How much will take home pay drop?

May 4th, 2014 at 9:27 am by David Farrar

Stuff reports:

National wants Labour to say how much its policy to keep interest rates down will cost wage earners, calculating it would need to strip an extra 6 cents of every dollar earned to equal a 1 per cent interest rate rise.

Last week Labour announced its policies to help the Reserve Bank to control inflation, including a variable savings rate (VSR), which would alter the level of KiwiSaver contributions to ease the pressure to increase the Official Cash Rate (OCR), the benchmark against which almost all borrowing costs are set.

Speaking at the National Party’s northern region conference in Auckland yesterday, Economic Development Minister Stephen Joyce said the plans penalised wage earners in favour of farmers and home owners.

“KiwiSaver members are going to do all the heavy lifting for the whole economy.”

To make a material difference to interest rates a large chunk of take home pay would be stripped from them.

Joyce said Labour’s finance spokesman David Parker “has no idea how much KiwiSaver contributions would have to go up to make up for say a 1 per cent increase in interest rates.”

National had conducted “back of the envelope sums” which suggested that to prevent interest rates going up by 1 per cent, KiwiSaver rates would have to be lifted by 6 cents in the dollar.

I’ve seen that figure from a bank economist also. So what does that means if you are on say $60,000 a year. It means your take home pay will drop by $3,600 a year or a massive $70 a week to stop interest rates rising by 1%.

Now you may not even have a mortgage. Most people do not. Everyone who does not currently have a mortgage will have their take home pay slashed.

But what if you do have a mortgage. Say you have $300,000 owing on it. Let’s say the VSR means your interest rate is at 6% instead of 7%. What difference does that make to your weekly repayments? At 7% a $300,000 20 year mortgage costs you $536 a week. At 6% it is $495 a week so that saves you just $41 a week.

If you’re very wealthy, you’ll benefit from this policy. If your mortgage is say $1 million you’ll save $136 a week and your KiwiSaver contributions won’t increase as you’re self-employed.

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53 Responses to “How much will take home pay drop?”

  1. mjw (228 comments) says:

    But under Labour’s policy you get to keep the increased contributions. So this policy increases the wealth of the battlers. The current alternative, of using the OCR only, simply increases the wealth of the better off. High interest rates benefit the wealthy and the Aussie banks. VSR benefits the strugglers.

    Bill English says people can’t afford the small drop in take home pay. So what good has six years of National government been then? He is admitting that much of NZ is still on the bones of their arse. Time for a reboot.

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  2. David Farrar (1,856 comments) says:

    You get the benefit of the increased contributions in around 30 years time. Having $70 a week ripped away from your weekly pay will make life pretty unpleasant for many up until then.

    Tony Alexander has pointed out the banks will actually benefit from Labour’s proposed policy.

    And you must be on a very good income to call $70 a week a small drop in take home pay.

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  3. OneTrack (2,614 comments) says:

    mjw – “But under Labour’s policy you get to keep the increased contributions. ”

    But under Labour’s policy I might suddenly find that I simply cant afford the budgetted amount to pay my mortgage. And that means now. Today. And next month. Not when I retire.

    So how many mortgagee sales will this ill-thought out policy bring. High five.

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  4. alloytoo (434 comments) says:

    As Tony Alexander also pointed out Kiwi-saver funds will also be forced to “buy dear” thus lowering the growth of their fund and probably negating any potential benefit.

    And then if any future government introduces a means test for Super, it will simply have been taxation by stealth.

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  5. mjw (228 comments) says:

    dpf – I admit it. The banks will benefit no matter what we do.

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  6. alloytoo (434 comments) says:

    @MJW

    I don’t think you or Labour understand what “reboot” means.

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  7. tvb (4,210 comments) says:

    Imagine the cry if this policy came from National. All those stupid left wing journalists would be down on National hard. Of course we are not looking at a 1% rise we are looking at a possible 2% rise. Does this mean interest rates will drop 2% if a Labpur Government forces through kiwisaver contributions to rise by $140/week for average wage earners. Thanks Labour.

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  8. NK (1,072 comments) says:

    Labour should have made increased mortgage repayments compulsory. That’s better for homeowners with mortgages than saving it. Pay off debt!! That’s what Labour has been screaming about for years. We have too much private debt; that’s where the extra $60 per week should be going, not to NZX fees.

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  9. Judith (7,643 comments) says:

    The way I see it, we really don’t have much of a choice if we want to have any kind of future.

    We’ve lived hard, and enjoyed too much and now its time to pay. If its not through this policy, it will be through some other equally as negative to our pay packets. We simply cannot keep passing the buck, the debt etc to other generations – its time to pay the ferryman ! We can whinge and moan and talk about how hard it will be for some – but we weren’t whinging when everything was great and we were living the life of ‘Riley’ !

    Sorry – but no matter who the next government is, we are still going to have to pay the cost of our excesses in some way or other – you’re blind if you can’t see that.

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  10. NK (1,072 comments) says:

    Our excesses Judith? Speak for yourself. Our family doesn’t live a lifestyle full of “excesses” apart from paying excess tax. Let me decide what to do with my money and then we’ll all be better off.

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  11. Judith (7,643 comments) says:

    @ NK (939 comments) says:
    May 4th, 2014 at 10:07 am

    Perhaps you don’t live with excesses in your daily living NK, but you do live in a country where we (the electorate) have asked for and demanded certain services and standards that we (as a country) have had to borrow for.

    At some stage that has to be paid back. Unfortunately it doesn’t matter whether you, or I requested those things – we all have to make the sacrifices to pay for them.

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  12. CharlieBrown (909 comments) says:

    I’m no fan of the policy but i’d have to call this a case of scaremongering. How often do we see rate changes of 1%? And the tools Labour have proposed there is still room for interest rate rises.

    As i said, I’m no fan of this policy, I think it will be destructive on the economy without achieving its aims for many reasons, just not so much for the one mentioned.

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  13. Adolf Fiinkensein (2,797 comments) says:

    Just like the fool Rudd, these Labour people are writing policy on table napkins.

    s there nobody left in Labour who can do simple arithmetic. Certainly that dil Parker does not know how.

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  14. s.russell (1,564 comments) says:

    Firstly, no-one is advocating VSR as a total replacement for OCR changes: under this policy the RB’s reaction to an overheating economy would likely mean changes to both.

    And, logically, whatever aggregate effect a VSR change has is offset by the forgone aggregate effect of a equal-effect change in the OCR.

    When the OCR goes up – artificially increasing interest rates – the whole cost is borne by those who have borrowed money – not just mortgagees (about 33% of all households) but businesses as well (stifling investment in the economy’s future). Having the VSR to adjust too shifts part of the burden to another group – those with income but no mortgage. It shares the pain around a bit more.

    In both cases there are complex offsetting factors. Those with fixed interest investment are winners from any OCR hike, and could spend more as a consequence – but these people (being savers by nature) tend to simply pocket the cash and enjoy the better investment returns without boosting spending. Likewise, some of us would be able to dodge a VSR rise because we save more anyway, so the change makes no net difference.

    Tony Alexander has a valid point: but it is not as compelling at second sight as at first. If the OCR is ALSO going up as a response to the economy overheating, then fixed interest investment becomes a better option for KiwiSaver investors. Besides which, a great deal of the money going into shares would be going into overseas shares, not domestic ones. And more saving is good at virtually any time, even if (as he says) it is most lucrative when markets are low.

    Some are saying that a VSR means income earners would be subsidising borrowers. No. What happens with the OCR is that borrowers now pay ALL of the cost of slowing the economy. In effect they are subsidising income earners. A VSR rise would reduce the existing subsidy.

    And finally, while being forced to save more comes at a short-term cost, it is ultimately to savers’ benefit. So it is debatable whether you can call it a cost at all.

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  15. dog_eat_dog (743 comments) says:

    So if I have investment goals that aren’t served by one particular financial product – a retirement one I have to be 65 to access no less – I should get less on my savings so people who borrowed more than they can afford don’t bitch about interest rates?

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  16. mjw (228 comments) says:

    Adolf – actually it is Stephen Joyce who is writing policy on table napkins. Or to be more precise, criticising labour on the basis of his own “back of the envelope sums.” Actually, I am surprised at Tony Alexander too. I don’t think he has a reputation as an economic or tax modeller, so to jump in so definitively, and so early, suggests he has some kind of agenda (probably publicity, rather than political).

    To be fair, I don’t think anybody knows exactly how this will play out. It would require much more economic modelling and market observation to start to make informed comments. But I think the policy is very worthwhile as it prima facie addresses some pretty serious issues with current policy, and gives the Reserve Bank more flexibility. So definitely worth a go. If fact, potentially a circuit breaker in my view..

    The criticisms from the Nats smack more of politics than sound economics, as you might expect. Can’t really blame them for that, but I’m certainly not accepting their half-baked economic analysis.

    Of course, the Nats canned contributory super in the past and dragged their feet on it in the present. So I wonder whether the Nats are simply opposed to Kiwisaver full stop? Perhaps they could make that clear?

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  17. wat dabney (3,672 comments) says:

    We simply cannot keep passing the buck, the debt etc to other generations

    What debt are you talkng about?

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  18. Viking2 (11,144 comments) says:

    Asked about the calculations, Joyce said that raising the OCR by 1 per cent took around $2.5 billion a year from the economy,

    And that’s problem with changing interest rates. It steals cash from those that earn it to give to some one unknown, but certainly either bankers or off shore lenders, in the preposterous notion that doing so will stop inflation. The majority of inflation in NZ is either created by govt. (e.g. pushing up wages by law or overspending and borrowing or is bought into NZ via the cost of our $.
    As the dollar goes down our inflation is set by default to rise.(and it will.). (Buy all the property you can lay your hands on. 1970′s all over again when house prices doubled along with interest rates. Fix longterm).

    Interest rates can never and never have tamed inflation. Even if you are programmed to think so. What I have just written above demonstrates the logic of why.

    We now export more than we ever have, we now import more than we ever have and we now have the biggest Govt. debt we ever had and still have only paid our way for four months in 40 years.

    Not looking good despite all the spin.

    Any business would be in the hands of the receiver. Time to call Kord Mentha?

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  19. duggledog (1,359 comments) says:

    Details, details. Just like their Kiwipower scheme or whatever they called it, it’s only designed to resonate with the lofos or rather 30 – 40% of the entire electorate. But je-sus don’t they work sometimes.

    National have to find a way to articulate the way it will actually work very, very clearly. At this stage I would be spending a lot of time and money reducing, simplifying and testing their counter arguments with focus groups of dummies in time for the election

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  20. wat dabney (3,672 comments) says:

    And that’s problem with changing interest rates. It steals cash from those that earn it to give to some one unknown, but certainly either bankers or off shore lenders

    Increased interest goes to savers, who are at least as deserving of consideration as those who wish to borrow. Without savers, economies would not grow.

    No cash is stolen.

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  21. wat dabney (3,672 comments) says:

    Interest rates can never and never have tamed inflation.

    …and that’s simply false I’m afraid.

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  22. duggledog (1,359 comments) says:

    Judith @ 10.01:

    ‘Sorry – but no matter who the next government is, we are still going to have to pay the cost of our excesses in some way or other – you’re blind if you can’t see that.’

    Judith really, what world do you live in? For your fellow countrymen to ‘pay up’ as you so grandly suggest is just laughable. Don’t they pay enough already? I am well aware that I pay about 50c in every dollar to the bloated state. How much more would you like me to cough up? 60c? 70c?

    Most people simply can’t ‘pay up’, as they’re already up to their eyeballs in personal debt due to foolish choices & keeping up with the Jones’, up to their collective necks in central government debt due to general disinterest, and local government debt due to even more acute disinterest.

    Those that can pay a bit more, won’t as they will either leave, move their money elsewhere, sit on it or shut down business.

    What has to happen is this – instead of a nebulous demand for everybody to start ‘paying up’, we need to stop ‘paying out’.

    There has to be a reckoning at some point, as this country should be much wealthier than it is, but we are continually being dragged down by govts that throw poorly targeted spending to the wrong areas. We’re famous for it.

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  23. Pete George (22,859 comments) says:

    Labour will force some people to invest through Kiwisaver while keeping interest rates low so the investment returns will be kept low. In most cases people with mortgages are better to pay them back faster rather than invest.

    If wages rates are pushed up as Labour suggest that will create more inflationary pressure.
    If the exchange rate is pushed down as Labour want that will create more inflationary pressure.

    So interest rates will have to go up and the exchange rate will go up or Kiwisaver contributions will have to go up a lot and wage rates will have to go up.

    What comes next in Labour’s policy?

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  24. Duxton (581 comments) says:

    mjw – “But under Labour’s policy you get to keep the increased contributions. ”

    …..which you will have to wait another two years (until 67) to receive, and which will be included in asset testing calculations.

    I don’t want to join Kiwisaver. I have made my own superannuation arrangements, which will enable me to retire at 60 at no cost to the taxpayer. Labour’s policy will force me to transfer my current contributions to a Kiwisaver account.

    Stuff that…..

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  25. Duxton (581 comments) says:

    Incidentally, why isn’t National pointing out that labour want to make Kiwisaver compulsory? I would think that would be a very effective meme.

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  26. Viking2 (11,144 comments) says:

    If National are re-elected will they need to do an Abbott style chop chop.?

    We need to do something.

    At this point there is only one way to stop inflation.
    Ensure our dollar remains at a high against others.
    Problem is that attacks our export competitiveness.
    Despite the spin to the contrary with stats. that show manufacturing as growing if that is dissected it is the milk part of manufacturing that is growing and the rest is declining. How could it not be when every week there is another shutdown somewhere. Now we can replace those jobs with cable layers for broadband which is pretty much what we have done but sooner rather than later that is going to run out.

    If you assume that inflation is every Kiwi’s problem (and it might be), then why should not everybody or at least as many as possible pay for that remediation of that problem? ( note here as a socialist country we manage it for most other things., including earthquake fixing).

    That entails looking at selecting an item where the cost will be shared by the most people and one where people have an opportunity to modify their usage or costs. ( not to dissimilar to what is required for rates and is also the principle upon which GST is founded. GST has holes that need fixing e.g. to sale and purchase of housing )

    Apart from sex, which is a non tradeable, non taxable enjoyment, it seems to me that there is only one or two products which would meet that criteria. i.e. products that most people use daily.

    Energy is the most used by everyone product.
    If the Govt. is really serious about taking cash from the community to lower inflation, (Asked about the calculations, Joyce said that raising the OCR by 1 per cent took around $2.5 billion a year from the economy,) as it thinks this will do the trick then it should regulate to allow the RBNZ to Tax the price of energy over and above its own taxation for road spending i.e. petrol, diesel, gas, electricity,LPG by an amount to be varied from time to time as required with the extra revenue devoted only to paying back debt.

    The effect would be immediate, cash, and would modify the spending of most people and more importantly not target just a few to pay for the excesses of all.
    e.g. only about 35% of the population have mortgages and I would suggest many of them are not the spenders who contribute to our incoming goods cost and therefore inflation. i.e. 1,470,000 bear the brunt of being robbed of 2.5 million of every cent rise in the OCR. ( about $1700 per year)
    Compare that with the current number of just cars at 2.5 million, so nearly twice as many. (about $100 per year.)

    Some might remember they have seen this mooted before and yes it was in a limited fashion. I think it was Don Brash who with the productivity commission, that Key and English ignored, that suggested we should vary the taxation rate on petrol.
    I consider the idea to be in the correct direction but too limited in scope.

    The big gain with doing this would be that banks would focus on banking rather than spending their day employing economists who blather on repeatedly about the need to hike interest rates. All in the interests of the banks rather than the customers.
    It would bring a lot of stability to money trading as the dollar would not be in play every six weeks as it is now with the instability that causes for our exporters.

    Is it a hard to do.
    NOPE.
    All the energy sectors already have either an hourly or better price system in place e.g. service stations or have meters and or means of collecting the tax. e.g. power companies etc.already have and energy tax on each bill.

    Do I think english or Key will do this?
    NOPE
    Can’t see past the ends of their noses.

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  27. bc (1,334 comments) says:

    We may not like it, but Labour have scored a hit with this policy. It’s been a preety good week for Labour, combined with a rather poor one for National.
    Cunliffe gave a very confident interview on Q & A without coming across as arrogant. It’s good for democracy to have a strong opposition.

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  28. wat dabney (3,672 comments) says:

    Viking,

    Taxing energy is highly regressive, and it’s clearly not the less-well-off who are generating inflation through borrowing and credit creation.

    Obviously the Labour Party was happy to jack-up power prices as a stealth tax on the poorest, but that’s hardly a recommendation.

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  29. CharlieBrown (909 comments) says:

    Does Labour intend to increase the age of withdrawal for Kiwisaver? One of the reasons I didn’t join was I have health issues that mean I’m not likely to live much longer than 65. If they increase the age of withdrawal plus make it compulsory they are effectively denying me of even more money.

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  30. NoCash (255 comments) says:

    Thinking along the line of V2 and NK, I can think of two other possible “tools”…

    Limit the max length of loans from 25 – 30 yrs to 15 to 20 yrs. That will get loans paid off faster and limit how much people can borrow due to the higher amount of repayments, hence reducing the house price pressure.

    As most banks already allow borrowers to increase the amount of repayments on fixed rate loans, normally up to 20%. Let the RBNZ to use it as a mean to put pressure on borrowers of fixed rate loans. The money saved in interest will be noticeable at the end of the fixed rate term, far better than having to wait till retirement. This would also force borrowers to budget with a higher margin in case their fixed rate loan repayments go up during the term.

    Both of the above tools would take money off borrowers of fixed rate loans buy forcing them to payoff their loans faster, reduce the money available that could otherwise fuel price inflation, without affecting interest rates, nor people who don’t have a mortgage directly.

    The biggest issue with my suggestion is that banks won’t like it…

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  31. duggledog (1,359 comments) says:

    I believe Kiwisaver is and always was a signal that in the future, say 20 years hence, there is either going to be no pension available at all, or it will be means tested, or the age of retirement will be lifted so high that most won’t get it anyway (which was the nasty little fish hook behind it all way back in the first place!)

    There are several reasons aside from this, that I am not interested in Kiwisaver. I never saw the point of squirreling away money that is never going to earn me a return higher than whatever the banks were charging on interest for my mortgage.
    Also, the very last organisation I am going to trust with my money is a Government, even less a New Zealand Government.

    Also, I reckon those charts the fund managers show you are laughable. Save this much and when you are 65 you will have $350,000!!!
    Cool – so by then, I’ll have enough money to buy a second hand Ford Fiesta.

    I’m looking after my own retirement thanks very much. I plan to work half the year when I get to 55, and not at all from the age of 60.

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  32. Viking2 (11,144 comments) says:

    wat dabney (3,504 comments) says:
    May 4th, 2014 at 11:41 am

    Viking,

    Taxing energy is highly regressive, and it’s clearly not the less-well-off who are generating inflation through borrowing and credit creation.
    =================================
    Stealing money from the few that pay interest is even worse when it doesn’t work except to put money in the pocket of other people.
    If what you say was right then we would have thousands of poor currently as both all energy has had taxes either increased or added in the last 5 years. But we have this booming economy haven’t we. so that’s your argument shot.
    Or maybe if we believe labour the we do have thousands of poor even though the govt. has handed them out more money than ever.

    Energy use is within the ability of most to have some effect on their money.
    One could even argue that increasing GST would do a better job than raising interest rates except it would not be quarantined and used to pay debt but to hand out more to those the Govt. wanted to help!

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  33. Paulus (2,503 comments) says:

    Heard Don Brash on Radio Left in is in favour of the Labour ideas

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  34. Viking2 (11,144 comments) says:

    Ravings by Rodney

    *Governor Wheeler is steering the economy towards another recession*

    The following link will take you to the latest Raving –
    http://www.sra.co.nz/pdf/RecessionMay14.pdf
    .

    Rodney’s Ravings are for general distribution and you are welcome to
    forward these reports to other people. To learn more about our
    services visit our website – http://www.sra.co.nz
    .

    *EXECUTIVE SUMMARY*

    I am not suggesting that OCR hikes are not needed because they will
    result in an unnecessary recession. OCR hikes are needed, which is why
    I argued in the January Raving that it was finally time to take the
    risk of interest rate increases seriously. As Governor Wheeler said in
    the last sentence of the Policy Assessment in the March Monetary
    Policy Statement, “By increasing the OCR as needed to keep future
    average inflation near the 2 percent target mid-point, the Bank is
    seeking to ensure that the economic expansion can be sustained.” This
    is what monetary policy should be trying to achieve. However, there is
    a fundamental flaw in the measure of inflation the governor is tasked
    to target: the Consumer Price Index (CPI). This flaw and the way
    successive governors have gone about achieving the target of low
    inflation have made recessions by-products of monetary policy. This
    Raving explains the fundamental flaw with the inflation target and
    shows that Governor Wheeler plans to some extent to follow in the
    footsteps of his predecessors which means another recession is likely
    if not inevitable.

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  35. Viking2 (11,144 comments) says:

    NoCash (244 comments) says:
    May 4th, 2014 at 11:50 am

    The biggest issue with my suggestion is that banks won’t like it…

    Nope.
    the issue is that it targets a small group of borrowers who then carry the can for the other 3 million who interact with the economy.

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  36. OneTrack (2,614 comments) says:

    “Incidentally, why isn’t National pointing out that labour want to make Kiwisaver compulsory? I would think that would be a very effective meme.”

    Possibly because National are thinking of doing the same thing?

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  37. OneTrack (2,614 comments) says:

    “Cunliffe gave a very confident interview on Q & A without coming across as arrogant. It’s good for democracy to have a strong opposition.”

    He did a reasonable interview (as far as Cunliffe interviews go), but he came across clueless as far as his policies are concerned. “Oh, we don’t have those details. Oh, we’ll make that up later ….”.

    A big policy which could have the ability to trash the economy, but he still wants us to vote for him and he’ll work out the details later. The details might mean we don’t want the policy. That he can’t see that is also troubling.

    Sorry, this Sledge Hammer approach doesn’t do it for me, “Trust me, I know what I’m doing ………..Bang”

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  38. hannity (151 comments) says:

    own goal from Joyce.

    His comments only confirm how much real income is lost to the banks everytime theres a 1% increase in the OCR.

    Why would anyone pay $3600 pa to a foreign owned bank – rather than bank it yourself?

    burning $70 a week – over saving it ?

    That sort of boneheaded thinking would have us $70 billion in debt in six years.

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  39. wat dabney (3,672 comments) says:

    Viking,

    Stealing money from the few that pay interest is even worse when it doesn’t work except to put money in the pocket of other people.

    Again with the stealing.

    If what you say was right then we would have thousands of poor currently as both all energy has had taxes either increased or added in the last 5 years. But we have this booming economy haven’t we. so that’s your argument shot.

    My point was that energy taxes are regressive. How is that argument “shot” by your observation about the state of the economy?

    Energy use is within the ability of most to have some effect on their money.

    Remember, cash is but a very tiny component of the money supply: 4964 NZD million as opposed to 271975 NZD million broad money.

    http://www.tradingeconomics.com/new-zealand/money-supply-m0
    http://www.tradingeconomics.com/new-zealand/money-supply-m3

    Tackling inflation must necessarily involve addressing broad money – the creation of credit – which at the end of the day means interest rates.

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  40. slijmbal (1,214 comments) says:

    By definition interest rate and the VSR approaches both aim to take money out of the economy to reduce excessive money chasing the same goods and thus inflation. The RB frequently refer to house prices and see this as a major driver of increased spending. The interest rate increases also reduce the cheap money chasing house purchases. It has thus a double sided approach.

    The problem with the VSR option is as much of the housing boom is driven by cheap money then keeping cheap money would normally lead to an even bigger boom and exacerbate the problem. It would, in effect, make leveraged purchasing of houses even more attractive, admittedly with reduced available funds for many buyers. It seems the worse of the 2 approaches by a long way as it would thus be less effective.

    An approach that reduced the amount of cheap money directly e.g. increased capital requirements for lenders would be much more effective and more robust financially.

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  41. Viking2 (11,144 comments) says:

    When we had inflation in the mid teens interest rates were way up over 20%. Paid a few dollars at that rate.
    didn’t stop inflation.
    Inflation is driven by the increased costs in the purchase of goods and services.
    If the dollar goes down or the labour cost goes up then the TV or the new house costs more. That’s inflation.
    The cost of money won’t stop either happening.

    Joyce,s argument is that by removing 2.5 billion from the economy, i.e. increasing the cost of money and giving a free ride to someone will fix inflation.
    No it won’t.
    You can’t fix inflation.
    You can maybe moderate its worst effect by delaying its entry into the market place, but arrive it will.
    You can maybe discourage investment in particular sectors which will then create other issues, like a shortage of housing, but you cannot stop it. No one has in thousands of years.

    If you want, need or screw a wage increase then if your work rate isn’t better you have created inflation in your product with no offset. Productivity is the only offset to inflation. Increasing interest rates works against increasing productivity. It increases cost with no corresponding increase in productivity.
    Indeed it is counter productive.

    Remember the opposite of inflation is deflation. Do you or the banks want that?

    If we want to harness inflation then we need better productivity so we remain competitive with our exports and our import substitution.
    Not even remotely possible while Kiwi’s want govt. to subside everything, govt. setting minimum rates for work, setting rules that ensure high cost production without compensating factors.
    dime is getting rich by importing from a country that has none of those things in the way of productivity. If we added to his import prices an amount equivalent to our social costs per personto be remitted back to each Chinese employee then there would be a change in how their productivity affects us.
    then manufacturing would change.
    Until then inflation is going to get ya.

    Buy property, its the best hedge.

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  42. wreck1080 (3,734 comments) says:

    I’m more worried about labour increasing the top tax rate — that will affect my income more than any of the other guff.

    Even worse, Labour are not saying how they will increase taxes.

    Keeping it secret from voters.

    Labours party motto should be ” Labour, full of secrets”

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  43. wat dabney (3,672 comments) says:

    Inflation is driven by the increased costs in the purchase of goods and services. If the dollar goes down or the labour cost goes up then the TV or the new house costs more. That’s inflation.

    This is completely wrong.

    Inflation, as the man said, is always and everywhere a monetary phenomenon.

    Inflation is the symptom of monetary excess: low interest rates resulting in the creation of too much credit chasing the same amount of goods and services.

    Inflation is addressed by increased interest rates to reduce the amount of credit being created; to limit or reduce the money supply.

    If you are talking about price increases for other reasons, relative scarcity or whatever, then it isn’t inflation. If the price of oil increases due to tension in the Gulf that is not inflation. If vegetables increase in price due to a wet winter that is not inflation (and, obviously, increasing the interest rates is not the remedy.)

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  44. slijmbal (1,214 comments) says:

    Have to agree with wat

    I would also add that other behaviors that increase money supply are also inflationary e.g. ease of getting credit.

    Furthermore, the worst offenders for creating environments that encourage inflation historically have been governments.

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  45. Viking2 (11,144 comments) says:

    Nope you don’t get it. Money is the means of exchange for goods and services.
    The Fed have increased the money supply in the USA by trillions. Their inflation is still low.Credit is not tough there either.

    Their inflation is low because they have plenty of Labour at present and plenty of competition and few of our do good rules and govt. subsidies.

    Genuine question.
    When the OCR is raised what happens to that extra money stolen in the name of inflation fighting? Who has it put in their bank account or in their pocket?
    What would happen if the market were left to decide what the rates of interest should be?

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  46. jcuk (586 comments) says:

    When Judith says it has come the time to pay the ferryman we have Wat Dabney and Duggledog going on about how they are taxed to the limit already [ wonderful sob stories…. they simply do not understand it is not them that have to pay LOL but rather the enjoyment all get from maintained social services and the like that all of us will have to forego to pay back the people who lent us the money to maintain our lifestyle over the past few years, It is nice that the Government will run a surplus next year but how many years of surpluses will it take to repay the country’s debt. This is a subject I certainly have not seen either calculated on a napkin or properly.
    That is the choice … to repay or maintain our current standard of living … or the later with a slowly diminishing loan … if conditions don’t change

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  47. seanmaitland (455 comments) says:

    “Heard Don Brash on Radio Left in is in favour of the Labour ideas”

    No he isn’t – he said its worth considering, but he’s not sure if it would work.

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  48. slijmbal (1,214 comments) says:

    @Viking

    the Fed have increased money supply as they don’t want to mimic the deflationary outcomes Japan had for 25 years + as a result of their huge bubble.

    They may be successful but it’s well likely all they have done is postpone and increase the effects.

    We are not comparing apples with apples.

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  49. Viking2 (11,144 comments) says:

    If the price of oil increases due to tension in the Gulf that is not inflation.

    not that old then?

    go look at what happened when the Arabs increased the price of oil in the early seventies.
    Inflation went mad, Muldoon added to that by building alls sorts of energy projects.
    house prices doubled in a few years as did wages.

    and we haven’t had a years of trade surpluses since.

    Nothing to do with the supply of money but it did entrench appalling monetary policy in many countries.

    There is always plenty of money in the world, because its mobile its just a matter of where it earns the most.

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  50. wat dabney (3,672 comments) says:

    Viking,

    The Fed have increased the money supply in the USA by trillions. Their inflation is still low.

    That’s because demand for credit collapsed following the global financial crisis. The Fed has been pushing on a string. Interest rate reductions have had little effect and the Fed has been struggling to maintain the level of money in the economy, trying to avoid the devastating collapse and deflation which helped turn the 30′s recession into a terrible depression. Hence the talk even of negative interest rates.

    “look at what happened when the Arabs increased the price of oil in the early seventies. Inflation went mad

    What you actually mean is that there was a general price rise because increased energy prices feed through into just about everything.
    But again, technically this was not inflation. This was prices going higher for a perfectly understood non-monetary reason.

    The problem is that the effects of inflation are indistinguishable from this type of general price rise, since they both show up as an increase in the CPI. This leads to lazy and ill-informed commentary conflating everything as “inflation”. Hence there are lots of reports about “high inflation” following the oil shock when in fact it was nothing to do with changes in the money supply, and the solution was certainly not to raise interest rates (at least, not for the first order effects, for which there was no solution.)

    There needs to be a technical term to distinguish monetary effects from supply/demand effects. That term is ‘inflation.’

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  51. mjw (228 comments) says:

    wat dabney. I don’t believe the Reserve Bank shares your definition, as the CPI measures broader prices rises not matter what their cause. Not to say that I don’t think you have a point, just not sure that is how the Reserve Bank actually operates.

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  52. wat dabney (3,672 comments) says:

    mjw,

    Yes, there are reports using the term “CPI inflation” which clearly deal with price changes rather than inflation: which then requires the term ‘core inflation’ to be invented to refer to actual inflation (specifically to remove the effects of shocks “such as a sharp movement in oil prices…”)

    http://reservebank.govt.nz/research_and_publications/reserve_bank_bulletin/2006/2006dec69_4holden.pdf

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  53. Frustrated (5 comments) says:

    Comment by s.russell May 4th, 2014 at 10:20 am has votes 2 for and 10 against as of writing, and comment by mjw just below is similarly negatively rated. Both seem to cover the subject quite well, and avoid much of the subjective comments that others seem to prefer, so not sure why people are voting them down. Disliking reality won’t change it.

    I’m not convinced that the VSR as proposed is the best solution, but it seems to have advantages in comparison to the OCR solution, so therefore should be worth investigating.

    1) the ‘cost’ could impact a greater population, not just borrowers, so the ‘cost’ per person could be shared more broadly and therefore lower.
    2) the ‘cost’ is not a transfer to others (local & intl savers), but a delay
    3) when many borrowers have fixed their rates, changing the OCR doesn’t have much impact. The impact of a VSR change should be relatively consistent, I think.

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