Drinkwater on monetary policy

November 22nd, 2009 at 6:00 am by David Farrar

Just as Scrubone has become the dedicated fisker of No Right Turn, B K Drinkwater has appointed himself as the fisker for Marty G at . His latest response to the suggestion that should target inflation, unemployment and the exchange rate is:

Genius! What the RBNZ should do is this: pick a point on the Philips Curve and manage New Zealand’s economy towards it! If only some genius thought of this before.

Oh, wait. Someone did, and it didn’t work. Apparently, some guy called Friedman accurately predicted its failure …

Stagflation in the 70s proved Friedman correct, but this is where Phil Goff wants us to go back to.

I actually can’t figure out whether Marty wants the interest rates to be low or high. He thinks that if they’re too high, then the currency carry trade will create a “flood of credit”, making mortgage rates too low. His preferred solution—abandoning inflation-targeting—clearly implies that he wants the OCR lower than it is, and that by doing this, somehow mortgage rates will go up.

He’s very confused.

And then Blaise sums up:

So Marty wants the following:

  • A lower OCR
  • Higher mortgage rates
  • Jobs, or in other words, investment in New Zealand
  • Reduction in the currency carry trade, a big chunk of such investment

My head hurts.

Need more be said.

Tags: , ,

18 Responses to “Drinkwater on monetary policy”

  1. RainbowGlobalWarming (295 comments) says:

    Who would have thought MartyG and/or his cohorts at Doh!Standard are full of it. If one draws a corollary between Doh!Standards commentary on Economics and Climate Change one could hypothesize they talk shit on both topics.

    I would be fascinated to hear opinions on this hypothesis.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  2. Michael E (274 comments) says:

    As Phil Goff spoke I’m sure I heard a ghostly figure over his shoulder go “Heh!”.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  3. tvb (4,204 comments) says:

    Bookend this with Fitzsimons believing in nutty conspiracy theories you get the picture of what a future Labour Government would look like. Running a successful economy requires hard work and discipline. There is not a silver bullet especially regarding the exchange rate. I am glad the Labour Party have chosen a political fight with John Key over managing the exchange rate. Bring it on.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  4. RainbowGlobalWarming (295 comments) says:

    Labour are clueless, there is practically nothing a government the size of NZ can to do manage exchange rates besides give it a judicious nudge at the right time *gasp*.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  5. Chthoniid (2,028 comments) says:

    Actually at one level it’s not hard-
    * save more
    * don’t have a housing bubble
    * don’t set fiscal policy in conflict with monetary (i.e. fiscal discipline is the key, not pissing it up against the wall buying train sets)

    The problem is that Labour refuses to recognise that their fiscal stance was in any way responsible for the mess we found ourselves in in 2008.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  6. tvb (4,204 comments) says:

    Labour’s constituency is all those people who have their hands out and want something for nothing. This was made stark for everybody when year after year they refused tax cuts and spent money on nutty programmes and people doing non jobs. Now they go on and think they can print money from the Reserve Bank to buy them votes.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  7. Viking2 (11,129 comments) says:

    tvb. I’d suggest that’s not so. Under Clark’s last years maybe but not normally. Labour is the only party that has bought change to NZ. National only ever have once and that was the contracts Act, which was right but poorly designed.
    If any outfit is dishing out the money this lot are worse than any and that’s after they got elected on saying they would change it all. Those of you that believed them got sucked in good and proper.

    Goffs talk the other day is fair and it is time we considered if paying the Reserve Bank Governor bonuses based on his control of inflation is the way forward. Its failed misserably for 20 years and will continue to do so.

    Here’s a better authourity than me on the subject of NZ’s demise.
    Go do some learning.

    http://www.stuff.co.nz/business/blogs/stirring-the-pot/3049405/New-Zealand-as-it-is-warts-n-all

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  8. Kimble (4,379 comments) says:

    I just dont understand why people keep insisting the RBNZ failed in its mission to keep inflation within a certain range. Inflation has been low, and while non-tradeable inflation did spike to 5 percent, the blame for that can just as easily be placed on a politically motivated expansionary fiscal policy. Not only has it been low, it has been predictable, I just dont think enough people recognise the importance of that.

    If the RBNZ does not focus solely on inflation, then inflation expectations WILL rise. It is that uncertainty which will damage the NZ economy much worse than anything you would want to fix by removing inflation targetting as the RBNZs sole concern.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  9. Viking2 (11,129 comments) says:

    Who cares about inflation when the policy that derives from controlling it are in part responsible for dooming NZ to 3rd world status. Why have kiwi’s left NZ for the last 20 odd years to find themselves a better standard of living?
    All the time this particular brand of control has been in place and Kiwi’s left at home have got poorer and poorer.
    Why shouldn’t we question this and why shouldn’t we question the various monetary and fiscal policies that surround this obsession towards the Gov’s. bonus payments.
    We should be obsessing about creating wealth for NZ and NZer’s not allowing any two bit money trader to influence what our dollar is worth based upon our interest rates and various carry trades.
    Try thinking a bit more out of the box and look at the world picture.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  10. Chthoniid (2,028 comments) says:

    Correct Kimble.

    Having an independent Reserve Bank and a focus on inflation has not only had wide political and economic support, it has largely kept underlying inflation in the narrow bands prescribed by the Act.

    It has certainly not been a miserable failure in this sense. The idea that you can with monetary policy achieve multiple policy goals (noting the old RB Act gave RB the goals of managing the balance-of-payments, controlling inflation, growth and increasing employment) has little empirical or theoretical support.

    The only practical thing we are aware of that the RB can do to sustain economic growth, is to have low and predictable inflation. That creates a better environment for long term planning and investment by businesses.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  11. Chthoniid (2,028 comments) says:

    I’m sorry Viking2, I don’t see the connection between the RB Act and the poor economic performance of NZ?

    Creating wealth is about turning inputs we have into something that someone, somewhere else values more. That’s ultimately a private sector decision, which means it is the incentives facing local entrepreneurs that matter. That means things like taxation and red tape issues matter.

    When Labour came into power I folded up my nascent consultancy business in Asia. My costs rose when ACC was nationalised. My return fell when the tax hit 39%. And people in similar households earning half my salary, got the same spending power with their welfare top-ups. What is the point?

    The root problem is that we have a political culture that says we want people to make wealth, but we don’t want them to keep it. If you succeed, we want to plunder that and give it to others. Aah, how we laughed when Helen exhorted NZ businesses to engage more with Asia after the raids on our wealth.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  12. Kimble (4,379 comments) says:

    “Who cares about inflation”

    Yeah, who cares about inflation? Why not have inflation at 10 percent? What could possibly be wrong with that? Or maybe have it at 10% sometimes, and 5% other times, thats even better right? Because the average would be lower. Durrrr.

    Hell, when was the last time we won the rugby world cup? Must be the fault of monetary policy too. And all those awful reality TV shows that have been spawned in the last decade? Monetary policy is to blame for that.

    As Matt says at TVHE, monetary policy is about the amount of money. Thats all. Go read his posts, they will explain it better than I can here.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  13. tvb (4,204 comments) says:

    Labour thinks wealth can be created by printing money, by taxing the wealth of the middle class to provide lifestyle options for the welfare class, and having pay increases in excess of productivity improvements. All of that works in the short term but then the economy crashes. Labour Government always run out of money and they lose Government when it does.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  14. Grant Michael McKenna (1,156 comments) says:

    “Need more be said” says DPF. Yes, more needs to be said, again and again, to show how economically illiterate Labour are.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  15. Viking2 (11,129 comments) says:

    Well Singapore manages well enough and has about the same population. Is a hell of a lot wealthier than we are, so they and others must do something right.
    I agree Chthoniid that welfare is not clever and I agree that it drags us all down.
    Interest rates only affect two sections of the community. Business and home and property owners. Doesn’t affect the rest.
    Brash has already said that he has looked at the housing issue and finds that in fact we spend less than the OECD average on housing so beating up home owners is just driving then to leave NZ.
    Business is tough enough in NZ now without driving the monetary cycle up and down using interest rates. One day flat out producing the next fucked and bankrupt. All makes good sense when you look at it doesn’t it.

    Interest rates and exchange rates are the two things that affect us most so its beyond time we had a more informed look at our system. One that isn’t driven by class politics.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  16. Chthoniid (2,028 comments) says:

    The irony of Singapore is that during the 60s unions in NZ opposed trade with them because they were afraid of this ‘low wage’ economy.

    Nonetheless, Singapore differs from NZ in many other respects. There is little in the way of a welfare system, and the government sector takes up around 25% of the GDP (as opposed to our ‘close to’ 40%). Taxes are low, monetary and fiscal policy has always been conservative. There’s an open-door policy to multinationals and foreign investment.

    This is backed up by a very high savings rate (supported by a timid welfare system and compulsory savings). In turn there have been little in the way of severe macro-economic imbalances, making the peg a bit easier to sustain. The “actual” exchange rate is close enough to the peg for there not to be a departure from economic fundamentals.

    NZ tends to acquire large macroeconomic imbalances under the weight of imprudent fiscal policies. The high interest rates + high exchange rate we had under Labour weren’t actually the problem. They were the symptoms or warning signs of problems being generated by Cullen & Co.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  17. Viking2 (11,129 comments) says:

    Thats right and that’s why we need to say so and do something about it all. Long term thinking instead of the political cycle thinking.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  18. RainbowGlobalWarming (295 comments) says:

    Irrespective, there is almost nothing the government can do to effectively manage the exchange rate in NZ given the massive amounts of speculating cash chucked in as a carry trade.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote

Leave a Reply

You must be logged in to post a comment.