"Welcome to the most insidious form of inflation: when newly printed dollars bypass consumer prices and flow directly into financial assets."

"The [US] Federal Reserve created $4 trillion in new money [in the GFC, and another $4 trillion over Covid] yet your grocery bill barely budges while Nvidia stock doubles in six months. [Over Covid, from March 2020 to mid-2021] the NZ Reserve Bank created NZD $50 billion in new money, and here again groceries barely budged over that period compared to bonds, shares and housing.]

"Welcome to the most insidious form of inflation: when newly printed dollars bypass consumer prices and flow directly into financial assets.

"You won't see this wealth transfer reflected in the Consumer Price Index. The CPI measures bread and gasoline, not Bitcoin and Berkshire Hathaway. Meanwhile, the [central banks'] money printing operation sends fresh liquidity straight to primary dealers, who park those dollars in stocks, bonds, and real estate. Asset owners get richer. Wage earners watch their purchasing power erode in real terms, even as official inflation statistics claim everything is fine.

"This creates a vicious feedback loop that sound-money advocates have warned about for decades. Cheap credit inflates asset bubbles, which [govts and central banks] then feels compelled to support with even more money printing. Each cycle makes the wealth gap wider. The Tesla shareholder benefits from artificially suppressed interest rates. The school teacher saving in a current account gets destroyed by financial repression. ... 

"Expanding the money supply faster than real economic growth means that new money has to go somewhere. Since 2008, it has systematically flowed into assets that wealthy people own rather than goods that working people buy. 

"Your [portfolio] might look healthy, but you're watching monetary debasement in real time. The stock market is booming because dollars are dramatically less scarce, not because companies are dramatically more productive. 

"If you can, buy stocks, bitcoin, property, or gold. This makes you a beneficiary of this phenomenon, not a victim."

~ Handre

Bloomberg has things back to front.

Bloomberg just called New Zealand one of the world's clearest housing cautionary tales.

In a piece titled The World’s Most Extreme Housing Boom Is Now Roiling an Entire Economy, global business news leader Bloomberg has analysed what’s happening here and what other countries can learn.

The piece said New Zealand was once home to the “world’s biggest housing booms,” but is now in the grip of a prolonged downturn, “exposing how deeply the country’s economy depends on ever-rising home values.”

Well, they're right about that last. But they're wrong about how we should react to the leaking of that housing bubble. Cambridge developer John Kenel makes the counter-argument:

Prices down 16% from the peak. Wellington down 27%. The economy stuck in the mud.They are not wrong about the numbers.
    But I think they have got the story wrong.
    Bloomberg is treating falling house prices as the tragedy. I do not think that is the real tragedy. The real tragedy is what falling house prices revealed.
    We did not just build a country with expensive houses. We built a country where housing became the economy. And councils worked that out pretty quickly.
    Every new house became a chance to clip the ticket. Development contributions. Consent fees. Inspection fees. Infrastructure charges. Rates. More reports. More consultants. More delays.
    Somewhere along the way, councils stopped seeing new housing as something to enable and started treating it like a funding machine. Not just for the direct cost of growth. For everything.
    Then they act shocked that new homes cost too much.
    You cannot load cost after cost after cost onto new housing, and then complain houses are unaffordable.
    That is the bit nobody wants to say out loud.
    And now politicians and commentators want to blame mum and dad investors for the mess. The couple who saved hard, took a risk, and bought 1 or 2 rentals.
    Come on.
    Blaming them for the housing crisis is like blaming punters at the pub for the price of beer.
    They did not write the rules. They responded to the rules the system gave them. Just like everyone else.
    We do not have a housing problem.
    We have a country that decided housing was the economy.

A "country" that decided that? Or politicians who determined that, with planning and building rules restricting supply while central bankers gave us near-zero interest rates and pandemic-era stimulus. 

So house prices have fallen. Good. But fallen only to what they were only a half-dozen years ago.

The fall is not the tragedy. 

The fall is the correction. 

Or (if supply is allowed to increase) perhaps the beginning of one. 

To remain independent from politics, a central bank must be less political

"Independence isn’t an absolute virtue. Our constitutional order doesn’t include completely independent officials who can print money and regulate banks as they wish. ...

"The [central bank] has vastly expanded its scope of operations, propping up asset prices, monetising debt, channeling credit, directing banks how to invest, straying into climate and inequality, and denying whole business models such as narrow banks and segregated accounts. These actions are political and cross over into fiscal policy and credit allocation. It has had no reckoning with its great institutional failures, including [high] inflation and repeated bailouts.

"It is reasonable to discuss reform. Either the [central bank] must be more 'democratically accountable,' which is the same thing as 'politically influenced' when the other party is in power, or it must be reformed to a narrow, enforced and accountable mandate so it can remain independent."

~ John Cochrane from his WSJ op-ed 'Trump and monetary policy'

Pay no attention to the (mad) men behind the curtain [updated]

Readers here might remember I got some stick for calling John Key a fucking moron a while back. A fucking moron, specifically, for repeated calls for the Reserve Bank to juice up house prices again, just so home-owning voters will feel better again. Feel better again, and then vote National.

"The guts of what’s wrong," explained the moron, "is that the housing market is going down, not up" — and "then you have a negative wealth effect," and voters feel bad. And when they feel bad, they vote for the other team.

Classic short-termism.  Stuff rocket fuel into the economy, and then all things will be jake for the governing political parties. This, by the way, was Key's "one simple trick" while Prime Minister: ensure massive house-price inflation, no matter the economic and social dislocation, and then sit back and watch home-owners fooled into feeling better off, and borrowing and consuming more, regardless of the economic consequences. (Consequences for which we're all still paying, by the way.)

In the US, the discredited "wealth effect" — "a gussied-up version of Keynesian stimulus, only targeted at the prosperous classes rather than the government’s client classes" — is generally felt in the stock market. Pundits there are starting to get nervous about a soaring stock market with anaemic growth in the economic system itself, with "important implications for the path of America’s stockmarket boom and its economy."

The good times could continue, at least for a bit longer [says 'The Economist']. ... [But] might a wealthier society also take a harder fall? Bears would point to the bursting of the dotcom bubble in 2000, when a brutal stockmarket slump pushed America into recession. ... The stockmarket might be more of the economy. It still is not all of it.

It's not. And nor is the housing market. We can't get rich just by selling each other houses. (And kudos to one National minister at least who understands that.)

Yet David Stockman is concerned that nothing has been learned from the last major crash. 

Roughly 15 years ago it was reasonably well understood that the Great Financial Crisis of 2008-2009 had been case of speculation run amuck on both Wall Street and main street alike. These credit and housing bubbles, in turn, had been fuelled by the massive money-printing sprees of the Greenspan and Bernanke Fed.

It might have been presumed, therefore, that the mad money-printers [at the US central bank] would have had second thoughts about the underlying cause of these great economic disasters—that is, the dubious Greenspan policy known as the “wealth effects” doctrine. In simple terms the latter held that if people felt richer owing to soaring home prices and their stock market winnings, they would spend more freely and fulsomely, thereby goosing the Keynesian cycle of ever more spending-sales-production-income-and spending, which was to be rinsed and repeated in an endless round of rising prosperity.

At the end of the day, of course, Greenspan and his heirs and assigns at the Fed turned out to be unreconstructed Keynesians and the wealth effects doctrine a monumental economic con job. The latter did not make society richer; it just made the rich richer. Or stated more directly, main street got inflation at the grocery store, gas pump and doctor’s office—even as the asset-holding class experienced unspeakable windfalls in their brokerage accounts.

Let's not repeat the same mistake again here — especially when local interest rates are already below our trading partners, with no noticeable effect on genuine economic progress. Please: pay no attention to the mad men behind the curtain.

UPDATE:

"The advocates of annual increases in the quantity of money never mention the fact that for all those who do not get a share of the newly created additional quantity of money, the government's action means a drop in their purchasing power which forces them to restrict their consumption. It is ignorance of this fundamental fact that induces various authors of economic books and articles to suggest a yearly increase of money without realising that such a measure necessarily brings about an undesirable impoverishment of a great part, even the majority, of the population."

~ Ludwig von Mises from an interview 'On Current Monetary Problems'

"The fundamental error of Keynesian central banking is the pretension that the business cycle can be comprehended, assessed and expertly managed by what amounts to a monetary politburo of 6 government apparatchiks on the Reserve Bank's Monetary Policy Committee."

"The fundamental error of Keynesian central banking is the pretension that the business cycle can be comprehended, assessed and expertly managed by what amounts to a monetary politburo of 6 government apparatchiks on the Reserve Bank's Monetary Policy Committee. Moreover, that so doing the central bank will enable both greater financial stability in the short-run and higher and more steady longer-run economic growth and living standard gains than the market economy would generate on its own steam.

"You could call this the 'aggregate market failure' axiom. Otherwise, why would you need 6 fallible bureaucrats to set money market interest rates or fiddle with the shape of the yield curve on longer-term debt when there are vast trading markets perfectly capable of doing the job?"

~ David Stockman from his post 'How The Fed And White House Spenders Reduced Growth To Stall Speed' [translated into Enzed terms, 'cos it's just as relevant]

15 YEARS AGO: Houses are homes, not investments

A topical guest post from NOT PC first posted here from nearly 15 years ago (well, 13, close enough?) when house-price inflation was already rocketing ...

    Guest post by Vedran Vuk of Casey Research 

Recently, my parents were considering purchasing some real estate. As the financial professional in the family, they asked me, "What do you think? Will it go up in value? You know... not now, but eventually?" I've heard the same thing over and over again. In response, I shared my opinion: "Would you pay the current market price to live there even if its value never increased?" If the answer is yes, buy the property." Essentially, is the house worth it as a home, not as an investment?

In the past few decades, the concept of home ownership has been completely turned on its head. Previously, homes were considered a very long-term consumption good. Do you think anyone in the 18^th, 19^th, and prior centuries ever considered tripling the value of their homes by retirement time and selling them to move beachside? In the vast majority of cases, such ideas never crossed their minds.

Yet, somehow along the way, this became a reasonable investment expectation. Even today, home buyers still make their purchases with the hopes of escalating prices. But are homes really wise investments?

Consider the difference between your house and an investment such as Apple (NASDAQ: AAPL) stock. At a major company, the opportunities can be truly limitless. Apple can produce cashflows from computers, iPods, iPads, and future innovations that are just dreams and concepts today. If the local market is oversaturated, Apple has the option of spreading out all across the world. As a result, Apple's stock price has gone from $17 in 2005 to $540 today. Can your house do the same? Unless there's a hyperinflation ahead or your house is located in the New York City or London of the 21^st century, the answer is no. Why? Because your house is ultimately a product--and products have an upper bound to their prices.

To understand this difference, there's no need to drag out the Case-Shiller Index or analyze complex statistics. Suppose one bought a single-family house over a decade ago for $200K. At the peak of the housing bubble, the price reached $500K; to his joy, the owner sold it and moved thereafter to retire in the Bay of Plenty. Can the house's price go higher from here? With Apple, the stock price can just keep climbing with greater profits and innovations. But is that true with real estate?

For the sake of argument, let's say that prices do keep rising. Eventually, the second owner sells to another buyer for $1 million a decade later. Guy number two also peacefully retires in bounty. Well, where does that leave the third guy? Unless real salaries make an incredible jump in the same time period, no one will be able to afford the home next. The median worker earning $51K won't be selling such a house for retirement; instead, it will take him until retirement to afford it. In many ways, this "investment" more closely resembles a Ponzi scheme. (Yes, Ponzi schemes work: for those who get in early and get out - as the recent real-estate bubble demonstrated.) Ultimately, there's an upper bound to housing prices - they can't continue rising perpetually with no end.

The same is true of any product. At $300 for the newest iPod Touch, Apple might be doing well, but at $10,000 per unit, there likely would be very few buyers. As a homeowner, you're not holding a company that can innovate, cut costs, and enter new markets. You're ultimately holding a product which must be either sold to the next user or leased to the next renter. Houses are a good created for a specific use - to put a roof over one's head. They are not magical money machines. Previous generations understood this very simple concept. One built a home as a place to live and escape the elements - and worse yet, the squalor of tenement housing. Homes were not retirement tools, but rather long-term goods.

Unfortunately, policy makers still view homes as investments and are always worried about low prices. But is it really healthy to play another round of the same Ponzi scheme? Suppose the Reserve Bank manages to inflate housing prices again. There will be another boom in which some folks will make a tremendous amount of money. Eventually, housing prices will hit an unrealistic upper bound. Again, home prices will violently drop, resulting in homeowners deeper underwater than now. Of course, the banks will again take a hit as the mortgage holders. As long as real incomes trail the rise in housing prices, there will ultimately be a correction of some sort.

So, do I think the current real estate market is just fine? No, of course not; but I don't think shocking houses prices back into a bubbly stratosphere is the solution. Ideally, I'd like to see increasing housing prices, but only at the pace of real growth in society's wealth. Over the last few decades, houses grew in value for good reasons and bad. On the good side, the economy had been expanding. On the bad side, central banks’ low-interest-rate bubble artificially inflated housing prices beyond what made sense for economies to sustain.

If US companies such as Apple are creating greater abundance in society, it makes sense for US housing prices to grow with greater wealth. But, bringing house prices higher on a wave of printed cash does not make anyone wise investors, but rather willing participants in a Ponzi scheme where someone else will be left holding the bag. Though that might be an attractive solution for those underwater on their mortgages, it's no solution for the economy as a whole--nor for the next buyer, or the next but one. 

Vedran Vuk is a senior research analyst with Casey Research

End the Reserve Bank

New Zealand's Reserve Bank is a mess. Destroying the currency; clueless about the economy as it begins to circle the drain; chairman and governor gone, deservedly, amid shenanigans obscuring why; and a revolving door of management, two in temporary positions only, "one utterly unqualified for the role she holds, and one with serious ethical questions."

And this is the crowd supposedly protecting our money? Galt help us!

Walter Block's call to End the Fed (i.e, the US central bank) is just as apposite here. Only the numbers and names need changing:

Some 500 economists work for the Federal Reserve System. This is probably more than the entire dismal science faculty at all eight Ivy League Universities, perhaps with Chicago and Berkeley thrown in for good measure. If the Fed were disbanded, they would all have to seek other work, perhaps leading to prosperity. Under the present institutional arrangements, they undermine the economy. On the other hand, this is an empirical issue. Presumably, many of them would obtain faculty positions, on the basis of which they would be inculcating their charges with the same voodoo economics with which they ruin the economy.

Why? How so? That is because one of their present roles is to determine, among other things, the interest rate. ... The arguments [for this] have essentially been refuted centuries ago and are now regarded by the economics profession as beneath contempt.

Well, so it is for price controls, and, as interest rates are a price, just like that of imports, so too is controlling them via the Fed’s central planning “beneath contempt.”

Moreover, if there is anything we have learned both from theory and practice, it is that price controls create economic disarray.

Have we learned nothing from the almost perfectly controlled experiments of East and West Germany, North and South Korea, a true rarity not only in economics, but in all of social science? Presumably not, otherwise the Fed would never have lasted as long as it so far has.

Central planning never works and never will work. Prices, market prices, free market prices, are the eyes and ears of the economy. Without them, we would not know whether it is economically better to use platinum or steel for railroad lines. The former can do a better job. But its market price is so high we may do no such thing, if we want to allocated resources productively. Its relatively high price indicated that this metal should be used for more important purposes elsewhere in the economy, and lower-priced steel for this use.

Ditto for interest rate prices. Should we build a tunnel through the solid rock mountain, or a far longer road all around it? The former will cost far more right now and will take many years to come online, maybe decades. But it will save money for centuries, most likely in terms of reduced travel outlays. The circular road will cost less and will be available for motorists much sooner. It will last longer, and be in less need of repair, given that the danger of cave-ins will be comparatively minimal. If the interest rate is high, we will veer in the direction of the road. We will heavily discount the roundabout process of the tunnel. If low, the shortcut in terms of vehicle mileage will be more attractive. But this assumes a market rate of interest, not one concocted out of whole cloth by a bunch of central planners scattered all around the country, who pay no price, none at all, for being wrong.

We have not yet said anything about the second job of the Fed: maintaining the value of the dollar. It has lost some 97% of its value from the time of its inception in 1913 to the present time. On that ground alone, it ought to be disbanded, forthwith, and salt sowed where it once stood.

New Zealand did fine for decades without a Reserve Bank to issue banknotes and dictate interest rates. Let's do it again.

Adrian Orr. Worthless shit.

Money is no longer backed by gold. It's now backed only by debt, by public trust—and by the promises and integrity of its issuers.

In New Zealand, money is backed above all by the promises and integrity of the Reserve Bank of New Zealand.

So it's crucial that the public trust in the Bank is earned, and continues to be earned every day.

Not a trivial thing.

Which is why the spectacular departure of the Reserve Bank Governor in March in what looked like a fit of pique was so disquieting.

Even more disturbing was the abject silence and duplicitous announcements since from the Bank about the reasons for his departure.

Those reasons were revealed this week. Just days after lying, again, to the Parliament, he walked in a fit of pique because he wasn't given an extra few billion to continue expanding his empire.

Adrian Orr. In a field of shitty New Zealand bureaucrats, he has to be the most worthless shit of all.

"We (the public) still have no idea what actually happened to the Reserve Bank governor"

"IT IS ALMOST SIX weeks since the shock announcement early on the afternoon of Wednesday 5 March that the Governor of the Reserve Bank, Adrian Orr, was resigning effective 31 March, and that in fact he had already left . ...
    

"In his seven years in office he’d ... not only let inflation run out of control then ... a (mild) recession to get back in check, [and generated] $11 billion of losses the Bank had sustained punting in the government bond market. ... On many occasions – including at numerous select committee hearings – his relationship with the truth also seemed tenuous.

"It is good to see the back of him, but it really isn’t adequate that we’ve had no explanation at all for the sudden departure. ...

"'Let’s be very blunt,' [said Infometrics’ Brad Olsen on the day of the resignation]. 'The Board of the Reserve Bank needs to front, they need to front urgently, and they need to be open and transparent. Anything less is just not acceptable.'

And yet 'anything less' is just what we have got. No straight answers from either the Board or the Minister of Finance. ...

"If anything, the mystery – and a sense that the Board and Minister are keeping important stuff from us – was highlighted by the OIA response obtained from the Minister of Finance by the Herald’s assiduous Jenee Tibshraeny, as reported here. ...

"Faced with the set of facts (the unquestioned known ones), and applying something like Occam’s Razor, most reasonable people would deduce that something pretty serious and potentially scandalous must have gone on [in the organisation backing this country's paper currency] ...

"We (the public) still have no idea what actually happened. And that really isn’t good enough from either the Board or the Minister about the holder of such a consequential office. But what we do know is enough to lead a reasonable interpreter to fear that it really may have been something around Orr’s conduct. If not (and one genuinely hopes not) a straightforward explanation could set the record straight very quickly. And if so, people shouldn’t be able to hide behind private commitments to secrecy that might serve the interests of some of the powerful, but are hardly likely to serve the public interest."

~ Michael Reddell from his post 'What was the story re Orr’s resignation?'

Adrian Orr irresponsible to the last

"What of yesterday[, when Reserve bank governor Adrian Orr up and abruptly left]?

"... We had brief press releases from the Bank and from the Minister but no real answers. We are told there were no active conduct concerns – although there probably should have been, when deliberately misleading Parliament has happened time and again, and just recently – and yet the Governor just disappeared with no notice on the eve of the big research conference, to mark 35 years of inflation targeting that he was talking up only a week or two ago, (I also know that one major media outlet had an in-depth interview with Orr scheduled for Friday – they’d asked for some suggestions for questions). And with not a word of explanation. 

    "If you simply think your job is done and it is time to move on, the typical—and responsible – way is to give several months of notice, enabling a smooth search for a replacement. 

    "He could easily have announced something next week, after the conference, and left after the next Monetary Policy Statement in May.

"Instead, it is pretty clear that there has been some sort of 'throw your toys out of the cot and storm off' sort of event, which (further) diminishes his standing and that of the Bank (but particularly the Board and its chair). 

    "It all must have happened so quickly that we now have this fiction that Orr is on leave for the rest of the month ... After several hours of uncertainty, the Board chair finally decided to hold a press conference, which he didn’t seem to handle particularly well and (I’m told—I only have a transcript—in the end he too stormed off) we still aren’t much the wiser. ...

"I guess it is probably true that Orr can’t be forced to explain himself, although since he is still a public employee until 31 March I’m not sure why considerable pressure could not be applied. But even if he won’t talk the answers so far from either Willis or Quigley really aren’t adequate. You don’t just storm off from an $800000 a year job you’ve held for seven years, having made many evident policy mistakes and misjudgments, as well as operating with a style that lacked gravitas or decorum etc, with not a word. 

   "Or: decent and honourable people, fit to hold high public office don’t.

"... I had heard a story—apparently well-sourced—that the Bank had actually been bidding for a material increase in its funding, on top of the extraordinary increases of the last five years ... and Orr has long been known more for his empire-building capabilities than for his focus on lean and efficient use of public money, But ... [it] surely it can’t be the whole story.

"Comments by Quigley suggests that perhaps Orr was getting to the end of his tether, and some one or more recent things made him snap, reacting perhaps more than a normal person would do faced with the ups and downs of public sector life. It seems highly likely the budget stuff, and the desire to keep pursuing whims, was part of it, but it can hardly have been all. 

    "I don’t suppose he felt any great compunction about misleading Parliament so egregiously again…..but he should. And all this time – having stormed off with no adequate explanation—Quigley declares that he still had confidence in Orr.

    "Surely yesterday confirms again that both of them, in their different ways, were unfit for office.

"[Not to mention] the latest estimate of the losses to the taxpayer from the Bank’s rash punting in the government bond market in 2020 and 2021. $11 billion dollar in losses. Three and a bit Dunedin hospitals or several frigates or…..all options lost to us from this recklessness, undertaken to no useful end, and a loss which Orr endlessly tried to play down (suggesting it was all to our benefit after all), and about which not one of his Monetary Policy Committee members—one now temporarily acting as Governor—either dissented or gave straight and honest contrite answers. 

    "It has been 43 years since a Reserve Bank Governor was appointed from within. That is an indictment on the way the place has been run."

~ Michael Reddell from his post '$11 billion and out'

Reserve Bank's 'stabilisation': still chaos

In honour of the Reserve Bank's admission this morning of their own blithering incompetence, I wore my favourite anti-monetarist shirt to work. Its point is that the so-called stabilisers of prices create instead more chaos from their incessant boom and bust programme — first overheating, then withdrawing the heat, then resiling and trying to re-heat again.

No to mention that they don't even know what they don't know.

From May to August, the Reserve Bank undertook what Michael Reddell calls "a huge shift" — "from a “hawkish hold” (best guess, no easing until this time next year, and possibly some tightening late this year) to not only an OCR cut now, but a really large (at peak 130 basis points) change in the projected forward track for the OCR."

Do you think they know what they are doing?

"There has been no nasty external shock in that time (global financial crisis, pandemic, collapse in commodity prices etc) ... . I can’t recall another change that large that quickly, in the absence of a major external shock, in the 27 years since the Bank started publishing these forward tracks."

So why did they cut now, when price inflation is still out there, when three months ago they insisted they wouldn't, and couldn't?

"It was simply because Orr and the Monetary Policy Committee [at the Bank] badly misread how the economy was unfolding now ... Other commentators have used the label 'U-turn.' I prefer flip-flop myself."

I'd suggest it's the simple incompetence of the monetary stabilisers, tilting at the same old windmills with the hope of a different result. The programme of the stabilisers ("we know how to put inflation back into the bottle" they crow, then prove they can produce only the destruction of boom and bust) has always and everywhere been destructive. Hayek nailed the stabilisers decades ago, placing the blame for “the exceptional severity and duration of the Great Depression” squarely on central banks’ “experiment” in “forced credit expansion” first to stabilise prices and then to combat the resulting depression.

Hayek defiantly declared: “We must not forget that ... monetary policy all over the world has followed the advice of the stabilisers. It is high time that their influence, which has already done harm enough, should be overthrown.”

It's the kind of thing you need nailed up above the Reserve Bank's door. At least some of us have it on the back of a shirt.

"Don't ignore the reputational harm Willis is inflicting on our financial system by proposing untested, populist policy measures driven by short-term political motives."

"The Minister of Finance [Nicola Willis] has, over the last couple of weeks, been trailing various possible changes in the financial system. ... trying to beef up Kiwibank ... overriding various bits of policy that are now squarely the legal responsibility of the Reserve Bank ... chang[ing] the law to force the Reserve Bank to lower bank capital requirements, and provide carveouts for some or other favoured groups. ...
    "But if you really want to make a change like that you do it after wide and serious consultation, or perhaps even as part of a well-trailed campaign promise, not simply (as it seems) to play distraction because another government agency might be about to release a briefly awkward report. ... if you want to be taken seriously as a Minister of Finance, you don’t just drop such a view into an interview – with, it appears, nothing in support – you outline carefully your case, or commission some reviewers to look into the matter carefully. ...
    "I don’t suppose it is very likely that Willis and the government will end up doing any of the things she trailed in last week’s 'Herald' interview. ... [But don't ignore] the reputational harm Willis is inflicting on our financial system by proposing untested, populist policy measures — arguably driven by short-term political motives. ... it hardly enhances any reputation Willis aspires to to be (and be seen as) a more serious Minister of Finance (focused on things that might make a real difference) than her predecessor. ...
    "Willis could readily have changed the chair of the Reserve Bank board when his term expired ... She could have filled the vacancies on the board with people better qualified than those Robertson appointed. But [she] hasn’t done anything about that either. ... suggest[ing] she isn’t really serious about any of this.

    "In the same vein, each year the Minister of Finance writes a Letter of Expectation to the Board... [Her] 2024 letter ... has not a hint of any of the sorts of issues/concerns Willis was raising in the 'Herald' interview. She also hasn’t revised the Financial Policy Remit(a new tool) issued by Robertson a couple of years ago. ... [S]he has shown no sign of doing any of the things she could (e.g. Board chair and vacancies, unwinding new indemnities the Bank has been given) or of using any moral suasion (e.g. through the letter of expectation) around financial policy issues or the Bank’s budgetary excesses.
    "So it all just looks a lot like a search for a good headline ... rather than a Minister with any sort of serious interest in ... a much better central bank ... Perhaps in that sense she and the Governor ... deserve each other. It is just that New Zealanders deserve much better from both ..."

~ Michael Reddell, from his post 'Still a bad idea'

So maybe, just maybe, we shouldn't give central bankers the keys to the whole monetary system.

"To repeat one of my consistent lines, human beings are fallible, they make mistakes. Central banks – here and abroad – are made up of humans, so they make mistakes. Really serious ones, of the sort seen in the last few years, shouldn’t happen but they do. One might even offer perspectives in mitigation: the pandemic was something quite extraordinary, and many people (here and abroad) misread the macroeconomics of it for too long. But those responsible need to take responsibility for the mistakes that were made."

~ Michael Reddell from his post 'Still avoiding responsibility'

Don't worry, the central banks will control inflation.

 

[Hat tip Rudy Havenstein]

"To repeat, inflation is a purely monetary phenomenon."

"Unfortunately, the entire edifice of the government’s theories [on the causes of inflation] — the assumption of discretionary power, the administered-price theory, the wage-price spiral, the exogenous shocks, the self-sustaining expectations, the idea of 'cost-push' — all of it is the rankest nonsense as an explanation of inflation....

"Inflation occurs, by definition, when the economy’s aggregate volume of money expenditure grows faster than its aggregate real output. The excessive growth of money expenditures can have, again by definition, only two sources: either the velocity of monetary circulation grows excessively or the money stock itself grows excessively (or both). Our current inflation is attributable almost entirely to excessive growth of the money stock.
    "Because the excessive growth of the money stock and the inflation it causes do not happen simultaneously, some people always fail to perceive the relationship. Increases in the money stock take some time before their effect on the volume of expenditure becomes significant. But once the actual lag is recognised, the relationship is seen to be very close....
    "In short, inflation is not caused by cost-pushes, wage-price spirals, depreciation of the dollar on foreign exchange markets, regulatory constraints, minimum wage laws, or lagging productivity growth. Inflation is a purely monetary phenomenon: when the purchasing power of the dollar falls steadily and persistently over many years, it is because dollars have steadily and persistently become more abundant in relation to the total quantity of real goods and services for which they exchange. Inflation, in sum, is caused by excessive growth of the money stock. Period.

"As the [central bank] authorities can control the rate of growth of the money stock, they clearly are to blame for its excessive expansion....
    "[Government] deficits, in the absence of excessive monetary expansion, can not cause inflation. Clearly, the deficits, working through the political process as it influences the [central bank], encourage a loose monetary policy. But it is essential to recognise that it is the excessive growth of the money supply, whether to finance deficits or for some other reason, that causes inflation. Conversely, with a sufficiently slow growth of the money stock, there can be no inflation, no matter what is happening to the [government] budget, labour costs, regulatory standards, minimum wages, and so forth. To repeat, inflation is a purely monetary phenomenon.

"It hardly needs to be added that once excessive monetary expansion has been halted, inflation cannot be kept alive merely by expectations of inflation. People will find that, in the absence of continuing monetary stimulation of aggregate expenditures, the inflation they expected just doesn’t happen. If they are obstinate and continue to act as if inflation is not abating, they will simply price themselves out of their markets in the same manner as the conspiring firm in the example above. It is far more likely, however, that they will adjust their expectations as the rate of inflation falls.
"Expectations cannot sustain an inflationary process unless they are validated by the actual course of inflation; and that validation can occur only so long as the growth of the money stock remains excessive."

~ Robert Higgs, from his article 'Blaming the Victims: The Government’s Theory of Inflation'

Few people truly understand the destructive present relationship between interest rates and central banks. Daniel Lacalle points out the toxicity in this guest post, and suggests a way out ...

Central Banks Are Wrong about Rate Cuts

by Daniel Lacalle

When we talk about monetary policy, people do not understand the importance of interest rates reflecting the reality of inflation and risk. Interest rates are the price of risk and manipulating them down leads to bubbles that end in financial crises, while imposing too high rates can penalize the economy. Ideally, interest rates would flow freely and there would be no central bank to fix them.

A price signal as important as interest rates reflecting the true amount of money would prevent the creation of bubbles and, above all, the disproportionate accumulation of risk. The risk of fixing rates too high does not exist when central banks impose "reference rates," as they will always make it easier for state borrowing—artificial currency creation—in the most convenient—what they call “no distortions”—and cheap way.

Many analysts say that central banks do not impose interest rates; they only reflect what the market demands. Surprisingly, if that were the case, we wouldn’t have financial traders stuck to screens [before every central bank announcement] waiting to decipher what the rate decision is going to be. Moreover, if the central bank only responds to market demand, it is a good reason to let interest rates float freely.

Citizens perceive that raising interest rates with high inflation is harmful; however, they do not seem to understand that what was really destructive was having negative real and nominal interest rates in the business cycle's earlier phase. That’s what encourages economic agents to take far more risks than we can take, and to disguise excess debt with a false sense of security. At the same time, it is surprising that citizens praise low rates but then complain that home prices and risky assets rise too fast!

Shifting the Blame

Inflation is a huge advantage for the currency issuer. It blames everyone and everybody for the rise in prices, except for the only thing that makes aggregate prices go up, consolidate that increase, and continue to rise, even at a more moderate rate: printing much more currency than the private economy demands and setting rates well below the real risk levels.

The benefit of statism is that it puts the blame for high interest rates on banks, just as it blames supermarkets for high and rising consumer prices.

Who prints currency and disguises risk? Of course, we look at the European Central Bank (ECB) and the Fed and the local Reserve Bank, who all dictate the increase in money supply through repurchases and fixed interest rates. However, central banks do not buy back state assets, print money, or impose negative real interest rates because they are evil alchemists. They do so because the state’s deficit—which is artificial monetary creation—remains unsustainable, public debt is atrophied, and state solvency is worsened by imbalanced public accounts. The central bank is not responsible for implementing fiscal policy. Thus, the state is the one that prints money out of nowhere and passes the imbalance to the citizens through inflation and taxes.

No wonder politicians are always so eager to shift the blame.

In a genuinely open unhampered economy, banks do not create money out of nowhere; they lend to real projects that are expected to be repaid with interest, and those loans have collateral. If commercial banks created money out of nowhere, none of them would go bankrupt. They only create money out of nowhere when regulation imposes risk-disconnected rates and eliminates the need for capital to sustain the government by accumulating its bonds and loans under the false construction that they are “no-risk assets.” Thus, the castle of cards built under the disguise of public-sector risk always creates inflation, financial crises, secular stagnation, and liquidity traps. The amount of money created goes to unproductive expenditure, destroys the purchasing power of the currency, impoverishes citizens, and at the same time decapitalises the most fragile companies, SMEs (small and medium enterprises). 

That’s what they call the social use of money. Seriously.

Hikes or cuts?

The ECB has announced a possible interest rate cut in June that is in danger of being premature and wrong. First, because money supply, credit demand, and supply are rebounding, and inflation remains persistent and above the 2% target. Furthermore, the underlying trend is a much higher inflation level than the ECB’s target, even after two changes in the CPI calculation. After a 20% accumulated consumer price level since 2019, calling victory on inflation after two changes in the calculation of CPI and still elevated core inflation is insane. If we see the rise in non-replaceable goods prices, we can understand why citizens are angry. Real non-replaceable goods’ CPI is probably closer to 4-5% per year.

The ECB rate hikes are signalled by many market participants as the cause of the euro zone’s stagnation, but curiously, no one mentions that the euro area was already experiencing massive stagnation due to negative interest rates earlier in the phase. Besides, if you need to have real negative rates to “grow,” you’re not growing but accumulating toxic risk. 

The ECB knows that the base effect, which played in favour of year-on-year inflation in 2023, will not be supportive in 2024. They also know that monetary aggregates were down a few months ago but are rebounding, and that the supply of credit has not collapsed. The ECB, like every other non-deluded central bank in the known world, knows that inflation is a monetary phenomenon and that there is no such thing as so-called cost-push inflation, “greedflation,” or similar statist excuses. None of those factors can cause aggregate prices to soar, consolidate, or continue to rise; it is only the destruction of the currency’s purchasing power that causes inflation.

Of course, no central bank will acknowledge that inflation is its fault, among other things, because no central bank increases the money supply at will but to finance an unsustainable public deficit. However, no central bank will challenge a financial structure that is based on the myth that public debt is risk-free. Central banks know that inflation is a monetary phenomenon, which is why they attack rising consumer prices with rate hikes and money supply reductions. They just do it mildly because governments benefit from inflation.

Eurozone cuts?

The problem of lowering interest rates now, when there is no evidence of having controlled inflation and achieved a target that already erodes the purchasing power of the currency by 2% annually, is to fall into the narrative that the eurozone is in a poor economic situation because of monetary policy when it is due to the wrong fiscal policy, the disaster of the Next Generation EU Funds, whose failure is already only comparable to the forgotten "think big" Juncker Plan, a shortsighted and destructive energy, agricultural, and industrial policy, and a taxation system that shifts innovation and technology to other countries.

The ECB is aware that interest rates are not high and that the system’s money supply has not decreased as expected. In fact, it continues to repurchase outstanding bonds and will not carry out a significant reduction in its balance sheet in real terms until the end of the year. Lowering interest rates now includes the risk of depreciating the euro against the dollar and thus increasing the euro area’s import bill in real terms, reducing the inflow of reserves into the eurozone, and further encouraging public spending and government debt that has not been contained in countries like Italy and Spain, which boast of “growing” by massively increasing debt and where inflation, moreover, is not under control. 

All this reminds us of the mistakes of the past when Greece boasted to be the EU’s growth engine, and many said that Germany was Europe’s “sick member.” The ECB cannot pretend to be the Bank of Japan for two reasons: the eurozone lacks the luxury of Japanese society’s dollar savings structure or its iron citizen discipline, and, above all, because the failure of Japan’s ultra-Keynesianism has brought the yen to a 35-year low against the dollar.

(To those who say that the euro and the ECB are Europe's main problem however, I recommend that you exercise your imagination of what Spain, Portugal, or Italy would be with their own currency and populist governments printing as if Argentina were Switzerland. You don’t have to imagine it; remember when these countries had an inflation rate of 14–15% and they destroyed savings and real wages with the falsehood of “competitive” devaluations? It wasn't that long ago.)

* * * * 

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020), Escape from the Central Bank Trap (2017), The Energy World Is Flat​ (2015), and Life in the Financial Markets (2014). He is a professor of global economy at IE Business School in Madrid.
Ranked as one of the top twenty most influential economists in the world in 2016 and 2017 by Richtopia, he holds the CIIA financial analyst title, with a postgraduate degree in higher business studies and a master’s degree in economic investigation. He is a member of the advisory board of the Rafael del Pino Foundation and Commissioner of the Community of Madrid in London.
Lacalle is a regular collaborator with CNBC, Bloomberg TV, BBC, Hedgeye, Seeking Alpha, Business Insider, Mises Institute, and the Epoch Times as well as an occasional consultant for the World Economic Forum, Focus Economics, the Financial Times, the Wall Street Journal, and other major news publications around the world.

His article first appeared at the Mises Wire.

The Governor who printed $50 billion of inflation ...

"Yesterday the Reserve Bank ... released a statement saying, 'The NZ economy continues to evolve as anticipated by the Monetary Policy Committee.' What a line coming from a Governor who told 'Bloomberg News' in the US in 2021, whilst he was busy printing $50 billion in cash, which is the primary cause of our current high inflation, that "The fear of the 70s, the 80s, stagflation, it is such a different world [now]." How amusing, given that stagnation, recession & inflation is exactly what we are now experiencing. How amusing that the RBNZ says our economy continues to evolve as anticipated when its forecasts could not have been proved more wrong.
    "It gets worse. ..."

~ Robert MacCulloch, from his post 'When will the Reserve Bank of NZ Stop Spinning and Stop Misleading Parliament and the Nation?'

 

How often do we hear that government "austerity" is destructive —that it is the job of government, or their central bank, to "stimulate demand"? Or that growth can be gussied up by gobs of government cash? In this guest post, Frank Shostak is here to dismantle those ideas, and to explain that monetary pumping does not create new wealth, it destroys it ...

Does Government Spending and Money Expansion Create New Wealth or Destroy It?

by Frank Shostak

Many economists claim that economic growth is driven by increases in the total demand for goods and services, additionally claiming that overall output increases by some multiple of the increase in expenditures by government, consumers, and businesses. Thus, it is not surprising that most economic commentators believe that a fiscal and monetary stimulus will strengthen total demand, preventing an economy from falling into a recession. [And conversely, that a withdrawal of govt spending will send it there. - Ed.]

These economists believe that increasing government spending and central bank monetary pumping will increase production of goods and services and strengthen total demand. This means that demand creates supply. However, is this the case?

Why Supply Precedes Demand

In the market economy, producers do not produce solely for their own consumption. Some of their production is used to exchange for what others produce. Hence, in the market economy, production precedes consumption. Something is exchanged for something else. This also means that an increase in the production of goods and services leads to an increase in the demand for goods and services.

According to David Ricardo,

No man produces, but with a view to consume or sell, and he never sells, but with an intention to purchase some other commodity, which may be immediately useful to him, or which may contribute to future production. By producing, then, he necessarily becomes either the consumer of his own goods, or the purchaser and consumer of the goods of some other person.

An individual’s demand is constrained by his ability to produce goods. The more goods an individual can produce, the more goods he can demand. For example, if five people produce ten potatoes and five tomatoes, this is all that they can demand and consume. The only way to consume more is to produce more.

James Mill wrote,

When goods are carried to market what is wanted is somebody to buy. But to buy, one must have the wherewithal to pay. It is obviously therefore the collective means of payment which exist in the whole nation that constitute the entire market of the nation. But wherein consist the collective means of payment of the whole nation? Do they not consist in its annual produce, in the annual revenue of the general mass of inhabitants? But if a nation’s power of purchasing is exactly measured by its annual produce, as it undoubtedly is; the more you increase the annual produce, the more by that very act you extend the national market, the power of purchasing and the actual purchases of the nation. . . . Thus it appears that the demand of a nation is always equal to the produce of a nation. This indeed must be so; for what is the demand of a nation? The demand of a nation is exactly its power of purchasing. But what is its power of purchasing? The extent undoubtedly of its annual produce. The extent of its demand therefore and the extent of its supply are always exactly commensurate.

The Expanding Pool of Real Savings Key to Economic Growth

Without the expansion and enhancement of the structure of production, it is impossible to increase the supply of goods and services in accordance with the increase in total demand. Expanding and enhancing the infrastructure depends upon expanding the pool of real savings, which is composed of consumer goods and supports those employed producing those necessary goods and services.

Consequently, it does not follow that increasing government spending and employing loose monetary policy will increase the economy’s output. It is impossible to lift overall production without the necessary support from the real savings pool.

For example, a baker produces twelve loaves of bread and saves ten loaves. He then exchanges them for a pair of shoes with a shoemaker. In this example, the baker funds the purchase of shoes by means of the ten saved loaves of bread, which maintains the shoemaker’s life and well-being. Likewise, the shoemaker has funded the purchase of bread by means of shoes that he had produced.

Assume that the baker has decided to build another oven to increase production of bread. To implement his plan, the baker hires the services of the oven maker, paying the oven maker with some of the bread he is producing. If the flow of bread production is disrupted, however, the baker cannot pay the oven maker, so the making of the oven would have to be abandoned. Therefore, what matters for economic growth is not just tools, machinery, and the pool of labour but also an adequate flow of consumer goods that meet the producer’s needs.

Government Does Not Generate Wealth

Government does not produce wealth, so how can an increase in government outlays revive the economy? People employed by the government expect compensation for their work. One way the government can pay these employees is by taxing others who are generating wealth. By doing this, the government weakens the wealth-generating process and undermines prospects for economic growth.

According to Murray Rothbard, 

Since genuine demand only comes from the supply of products, and since the government is not productive, it follows that government spending cannot truly increase demand.

If the pool of real savings is large enough to fund government spending, then a fiscal and monetary stimulus will seem to be successful. However, should the pool of real savings decline, then regardless of any increase in government outlays and monetary pumping by the central bank, overall real economic activity cannot be revived. In this case, the more government spends and the more the central bank pumps, the worse off wealth generators will be, eliminating prospects for a recovery.

When loose monetary and fiscal policies divert bread from the baker, he will have less bread at his disposal. Consequently, the baker cannot secure the services of the oven maker, making it impossible to increase the production of bread.

As the pace of loose government policies intensifies, the baker may not have enough bread left even to sustain the workability of the existing oven since he no longer can afford the services of a technician to maintain the existing oven. Consequently, the production of bread will actually decline.

Because of the increase in government outlays and monetary pumping, other wealth generators will have fewer real savings at their disposal. This in turn will hamper the production of their goods and will weaken overall real economic growth. The increase in loose fiscal and monetary policies not only fails to raise overall output, but on the contrary, it leads to a general weakening in the wealth-generation process.

According to J.B. Say, 

The only real consumers are those who produce on their part, because they alone can buy the produce of others, [while] . . . barren consumers can buy nothing except by the means of value created by producers.

Conclusion

Most economists and economic commentators claim that increases in government spending and central bank monetary pumping strengthen the economy’s overall demand. This, in turn, sets in motion increases in the production of goods and services. Thus, demand supposedly creates supply.

However, to be able to exchange something for goods and services, individuals must first have something by which to exchange. To demand goods and services individuals first must produce something useful. Hence, supply drives demand, not the other way around.

Increases in government spending divert savings from the wealth-generating private sector to the government, thereby undermining the wealth-generating process. Likewise, monetary pumping results in wealth diversion from wealth generators toward the holders of pumped money. Far from stimulating economic growth, government actions hinder it.

* * * * 

Frank Shostak has over 40 years experience as a market economist and central bank analyst. He is an adjunct scholar of the Ludwig von Mises Institute and a member of the board of editors of the Quarterly Journal of Austrian Economics. He is highly regarded for his skills to convert complex economic issues into plain English. He has written articles that have appeared in The Wall Street Journal and in academic journals in Europe and the US. A follower of common -sense economics and damage inflicted from reckless money creation, his Sydney-based consulting firm, Applied Austrian Economics, provides in-depth assessments of financial markets and global economies.

His post first appeared at the Mises blog.

"Forget the cost-of-living-crisis. That's not something experienced in Wellington by public sector executives."

 

No wonder they're smiling: These ten people you see above above are given $5.2 million between them every year. Isn't that nice. Averaged out, that's a pretty tidy sum. What do they do for that money? They're on the Executive Leadership Team at NZ's Reserve Bank, aka Te Putea Matua (which my dictionary translates as "important basket.") Which doesn't really answer the question. (But might describe some of these people.)

The Reserve Bank, as I'm sure you know, has a coercive monopoly on the central price in the economic system. Only two of the Reserve Bank's "leadership team" however (Orr and Hawkesby) have any training in economics at all beyond high school. If that. "So," says economics professor Robert MacCulloch, "so I'm not clear what it is they do that's associated with NZ having better economic (monetary & banking) policies." 

They're posssibly not too clear about that themselves either -- although one does admit that "Sustainability has been a key focus," and another is a "recognised thought leader on digital and data innovation." Which clearly doesn't come cheap.

Overseeing this "team" is the Reserve Bank's Board of Directors (below)-- about whom, observes McCulloch, "it's even less clear what they do - again most have little to no expertise in central banking. [Quigley at least is an exception.] Nevertheless that 7 member Board took $662,000 for what-ever-it-is-they-do."

As McCulloch wryly notes, "Forget the cost-of-living-crisis. That's not something experienced in Wellington by public sector executives." No. But it should be.

What's ESG? What's ZIRP? -- and why should you care?

ZIRP (zero-interest rate policies) characterises the cheap credit that has flooded out of central banks in the last decade or more. 

ESG (environmental, social, and governance) is the dripping wet "stakeholder" theory that demands that so-called "ethical investors" should direct companies to undertake more politically-correct projects. It is the stakeholder theory route to collectivism.

Fortunately, as Peter Earle explains in this guest post, shareholders and consumers are starting to flex their muscles, and the credit contraction is making a lot of what was formerly cheap very expensive.

ESG as an Artifact of ZIRP

Guest post by Peter C. Earle

Founding myths tend to be mired in obscurity, and like many other investment trends, the roots of environmental, social, and governance (ESG) philosophies are unclear.

The founding of the World Economic Forum is one origin. Stakeholder theory is another of ESG’s clear antecedents, especially as formalised in R. Edward Freeman’s 1984 book Strategic Management: A Stakeholder Approach. The 2004 World Bank report “Who Cares Wins: Connecting Financial Markets to a Changing World” is another contender, providing as it did guidelines for firms to integrate ESG practices into their daily operations. And the publication of the reporting framework United Nations Principles for Responsible Investing in April 2006 (the most recent version of which can be found here) was another.

Its origins however are less important than the destruction it has caused.

Wherever it began, ESG clearly hit its stride within the last five to ten years. Those were heady times for bankers and financiers, first characterised by zero interest rate policies (ZIRP) and then, during the pandemic, by massively expansionary monetary and fiscal programs. Yet in the last two years or so, the prevailing economic circumstances have changed considerably. Inflation at four-decade highs is battering firms by raising the cost of doing business. It is also negatively impacting corporate revenues, as consumers retrench by cutting back on expenditures.

Nowhere are these effects more evident than in shareholder land, where the fourth-quarter 2022 S&P 500 earnings season is just about over. “Earnings quality” is an evaluation of the soundness of current corporate earnings and, consequently, how well they are likely to predict future earnings. For the past year, and certainly for the last quarter, the quality of earnings has been abysmal. One particular element – “accruals,” or cashless earnings – are their highest reported level ever, according to UBS. In that same report, we find the somewhat shocking revelation that nearly one in three Russell 3000 index constituents is unprofitable.

For those and other reasons, a theme in many of the fourth-quarter corporate earnings reports has been cost-cutting: Disney, Newscorp, eBay, Boeing, Alphabet, Dell, General Motors, and a handful of investment banks are all eliminating jobs and slashing unnecessary expenses. And although firms regularly write off the value of certain assets and goodwill, that process accelerates during recessions. 

Firms are additionally contending with the highest interest rates they’ve faced since 2007, and in some cases back to 2001. A substantial amount of corporate debt assumed at lower interest rates is now more costly to service, as a generation of managers grapple with a world of interest rates (and its effects) that they've never seen before.

Dividend payments for example, typically considered sacrosanct during all but the most severe financial straits, are being targeted for savings. February 24th in Fortune:

Intel, the world’s largest maker of computer processors, this week slashed its dividend payment to the lowest level in 16 years in an effort to preserve cash and help turn around its business. Hanesbrands Inc., a century-old apparel maker, earlier this month eliminated the quarterly dividend it started paying nearly a decade ago. VF Corp., which owns Vans, The North Face, and other brands, also cut its dividend in recent weeks as it works to reduce its debt burden … Retailers in particular face declining profits, as persistent inflation also erodes consumers’ willingness to spend. So far this year, as many as 17 companies in the Dow Jones US Total Stock Index cut their dividends, according to data compiled by Bloomberg.

All of this suggests two things.

First, if large firms are doing everything they can to reduce unnecessary overhead, then feel-good initiatives and other corporate baubles are likely to face the chopping block – even if quietly. ESG observance is one of those very costly trinkets, bringing as it does compliance costs, legal costs, measurement costs, and opportunity costs. The reporting requirements alone associated with upholding ESG standards are high, and rising. In 2022, two studies attempted to estimate those costs:

Corporate Issuers are currently spending an average of more than $675,000 per year on climate-related disclosures, and institutional investors are spending nearly $1.4 million on average to collect, analyze and report climate data, according to a new survey released by the SustainAbility Institute by ERM … The survey gathered data from 39 corporate issuers from across multiple U.S. sectors, with a market cap range of under $1 billion to over $200 billion, and 35 institutional investors representing a total of $7.2 trillion of AUM … The SEC has released its own estimates for complying with its proposed rules, predicting first year costs at $640,000, and annual ongoing costs for issuers at $530,000. The study explored the specific elements covered by the SEC requirements, and found that issuers on average spend $533,000 on these, in line with the SEC estimates. Elements not included in the SEC requirements included costs related to proxy responses to climate-related shareholder proposals, and costs for activities including developing and reporting on low-carbon transition plans, and for stakeholder engagement and government relations.

Difficulty measuring costs means difficulty budgeting for them. Another recent report commented:

Although it is inherently difficult to assess the costs [of ESG], it is fair to anticipate significant costs for ambitious ESG goals. In an article in The Economist, a specific cost estimate was made in relation to offset a company’s entire carbon footprint. This was estimated to cost about 0.4 percent of annual revenues. This could already be a huge component for many companies, but it is only one aspect of merely one ESG factor.

Yet that comment concludes with the kind of assurance that flows effortlessly from consultants well-positioned to, frankly, make a lot of money off of ESG compliance: “However, there is no real choice. The climate certainly cannot wait.” Given the recent backlash against ESG, whether driven by ideology or accounting, it’s clear that there is a real choice, and that choice is being invoked with increasing frequency throughout the commercial world.

Second, the recent explosion of ESG adoption may have been in the spirit, if not embodying a strictly theoretical manifestation, of malinvestment as predicted by Austrian Business Cycle Theory (ABCT). 

Without engaging in a lengthy discussion of ABCT, artificially-low interest rates (interest rates set by policymakers instead of markets) undercut the natural rate of interest, misleading entrepreneurs and business managers. Many years of negligible interest rates, indeed negative real rates, have given rise to bubble-like firms, projects, and I would argue, by extension, business concepts. The latter, which include but are not limited to ESG, seem feasible and arguably essential when the money spigots are open. When interest rates normalise and sobriety re-obtains, cost structures reassert themselves. It’s back to the business of business. 

Interest rates are now beginning to normalise. And, perhaps, business practices with them.

Gone are the salad days of easy money, and with it the schmaltzy wishlists of niceties which a decade of monetary expansion permitted activists to blithely force upon corporate executives. In the face of rising interest rates, an uncertain path for inflation, budget-constrained consumers, and rapidly deteriorating corporate earnings, shareholders are likely to take a closer look at how and where their money is being spent than they have in some time. 

Although it is unlikely to disappear completely, the ESG fad is probably past the crest of its popularity. It’s time again for firms to focus, singularly and completely, on the inestimable task of making money.

* * * * 

Peter C. Earle is an economist who joined the American Institute for Economic Research (AIER) in 2018. Prior to that he spent over 20 years as a trader and analyst at a number of securities firms and hedge funds in the New York metropolitan area. His research focuses on financial markets, monetary policy, and problems in economic measurement. He has been quoted by the Wall Street Journal, Bloomberg, Reuters, CNBC, Grant’s Interest Rate Observer, NPR, and in numerous other media outlets and publications. Pete holds an MA in Applied Economics from American University, an MBA (Finance), and a BS in Engineering from the United States Military Academy at West Point.

His post first appeared at the AIER blog.