IMF on monetary policy

March 21st, 2013 at 1:00 pm by David Farrar

The Herald editorial:

It is always useful to get a global perspective on issues that are the subject of local political wrangling. Light is generally shed on areas that may be clouded by the heat generated by debate. In that context, the International Monetary Fund’s annual report on the New Zealand economy is timely. It casts an especially valuable eye over the two questions of most current angst and anxiety, the significantly overvalued dollar and the overheated Auckland housing market. Its conclusions should put an end to much of the irrational comment on how these issues should be addressed.

The says there should be no “messing with” the framework just because the dollar is temporarily overvalued. Indeed, that framework, including a flexible exchange rate, was one of the reasons New Zealand had been relatively resilient in the face of the global downturn. “Do you want to mess [with] the framework because the exchange rate at the moment is overvalued, and do potentially long-term damage? I would be very reluctant to go down that path,” said Bruce Aitken, the head of the team.

We are a minnow. To think we can unilaterally change our exchange rate is silly. You can do it by printing more money of course, which is a great way of making the entire country poorer.

That represents a strong riposte to politicians who have sought to reap advantage from manufacturers’ grievances over the high dollar. It confirms the dangers inherent in, for example, the ’ call for the exchange rate to be part of the Reserve Bank’s mandate. The lower interest rates that flowed from this would, as the IMF notes, remove an advantage held by New Zealand’s central bank. Unlike its counterparts in several nations, it still has the scope to cut interest rates if the country were hit by another major shock. co-leader Russel Norman has accused the Reserve Bank governor Graeme Wheeler of complacency and being stuck in the 1980s. This report confirms that Dr Norman’s credibility is under far greater threat.

The Greens are almost the only party in the western world calling for printing money, when the official cash rate is still well above zero. Quantitative easing is the last resort, not the first resort. They just want to print money to pay for their promises.

The problem is not so much the NZ dollar is too high. The US dollar and Euro are tanking because a generation of borrow and spend policies are crippling them. By contrast we are historically low against the Australian dollar.

Tags: , , , , ,

20 Responses to “IMF on monetary policy”

  1. SPC (4,675 comments) says:

    The only reason our OCR is above zero is because we are covering our deficit financing by borrowing money offshore.

    At what level is it more prudent to print than to continue to borrow – the more borrowing the higher the debt cost.

    Given we won’t borrow to rebuild the EQC, is there any other way to quickly rebuild EQC reserves without the Green proposal? Or will the government just borrow some money to cover the EQC shortfall if another event happens? A gradual rebuild of the EQC via a little printing each year is not the worst option.

    Vote: Thumb up 1 Thumb down 9 You need to be logged in to vote
  2. Viking2 (10,738 comments) says:

    IMF. mmm well not much better at predicting anything than Standard and Poors. Meryl Lynch, NZ Trerasury, Solid energy.

    Why would we bother to listen to them or print the tripe they write. Good mates with the OECD bullshit brigade.
    Like the question about the Greens the other day.

    Can anyone point to something that they have said or predicted that’s actually been correct.

    Hope we don’t pay these soothsayers anything.

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  3. kowtow (6,723 comments) says:

    The IMF are party to the theft of depositor property (savings) in bank accounts in Cyprus.

    Why would anyone listen to thieves.

    The high dollar and the Auckalnd property market are chicken shit compared to the financial disaster that public and private debt have become.

    That’s the real danger; lifestyles funded by debt,reinforced by electorates who insist taxpayers keep them in a standard of living they have not worked for and therefor don’t deserve.

    Vote: Thumb up 1 Thumb down 1 You need to be logged in to vote
  4. Ed Snack (1,540 comments) says:

    Kowtow, probably not entirely true. If, as I have seen said, that the IMF and the EU wanted the levy only to apply to unsecured deposits, then they’re not behind the local Cypriot government’s ham-fisted attempt to mollify the Russian mafia. Theft it ain’t though.

    The options in Cyprus are limited, but making big depositors bear some of the cost seems reasonable to me. The other choices are stick it to the German taxpayer, open up the banks to the Russian tax department, or let them just go broke. FWIW, I’d favour the last, a la Iceland.

    Vote: Thumb up 1 Thumb down 1 You need to be logged in to vote
  5. grumpy (226 comments) says:

    “The Greens are almost the only party in the western world calling for printing money,”

    Haven’t you forgotten the McGillicuddy Serious Party………oh wait!

    Vote: Thumb up 2 Thumb down 0 You need to be logged in to vote
  6. flipper (3,274 comments) says:

    SPC…

    With respect, you are writing green garbage.

    If you truly believe the red melon rubbish, take a hike to Mugabeland and experience your nut cake ideas first hand.

    It is clear that you do NOT realise:

    a. The NZ dollar is high because the US$, and the Eruo etc,. are weak, and are thus not a good risk for either institutions or individuals, and

    b. New Zealand is seen as a safe investment nation because of its exchange rate rules (floating, unfettered), stable government, good institutions, and good (by currernt international rates) interest rates.

    Oh, and dont forget that when we borrow, probably only Aust. gets a better (marginal) interest rate at the moment.

    So, SPC/Greens, here endeth the first lesson. :)

    Vote: Thumb up 4 Thumb down 0 You need to be logged in to vote
  7. wat dabney (3,464 comments) says:

    The only reason our OCR is above zero is because we are covering our deficit financing by borrowing money offshore.

    No, the OCR is set by the central bank according to their estimates of future inflation. Government debt, by contrast, is an auction process.

    At what level is it more prudent to print than to continue to borrow – the more borrowing the higher the debt cost.

    Everything else being equal, the central bank must take the extra printed money into consideration and raise interest rates to neutralise its inflationary effect. The more money Russel prints, the higher interest rates must go. Unless he’s saying that, as finance minister, he would instruct the central bank to target a higher inflation target? But then inflation works as another form of taxation, a particularly regressive one. Russel can borrow money, in which case it is paid back via the progressive tax mechanism, or he can print money, in which case the poor – who hold a far greater proportion of cash to assets than the rich – take much of the hit.

    Vote: Thumb up 3 Thumb down 0 You need to be logged in to vote
  8. MT_Tinman (2,793 comments) says:

    This report confirms that Dr Norman’s credibility is under far greater threat.

    What credibility?

    Vote: Thumb up 4 Thumb down 0 You need to be logged in to vote
  9. Scott Chris (5,682 comments) says:

    The problem is not so much the NZ dollar is too high.

    Rubbish. Have a look at the TWI.

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  10. thedavincimode (6,131 comments) says:

    Scott C

    Why do you go away and then come back and just do stupid?

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  11. SPC (4,675 comments) says:

    flipper,

    You do not seem to realise

    1. the UK, Japan, the USA, Switzerland as well as EU members France and Germany all have lower debt cost than we do
    2. the UK, Japan, the USA, Switzerland as well as EU members France and Germany all practice QE.

    Is it OK to have an EQC with no reserve left and the government inactive on doing anything about this?

    PS
    a, I did not mention currency in my post – straw man issue.
    b. why refer printing money to Zimbabwe when the relevant comparisons are the UK, Japan, the USA, Switzerland as well as EU members France and Germany?

    Vote: Thumb up 1 Thumb down 2 You need to be logged in to vote
  12. SPC (4,675 comments) says:

    wat dabney

    You seem to have misunderstod the meaning of my comment

    “The only reason our OCR is above zero is because we are covering our deficit financing by borrowing money offshore.”

    If we had no budget deficit because government had slashed spending or increased taxes (as is occuring in Europe) we would have zero or near zero OCR too.

    Vote: Thumb up 0 Thumb down 1 You need to be logged in to vote
  13. SPC (4,675 comments) says:

    “At what level is it more prudent to print than to continue to borrow – the more borrowing the higher the debt cost. ”

    As to your response to this, I simply note the OCR is higher because we are borrowing money offshore to fund a deficit, would the OCR be any higher if we printed some of this money rather than borrowed it?

    Vote: Thumb up 0 Thumb down 1 You need to be logged in to vote
  14. bhudson (4,720 comments) says:

    @SPC,

    Actually the principal reason the OCR remains at the height it currently is, is that the Reserve Bank Governor doesn’t want to encourage heating up the property market even further as a result of lower interest rates.

    The reason is hasn’t been raised in recent times is that, likewise, he doesn’t want to discourage investment in general through increased costs of borrowing.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  15. SPC (4,675 comments) says:

    bhudson,

    Not exactly, the reason for the rate – which was decided on some time ago – was because of the governments chosen course of fiscal policy (borrow offshore to fund the deficit while working to get it back to balance over the medium term). At that time there was no heat in the housing market, nor an earthquake rebuild.

    The long delay to a recovery (waiting for the rebuild growth to kick in as if only this will launch it) meant inaction on the heat in the housing market and thus the look at alternative tools other than the OCR to dealing with this market. Thus keeping steady on the OCR – based on their original outlook on the governments fiscal policy.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  16. wat dabney (3,464 comments) says:

    SPC,

    No, you remain wrong.

    The OCR is a function of anticipated inflation. End of.

    If we had no budget deficit because government had slashed spending or increased taxes (as is occuring in Europe) we would have zero or near zero OCR too.

    No, we would have the current OCR.

    The OCR is not the rate the government needs to pay to borrow money. As I said, that is an auction process.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  17. SPC (4,675 comments) says:

    wat dabney

    In Europe slashing budgets and raising taxes results in near zero OCR, the same would occur here if that were policy.

    Such a tight fiscal policy reduces inflationary expectations etc, thus the OCR falls.

    No one has said the OCR was the rate we borrowed money at.

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  18. EAD (324 comments) says:

    Some interesting comments all round but the wood seems to have been missed from the trees by everyone.

    I’m surprised SPC received so many down votes as whilst printing money is a reckless idea, what is the difference between adding more NZD to the money supply via borrowing offshore (and paying back principal + interest) and creating it out of thin air? Of course the 2nd option creates a moral hazard which politicians being politicians wouldn’t be able to resist once the rubicon has been passed. At least borrowing from offshore creates quasi discipline but it means that more and more of New Zealanders wages will have to be expropriated via taxation/inflation to pay for an ever increasing debt load.

    Remember money is not wealth, it is a means of exchange. Under the gold standard and to a lesser extent Bretton Woods which tied money supply to gold, the money supply was essentially fixed and prices in general decreased year on year as all the benefits of productivity gains were passed onto workers via falling prices. Under a debt based, fractional reserve monetary system which we’ve had since Aug 15th 1971, the supply of money needs to keep rising to service the interest on the ever increasing amount of debt. Central planners manipulating the rate of interest ever lower is not the sign of fiscal prudence/less risk, it is the end result of a debt based monetary system trying to stay afloat under an ever increasing amount of debt. As an economy begin to rely more and more on increasing debt levels to give an illusion of growth not caused by productivity, the poorer and poorer the workers get as prices keep rising (not quite true as it is the value of the NZD decreases due to more of it now circulating making M in the P=MxV/Q equation grow) whilst wages are unable to keep up with a statistically manipulated inflation index.

    Read the below link about money and the scales will begin to fall from your eyes about the nature of our money system.

    http://mises.org/daily/6314/Banking-and-the-State

    Vote: Thumb up 0 Thumb down 0 You need to be logged in to vote
  19. EAD (324 comments) says:

    Also ask yourself why do we need monetary policy? Why don’t we let the free market set interest rates? What makes you think a small group of individuals at the RBNZ can better set interest rates than millions of individuals acting in their own rational self interest? If there is massive demand to borrow money in a free market then interest rates should RISE to reflect the increased demand and vice versa. In a free market, a grossly indebted country should be charged HIGHER rates of interest due to the perceived risks of not getting your money back yet our centrally planned monetary system has managed to turn economic law on its head (temporarily) whereby the more indebted the country (Japan, UK, USA et. all) the lower the interest rates!!

    Unfortunately if you attended any NZ University like my alma matter Otago, you would have been indoctrinated in Keynesian and Chicago School Economic (Friedman) thought so your mental framework of central planners manipulating interest rates/money supply in order to “manage” an economy will keep you caged on the hamster wheel of debt and boom-bust cycles. You will spend your time deciding which of the blue or red team is the wisest controller of the economy until like the EU, the whole thing just collapses on its weight of accumulated mal-investments brought about by the continual distortion or price signals caused by central planners manipulating interest rates/monetary volume.

    Vote: Thumb up 1 Thumb down 0 You need to be logged in to vote
  20. thedavincimode (6,131 comments) says:

    SPC

    It is truely remarkable that with all the informed comment floating about generally in relation to these issues that you could remain so steadfastly stupid.

    Vote: Thumb up 2 Thumb down 0 You need to be logged in to vote

Leave a Reply

You must be logged in to post a comment.