treasury Inflation-Protected Securities] traders are genius forecasters, but gold traders are morons?’ he asked. . .
    “The St. Lawrence University economist Steven Horwitz agrees both that inflation is already happening and that it is widely misunderstood. Monetarists, he says, were ‘too focused on aggregates like ‘the’ price level, which led economists to ignore the way inflation could distort individual prices at the microeconomic level, causing resource misallocation in the process.’
    Virtually all economists now agree, for example, that the Fed’s low interest rates inflated housing prices earlier in the decade. Yet as the prices of houses went up, few economists worried about inflation because the CPI looked relatively stable, due in part to a decrease in energy prices. When housing started to crash in 2007, many economists thought the Fed should inject still more funds into the system to stave off further declines. They failed to see that the Fed had distorted relative prices in the first place.’"

UPDATE 4: Crampton backs Matt Nolan’s mainstream mantra, and gives me a smack.  I’ve taken it well, I think, considering he ignores the twin problems of “price stability and stealth inflation.


  1. Not being an Economist, but I still can't understand why commentators seem to call for a fall in the New Zealand dollar.
    All that means to me is the money I have today, will be worth less tomorrow.
    Is it not a sign of a well / poor performing economy, is the relative value of their currency compared to others


  2. Mr Goff, like so many gormless purveyors of public rhetoric, is extolling the virtues of a weak dollar to export. He must, presumably, be implying that by encouraging more exports (through a weaker dollar) that we will be significantly more prosperous.

    Undoubtedly a weaker dollar will improve exports at the margin but my question is: what is it that we are supposed export in such volumes that we are launched to the forefront of world economic performance?

    Why don't these discussions start at the fundamental strategy level. What sustainable competitive advantage can New Zealand realistically achieve in production that we haven't already fully developed?

  3. Looks like Labour is setting itself up for a more power to the reserve bank.

    The interest rate tool alone doesn't give them enough power as banks did not pass on the rate decreases fully.

    We can already hear the bells of new tools that allow decoupling of real-estate investments from the interest rate.

  4. The previous administration disgracefully interfered with and pressured what is supposed to be an independent body. Bollard allowed himself to be brow-beaten, whereas Brash did not.

    Goff just wants RB to dance to his tune.

  5. An interesting research paper here (a non-political one), which the conclusion seemed to be in-line with what Dr. Brook said in that video (non-controlled interest rates), although the authors of the paper used slightly different wordings (which indirectly implies the same thing to my understanding) and I just cut & pasted the last paragraph from the conclusions on page 2, that stated:

    Conclusions: a fixed exchange rate framework, shocks to the economy must be absorbed mainly by movements in interest rates, which implies in more persistent interest rates' dynamic. However, in flexible exchange rate regimes policy makers have more degrees
    of freedom to absorb shocks into the economy, as exchange rates may absorb partially such shocks.

    Download: Econophysics of interest rates and the role of monetary policy

  6. I'm all about the mainstream mantra - can't help myself ;)

  7. Wasn't meant as a smack, Peter. I can totally buy that inflation targeting that doesn't count asset prices can push inflation into the uncounted categories. It's just that most other alternatives are worse if you have a Fed.

  8. Oh for god's sake: Robert Murphy's comments about gold are the most moronic thing I've read in a while.

    Bond prices are a predictor of inflation because they're the price you're willing to pay in dollars NOW to get dollars THEN. So they're the market's way of giving the money-now price of money-in-the-future. The market being pretty smart, they're a good predictor of inflation.

    Gold prices aren't the market's way of pricing future money. And (guess what!) they're not a good predictor of inflation.

    But of course Reason thinks the gold market is somehow magical, for reasons which escape any rational thinker.


  9. David,

    Actually, Goff is trying to avoid huge currency swings. Our dollar's gone from 80 cents-ish US to 45-cent-ish US to 80 cents-ish US in about a year. That volatility sucks for both importers and exporters.

    You're incorrect to label him purely as an exponent of a weak NZD. He wants a more stable NZD.

  10. "The interest rate tool alone doesn't give them enough power as banks did not pass on the rate decreases fully."

    But they can't. The credit spreads on their FRNs are too high.


  11. Anon

    What is so bad about surrency swings? If you are an exporter (which we are), they allow extra profits to be generated on every transaction (if you know what you are doing). Without them our business would not be operating here. That would mean some 20 Kiwis down the road and at least four families heading off-shore to warmer climes.

    Ah, I see where you might be coming from. Perhaps another business closure would be a good thing. It would mean the rest of you unproductive drones would be pushed that much further into debt...



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