Economic confusion from Cunliffe

March 15th, 2014 at 9:00 am by David Farrar

Jamie Whyte blogs:

David Cunliffe today gave a speech to the New Zealand Initiative, an economics think tank. The talk outlines the Labour Party’s economic policy. It displays so much economic confusion that it will take several posts to get through it all. Today I want to identify a fundamental conflict between Labour’s economic goal and its proposed monetary policy.

Mr Cunliffe begins his speech by saying that New Zealand businesses produce too much low value stuff. Labour wants to “support New Zealand business in the journey from volume to value”. 

Personally I’m very wary of any politician that makes a sweeping statement about what NZ businesses need to do. There is no one correct answer. For many businesses, volume is best, for others value is best. Having the Government declare businesses produce too much low value stuff is easy to do from an academic viewpoint –  but the businesses out there fighting for market share tend to be the best judge of what works for them.

He then claimed that “the biggest obstacle to our exporting businesses is the consistently over-valued and volatile exchange rate. Labour has long signalled it will review monetary policy to ensure our dollar is more fairly valued to help business and lower our external balance”.

The translation of this, is Labour is campaigning for higher inflation and price increases for everyone.

A devalued dollar helps exporters sell more overseas by reducing the price foreigners pay for our goods. For example, if the NZ dollar fell from US$0.85 US$ 0.70, what an American pays for a NZ$1,000 widget would fall from US$850 to US$700. So Americans would buy more of those NZ made widgets. But, of course, the value of those widget sales would have fallen. The reduced exchange rate increases the volume of what we sell overseas by decreasing its value – the exact opposite of Mr Cunliffe’s goal.

That is a total contradiction which exposes Labour’s economic policy to be slogans around a few tried left wing canards. Their monetary policy is, as Dr Whyte points out, in total opposition to their economic policy.

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NZIER on who should set the cash rate

June 25th, 2013 at 2:00 pm by David Farrar

NZIER have published this note:

The Greens’ idea to use the Reserve Bank Board to make monetary policy might improve decision-making but using a board designed to represent industry, risks compromising the Reserve Bank’s independence and the goals of monetary policy.

So they’re saying collective decision making may be better, but not if those deciding are not independent.

Responsibility for monetary policy rests solely with the Governor of the Reserve Bank of New Zealand. Twenty-five years ago, monetary policy was tied to the neck of one person to maximise accountability for inflation targeting. Today most countries have adopted inflation targeting but use a board rather than a single person to set interest rates.1

Groups tend to make better decisions than individuals by using a wider range of information. That often leads to less extreme decisions.2 And decision-making by groups is more effective because members of the group contribute a greater variety of perspectives.3

I would note it can lessen accountability though.

Recently the Reserve Bank of New Zealand set-up an internal Governing Committee, comprising the Governor, Deputy Governors and an Assistant Governor, as a group to assist decision-making.

These innovations help the Reserve Bank form better decisions from a wide range of information and perspectives. That means the distinction between a single decision-maker and decision-making by a board is blurred by current Reserve Bank practice. 

So we expect better monetary policy from a board rather than a single person. But given the way policy is currently set these gains are unlikely to be large.4

In other words, the decisions are in practice collective ones.

Moving to a board structure has practical implications. We agree that like elsewhere in the world, releasing the minutes and voting record of the committee improves transparency.


But already New Zealand has a very transparent central bank. According to one measure, New Zealand ranks as the second-most transparent central bank globally.5 Publishing the board minutes is helpful but the Reserve Bank of New Zealand does not have a transparency problem. 

But let’s not pretend there is a huge problem.

It’s not clear what making the decision-making board more representative of the wider economy might achieve.

If the problem is improving decision-making, NZIER’s view is the Reserve Bank already receives considerable input from all parts of the economy as part of its regular information gathering process.

Including exporters and manufacturers on a decision-making board seems targeted towards a solving a different perceived problem: changing the objectives of monetary policy.

But good monetary policy is not about promoting exports: it’s about targeting inflation.
Ultimately, monetary policy is a technical activity. So any decision-making board needs the professional advice and experience of career economists that understand the economy.

Basically the proposal is an attempt to change the purpose of monetary policy by stealth.

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Who should set the cash rate?

June 21st, 2013 at 7:00 am by David Farrar

The Greens have proposed that the Reserve Bank Board should set the official cash rate, not just the Governor. It’s a reasonable debate to have, but one that seemed familiar. I was sure the issue had been canvassed in the past as part of an independent review. I asked Don Brash if my recollection was correct and he responded:

David, you are almost correct. Cullen asked Lars Svensson to conduct a comprehensive review of the whole monetary policy framework. At the time, in 2000, Svensson was a leading monetary policy academic, at Yale from memory. Being Swedish, he had the advantage of being from a country regarded as “moderate” in political terms and, like New Zealand, a country very dependent on trade, with a floating exchange rate. He has since become one of the Deputy Governors of the Swedish central bank. 

He gave the New Zealand framework top marks, describing it as “world’s best practice”, but he did say that he thought that having all monetary policy decisions vested in the single person of the Governor was risky. (Fortunately for me, he said I had done a good job!) He suggested that instead monetary policy decisions should be taken by a small internal committee of senior RB staff – not by the board of (outside) directors because of the potential for conflicts of interest. Both the Treasury and the non-executive directors of the Reserve Bank recommended that New Zealand stick with the single decision-maker model because that makes it easier to pin the blame if monetary policy doesn’t deliver what the Policy Targets Agreement (the agreement between Minister of Finance and Governor) requires to be delivered.

It is a fair point, that if you make the decision a joint one by the Board, it makes it harder for there to be accountability for any failure in monetary policy.

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Greens dump printing money plan – for now!

June 19th, 2013 at 11:10 am by David Farrar

Vernon Small reports:

The Greens have dumped their call for quantitative easing – or printing money – after it became an electoral liability for the party and a future Labour-led government.

Green co-leader Russel Norman yesterday confirmed the u-turn after Monday’s release of the joint Labour-Green-NZ First-Mana report into manufacturing left the policy out of the mix.

Prime Minister John Key and other Government ministers have latched on to the plan to ‘‘print money’’ to paint the Opposition as economically radical.

Norman said it was never Green policy but was included in a discussion paper, issued last October.

This suggests they were not advocating it. This is far from the reality. Russel Norman was constantly tweeting that we should be printing money, and providing examples of other countries that were doing so. There is no doubt that the Green’s proposed Finance Minister thinks we should be printing money. The only thing that has changed is they have agreed to stop talking about it in public.

But if a Labour/Green Government got into office, and couldn’t get the books to balance, what do you think is more likely – that they’ll cut spending or print money?

And enjoy Clark and Dawe as they explain what the Greens mean by quantitative easing!

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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 IMF says there should be no “messing with” the monetary policy 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 IMF 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 Greens’ 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. Greens 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.

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The problem for Shearer

March 21st, 2013 at 11:00 am by David Farrar

The undisclosed bank account is posing some challenges for David Shearer, beyond just the transparency issue.

Stuff reports:

Shearer told Fairfax Media yesterday there was no advantage to having the account and there was “nothing special about it”.

Asked what that said about his financial expertise, given low interest rates in the US and the exchange rate losses he may have suffered from a rising New Zealand dollar, he shrugged and said: “The bottom line is it is there, and I have nothing more to say about it really.”

Banks today also questioned why Shearer would keep such a large amount of money in an account that paid such low interest – maybe 1.5 per cent – when he could earn more in New Zealand.

Shearer had also disclosed a mortgage in the register, which would charge a higher interest rate than the banks paid on deposits in New York.

“Why doesn’t he transfer some across and pay off his mortgage?” Banks asked.

How an MP arranges his or her personal finances should generally be of no concern to the public – it is a private matter. But when due to a stuff up, you force it into the public arena, people naturally get curious. You just can’t help it.

Now some people have got over-excited and have been saying that Shearer has a conflict of interest with Labour’s policy to spend billions of dollars pushing down the exchange rate, as that would allow him to convert his US dollars into NZ dollars at a higher profit.

I’m sorry, but that’s ridiculous and is the sort of paranoia best left to some of the extremists on the left who likewise allege that John Key was asking questions in Parliament on Tranzrail to help their share price, rather than because he was (then) Opposition Finance Spokesperson.

Labour want to waste billions of dollars intervening in the exchange rate because they think it will be popular, not to help their leader make money on currency transactions.

So I don’t think the public will have a bar of the conspiracy theories.

But what the public do understand is paying down your mortgage. It’s something common to most families. You pay much more on your mortgage than you get in a bank, so you always transfer surplus savings against your mortgage.

And what the public will be wondering, even though it is none of their business, is why would you have several hundred thousand dollars in an US bank account, and not use it to pay down or off your mortgage. I mean no one sensibly wants to pay more interest to your bank than they have to.

The only three answers I can come up with are:

  1. You’re financially incompetent and it never occurred to you.
  2. You’re so well off, that saving thousands or tens of thousands of dollars off your mortgage doesn’t matter in the bigger scheme of things.
  3. There is some other reason to want to keep the money in the offshore account.

Have I missed a significant possibility?

Vernon Small also touches on the political side of the non disclosure:

The blunder shows a slackness and a lack of attention to detail unbecoming a prime minister.

Even having the account – rather than closing it quick-smart when he became leader – is problematic.

What of Labour’s views on economic nationalism? What about investing in local enterprises rather than leaving the money at low interest rates to be invested in the US?

And why not close it and bring it back now? Surely not because he is waiting for the exchange rate to move back in his favour? Mr Shearer, currency speculator?

It isn’t necessary to get overexcited by the ramifications of all this to see the potential for political harm for Labour and Mr Shearer.

By far the worst is that at a stroke he has neutralised attacks he could make, come the 2014 campaign, on John Key’s “brain fades”.

It is not hard to see how they will be turned back on him.

Which is worse: forgetting a swift mention of Kim Dotcom in a briefing by spooks or failing to remember for three years in a row your nest egg tucked away in a New York bank?

Labour had a very obvious campaign around Key having so called brain fades. It is now in tatters.

UPDATE: We have has some useful additional possible explanations. The list now is:

  1. You’re financially incompetent and it never occurred to you.
  2. You’re so well off, that saving thousands or tens of thousands of dollars off your mortgage doesn’t matter in the bigger scheme of things.
  3. Deliberately not paying off the mortgage, so he appears “an everyday bloke”
  4. Is writing the NZ mortgage payments off tax as an investment property
  5. Waiting for the exchange rate to drop, before he moves the money back to NZ
  6. There is some other reason to want to keep the money in the offshore account (US itunes purchases?)
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How they plan to pay for their promises

March 14th, 2013 at 4:00 pm by David Farrar



This is the alternative. They honestly seem to believe that you can enrich a country by just printing more money. I thought this lunacy died out with Social Credit.

The only Western countries doing QE are those which have the official cash rate near zero and have run out of other options. No sensible country is advocating printing money in the circumstances NZ is in.

There is a difference between a last resort and a preferred option. As an analogy if someone is dying from blood loss through a severed limb then a tourniquet is your last resort to stop them dying. But if they have just cut their leg open a bit, you don’t apply a tourniquet as your first response because the impact of doing so is very nasty.

In monetary terms, the nasty impact is prices go up and up.

You can see the Twitter debate here.

Be scared, be very scared. Most Green policies will just be inefficient and waste money but not necessarily be hugely harmful. This one is different.

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Fallow on monetary policy

January 31st, 2013 at 4:00 pm by David Farrar

Brian Fallow writes in the NZ Herald:

Listening to a procession of manufacturers say their piece to the parliamentary inquiry into manufacturing this week, two things were clear.

One is that the high dollar is causing real and lasting damage to their sector.

The other is that the idea that an overvalued exchange rate is the fault of the monetary policy framework has hardened into dogma.

Cast off outdated neoliberal doctrine. Change the Reserve Bank’s mandate. Then New Zealand manufacturers will have a fighting chance. That was the message.

It echoes statements like this from Labour leader David Shearer last Sunday: “We’ll make changes to monetary policy so that our job-creating businesses aren’t undermined by our exchange rate.”

It is glib. It glosses over difficult questions about what changes they have in mind, and what the costs, risks, trade-offs and spillover effects would be

All correct.

And it misdiagnoses the problem, which is that the rather enfeebled state of much of the other 99.8 per cent of the world economy has led to policies abroad which are unhelpful from New Zealand’s point of view and which we can only hope succeed.

This is in fact the major point.  The US and Europe are poked (for now) and their dollars are weaker. Politicians preaching how we can rectify this are dreaming. If we want proof that this is about the weakness of the US$ and the Euro, not a strong NZ$ – look at this graph from ANZ:


As you can see we are in fact historically quite low against the Australian dollar.

If the object of the exercise is to ensure that in the future the Reserve Bank runs monetary policy looser than it otherwise would, consider this: higher inflation would lower real wages, and real incomes more broadly, in the hope of protecting jobs in the favoured sector. Should the union movement support that?

Lower interest rates would increase the risk of a housing bubble that, this time, bursts messily all over us. Ask the Irish tradesmen flocking to Christchurch how much fun that is.

If it succeeds in making New Zealand exports cheaper to foreign buyers – a pretty big if – it will also make New Zealand assets cheaper to foreign buyers. That should give economic nationalists in New Zealand First and the Greens pause.

So nice to have someone print this out.


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Brash on monetary policy

December 17th, 2012 at 1:00 pm by David Farrar

Don Brash writes in the Herald:

Your columnist Bernard Hickey often writes articles with which I agree, but he has a real blind spot about monetary policy. Not long ago he was advocating printing money to reduce the foreign exchange value of the New Zealand dollar and avoid the need for so much government borrowing, apparently oblivious to the inflationary effects of such a policy. Yes, other central banks are printing money and buying government bonds, but they are all faced with potential deflation and have already reduced interest rates close to zero.

We are not in that situation by a very long way.

Printing money means we pay more for petrol, food, clothing etc.

Last Sunday he criticised what he described as our “obsession with strict inflation targeting” and “the theory that low inflation cures all ills”. But we’ve never had a “strict inflation targeting regime” and successive Reserve Bank governors have been willing to ignore the price effects of one-off factors like oil shocks and changes in GST, thereby allowing inflation to rise above the announced inflation target.

And the regime is set 1% higher than it used to be. It was 0% to 2%, and now is 1% to 3%. And as Don has said, it hasn’t rigorously been kept at 1% over the years.


If anything, we have had too much inflation. Those who say the answer is more inflation should be disregarded. How much more? Do we want 5%? 10%? 15%?

Low inflation does not cure all ills. But higher inflation helps nobody (except property speculators). It doesn’t even stimulate employment as we used to believe, except briefly by temporarily cutting real wages.

And while printing money or drastically easing monetary policy might get the exchange rate down, we know from bitter experience that this provides only temporary relief for exporters as higher inflation quickly offsets the benefits of a lower exchange rate.

For decades we could compete on international markets with the New Zealand dollar at US$1.12. Now we can’t because too often we listened to those who argued for just a bit more inflation.

The answer is not more inflation. The answer is greater productivity. You can’t print money to make a country richer.

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Bank of England Governor on quantitative easing

October 25th, 2012 at 12:00 pm by David Farrar

The Financial Times reports:

Sir Mervyn warned there were limits to the BoE’s policy of quantitative easing, under which it prints money and injects it into the economy by purchasing bonds: “Printing money is not . . . simply manna from heaven. There are no short-cuts to the necessary adjustment in our economy.”

And the BoE only did it because their cash rate couldn’t go lower.

Sir Mervyn also rounded on those calling for his institution to cancel the government debt it owns. Lord Turner, chairman of the Financial Services Authority and a leading candidate to replace Sir Mervyn as governor next year, mused about debt cancellation in a speech earlier this month. Calling such ideas “bad money creation” which would fudge monetary and fiscal policy, Sir Mervyn said “the BoE could not countenance any suggestion that we cancel our holdings of gilts”.

This will be the next policy from Dr Norman. Just have the Reserve Bank cancel all government debt. Bingo. Problem solved.


Mayes on QE

October 11th, 2012 at 1:00 pm by David Farrar

Former Reserve Bank Chief Economist David Mayes writes in the Herald:

Printing money is usually a last resort that seriously troubled countries use to stave off collapse, and not some mysterious trick that other nations have conjured up to achieve quick riches.

I never though a so called serious political party would advocate it, since Social Credit were killed off.

New Zealand has definitely not run out of opportunities to use conventional monetary and fiscal policy if it feels the economy faces a lack of demand. So why move to the unconventional now?

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy.

And our cash rate is 2.5%

Quantitative easing is used when short-run nominal interest rates have been lowered to zero and it is still necessary to expand the economy. If the central bank then buys longer dated bonds or other financial securities (including commercial paper or mortgages from the private sector), it may continue stimulating the economy.

Evidence from a symposium being published by The Economic Journal suggests that this is achieving a little in the United Kingdom, the United States and the Euro area.

The problem is that it only works well if people fear major inflation and rush out to buy before prices rise. Once growth re-establishes again, the central bank sells all assets and mops up the extra money before inflation gets out of hand. That of course explains why it doesn’t really work. If inflation is going to be headed off, then why buy now? Hence the weak effect.

Thus quantitative easing needs to be on a massive scale if it is to work.

And this is what worries me. The Greens proposed printing $8 billion of money to stimulate the economy. Now what would they and Labour do, if that doesn’t work? Would they say it was a silly idea, or would they say the problem is they did not print enough money? They’ll then be printing another $10b, another $20b etc.

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Fed Farmers say no to printing money

October 10th, 2012 at 7:00 am by David Farrar

The Greens claim their printing money proposal (which Labour supports, so long as the RB decides to do it, not the Govt) is to benefit exporters.

Well the group that represents more exporters in NZ than any other, Federated Farmers, have said they think the proposal is lunacy.

3 News reports:

The country’s biggest export sector is strongly opposed to the Green Party’s suggestion that the Government should print money to bring down the value of the dollar.

The agricultural sector sells most of its products overseas and Federated Farmers says printing money, known as quantitative easing, would be “incredibly bad” for New Zealand. …

The Government has rejected the idea and Federated Farmers president Bruce Wills says it would “set off an inflationary bomb that risks returning New Zealand to the dark days of double-digit interest rates”.

Mr Wills says quantitative easing should be a “break glass in case of fire” policy option.

“New Zealand is nowhere near such desperate measures because our official cash rate is 2.5 percent versus 0.5 percent in the United Kingdom, 0.25 percent in the United States and 0.10 percent in Japan.”

This is what is so bizarre about the Greens policy. Those countries which are doing QE are not doing it because they want to. They are doing it as a last resort as they can not lower their cash rate any lower.

The Greens would have New Zealand as pretty much the only developed country in the world to print money and cause inflation, as a preference rather than a last resort.

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Dom Post on Greens plan to print money

October 9th, 2012 at 3:00 pm by David Farrar

The Dom Post editorial:

New Zealand should have learned from bitter experience that it cannot shield itself from the vagaries of the international market. Labour and National tried that in the 1970s and early 1980s and ran up debts that took a generation to repay.

New Zealand is a small trading nation a long way from its markets. The only way for it to survive and prosper is to be flexible, adaptable and resilient. If the balance of economic power in the world is shifting, there is no use pretending it is not.

The decline in the value of the US dollar and the euro is a reflection of the decline in the relative worth of the American and European economies.

The attempts by American and some European policy-makers to reboot their economies by printing money are acts of political desperation.

It makes no sense for a country which has weathered the global financial crisis better than most of its Western counterparts to emulate their risky tactics. Printing money – or quantitative easing as it is technically known – fuels inflation, devalues assets and reduces purchasing power. Once started it is difficult to stop, as Germans discovered in the 1920s when wheelbarrows replaced wallets as the most efficient means of carting cash.

The Greens plan will see shares in Mitre 10 and Xerox increase!

It is interesting that Labour has not ruled out printing money also – just that they don’t want their fingerprints on it. The summary is:

  • Greens will force the Reserve Bank to print more money, driving up prices for all NZers
  • Labour will amend the RBA, to encourage the Reserve Bank to print more money, driving up prices for all NZers
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Meet your future Green currency

October 8th, 2012 at 3:00 pm by David Farrar

Also a great comment by Alex Tarrant on Twitter:

BREAKING: Fuji Xerox approaches Green Party in early bid for printer procurement contract…

Heh. Also Victoria tweeted:

Brb, just getting a wheelbarrow to carry my notes to buy a loaf of bread!

Matt Nolan at TVHE blogs a very useful analysis of what the Greens have proposed (and Labour are semi-supporting):

 Russel Norman is completely misrepresenting QE by saying that the recent crisis is “evidence it isn’t inflationary”.  QE was put in place to fight the fact that policy was too tight overseas, and they were trying to fight deflation – in essence the fact that inflation stayed near the “target band” in these countries is evidence that QE is indeed inflationary as you would expect … just in the way they were intending.

Exactly. QE can be considered if you face deflation, and your official cash rate is as low as it can go. We are within our target band at 1% (which is what I think we should be aiming for) and the cash rate is 2.5%.

Remember how often Greens and Labour complain about increased costs such as electricity and food? Well this is a policy to increase their costs even more for families finding it hards to make ends meet.

Now you may believe we should fund the rebuild with a one-off tax – that’s fine, in that case get the government to put a tax in place directly (or to directly cut spending from other place).  However, taxation by stealth of this sort is likely to be worse in multiple ways:

  1. We have betrayed RBNZ independence for virtually no reason … understandably a sneak tax by the RBNZ would make people less likely to believe them in the future about holding to their inflation mandate.  As a result, we run into the time-consistency issue in monetary policy again, and it will become more painful for economy when the RBNZ tries to commit to its inflation mandate again.
  2. We have a relatively rough redistribution of resources due to this.  By putting in our sneak tax through QE, we transfer resources to those with assets, those doing the rebuild, and those who can easily adjust prices/wages – while hurting those on fixed income, and those who have saved.  It is an inflation tax – pure and simple – and as a result, it will initially transfer resources from those who can’t protect themselves (generally the poor) to those who can (generally the rich).  If we introduce the tax through fiscal policy instead we can sort out these distributional issues a little better.
  3. A country that is willing to introduce QE as a clear fiscal transfer – when there is no monetary policy reason – will destroy its credibility with international lenders.  People will scoff at this, but such a policy will increase the level of “inflation insurance” lenders ask for – increasing the cost of credit in New Zealand.

That is a very good way to put it – the Greens have proposed an inflation tax – one that will hit fixed income households the hardest!

The Greens, and Ganesh Nana, are wrong in stating that the RBNZ has failed.  Distinctly and totally wrong.  Things like this:

”No system of monetary policy is perfect and New Zealand cannot remain the last devotee to a failed monetary theory while the rest of the world moves on,” Norman said.

Paint a complete and utter misrepresentation about the lessons from the Global Financial Crisis.  Our flexible inflation targeting framework saved us from a massive crisis at home – while the rest of the world fell apart.

Matt’s conclusions:

  1. We don’t need QE in NZ, as we have enough monetary stimulus (and if not we can cut interest rates further).
  2. What is being suggested isn’t even QE – its the monetization of government debt, effectively a inflation tax to pay for the rebuild in Canterbury.
  3. It is unlikely that such a tax is the “best” way of raising the revenue to rebuild Christchurch – which should be the primary question.

Say no to the Green’s inflation tax.

Oh you must watch the video also, H/T Whale.

John Clarke as hilarious as always. He is also factually correct in this case.

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Greens literally believe money does grow on trees

October 8th, 2012 at 7:00 am by David Farrar

I thought this madness died with Social Credit, but Greens (and Labour may not be far behind) have said that they want the NZ Reserve Bank to effectively start printing money. They think that NZ printing more money is a good way to increase the relative value of the US dollar. We might as well start burning our savings.

Make no mistake, what they are calling for is the value of everyone’s savings to be reduce, as inflation takes off. You know all how they say wages are too low for low income workers? Well they want the cost of food, goods and services like electricity to increase faster than they have been.

There are basically two sorts of countries that print money. Those that are bankrupt, and those whose economies are so stalled that the central bank cash rate is as low as it can go.  In the US it is 0.25%. NZ is at 2.5% so a fair way away from that.

Russel Norman claimed:

Secondly, when you look overseas at the use of quantitative easing – because all of our major— most of our major trading partners are using it

This is simply wrong. The US and the the Eurozone and Japan have done it (and sort of the UK)  - again because they are almost bankrupt or their central rate can not be lowered anymore. But they are not our major trading partners.

Our exports for the year to June 2012 came to $46.7b. Exports to the Eurozone were $2.9b, UK $1.4b, Japan $3.4b and US $4.1b. That is a mere $11.8b out of $46.7b – under one quarter. Australia is almost a bigger export market than those four combined.

And let me tell you if we started printing money, and Australia was not, watch the outpour to Australia get far far worse.

Some policies put forward are just silly, or ineffective, or wasteful. Some are very very bad and dangerous. This is one of them. The idea of printing money to grow the economy has never worked long-term. It gives you a short-term sugar rush at best. It puts up the price of pretty much all goods and services as inflation grows.

It is actually to our advantage long-term that the US and Eurozone are printing money. Proposing to follow them voluntarily is the worst thing NZ could do.

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Labour’s inflation policy a recipe for disaster

December 28th, 2009 at 3:00 pm by David Farrar

The Dom Post has a guest column by Stephen Kirchner from the CIS:

The idea that New Zealand can ignore inflation and grow faster through easy money and a lower exchange rate is a tempting, but short-sighted view. It ignores the fact that higher domestic prices would ultimately undermine rather than promote international competitiveness. Economic growth and export success must ultimately be built on real factors such as productivity growth, not easy money and exchange rate depreciation.

It is like cheating on an exam – only works for a while

The Reserve Bank’s primary focus on inflation recognises that monetary policy needs to be based on a single instrument and policy objective. Pursuing multiple objectives with multiple instruments, as Labour now suggests, is a recipe for incoherent policy and poor economic performance such as New Zealand experienced before its path-breaking reforms of the 1980s.

TVNZ is a good example of having multiple conflicting objectives. Either none of the objectives are achieved particularly well, or some of them are just ignored.

It would also undermine the transparency and accountability that were important objectives of the Reserve Bank of New Zealand Act. Under the current framework, the governor of the Reserve Bank is personally accountable for realising the inflation target under a policy targets agreement with the finance minister. Sustained breaches of the inflation target can result in the non-executive members of the Reserve Bank board recommending dismissal of the governor to the minister. This is no idle threat, but it would be difficult, if not impossible, to hold the governor accountable for achieving multiple objectives instead of a clearly defined inflation target.

An excellent point. More objectives will mean less accountability. The Governor will always have a get out of jail card.

Since the first PTA was entered into in 1990, the inflation target has been progressively watered down. Most notably, the inflation target has been relaxed from 0-2 per cent to 1-3 per cent and given a medium-term focus, so there is now greater tolerance of short-term breaches.

I actually believe it should go back to a 0% to 2% range. Over time even 3% inflation is too much.

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More on monetary policy

November 26th, 2009 at 2:00 pm by David Farrar

Matt Nolan blogs:

Monetary policy at heart isn’t about “unemployment” or “output” or “the exchange rate” (which is a relative price).  Monetary policy is about money, it is about the supply of money, it is about the price level and inflation.  The “interest rate” is merely an instrument central banks use to control the money supply and keep “inflation stable”.  By keeping inflation stable we increase certainty and we help make sure that money remains a good indicator of the relative value of REAL goods and services.

The idea that we should mess around with this to tinker with other things misses the point – if our exchange rate is funny, unemployment is high, or output is below potential we have to ask “what issues in REAL economy are causing this”.  Monetary policy in itself is irrelevant – monetary policy IS about money, it IS about inflation, it IS about expectations regarding these nominal variables, it IS NOT about real economic variables.

I am not saying that monetary policy hasn’t moved real variables – but in a world where monetary policy IS solely focused on inflation and consistent expectations is a world where monetary policies impact on the real economy is at its best.

It worries me greatly that Labour have abandoned support for a bipartisan monetary policy consensus.

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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 The Standard. His latest response to the suggestion that monetary policy 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.

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Reaction to Labour’s monetary policy u-turn

November 20th, 2009 at 10:00 am by David Farrar

Matt Nolan translates what Labour is proposing:

Labour goals were:

  1. a stable and competitive exchange rate;
  2. reduced interest rates for businesses and home owners;
  3. continued priorities of price stability and low inflation;
  4. to guard against expectations of price rises.

So, with goal 1 they want to reduce the flexibility of NZ$ prices, which will lead to higher unemployment and a worse allocation of resources.  Furthermore, they want to keep the dollar low which implies subsidising exporters to the cost of households in the short-term.

With 2 they want to punish savers.

And with 3 and 4 they want to contradict themselves – as by limiting price flexibility and holding the exchange rate and interest rates down they WILL drive an increase in inflation expectations, dump price stability, and remove any chance of a low inflation environment.

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Labour abandons monetary policy bipartisanship

November 19th, 2009 at 11:00 am by David Farrar

Tracy Watkins reports:

Labour leader Phil Goff is calling an end to the 20-year consensus on monetary policy.

Mr Goff is expected to use a hard-hitting speech to Federated Farmers in Wellington today to declare that the Reserve Bank’s policy targets – which influence interest rates and the dollar – are no longer working.

Labour came under pressure while in office to change monetary policy and signalled a rethink toward the end of its term but did not indicate what might replace the current regime. Mr Goff is not expected to spell out the alternatives in his speech today but will call for more work on the options.

This looks rather desperate.

First of all, it is of course correct that monetary policy is not perfect.

But I am reminded of the words of Winston Churchill about democracy – how it was the worst form of Government – apart from all the others that have been tried.

While there are some enhancements that can be made (and Dr Bollard has been doing some work on these), you can’t really make significant changes without allowing inflation to get out of control – and that just lowers the country’s standard of living – everyone gets poorer.

So to some degree Goff is just posturing to, unless he starts specifying what changes he would make. But declaring monetary policy is no longer working is silly, because of course it is. You can’t blame the high NZ dollar on monetary policy considering we have the official cash rate at a very low 2.5%.

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Brash vs Gould

February 3rd, 2009 at 1:00 pm by David Farrar

Don Brash does an excellent rebuttal in the NZ Herald to a call by Bryan Gould for more regulation. Some extracts:

But Gould implies that the crisis was caused by “free” and unregulated markets, especially in the financial sector. This is quite simply nonsense. Banks may be relatively lightly regulated in New Zealand (where there is no banking crisis), but they have been highly regulated in the United States and Europe for many years.

Worth thinking about. And then talking about the US regulations:

In many ways, this intensive supervision by official agencies made matters worse by leading bank customers to assume that banks were effectively “guaranteed” by Government, thereby enabling banks to operate with levels of capital well below those regarded as prudent in earlier decades. Perhaps even more serious, intensive supervision led some bank directors to suspend their own judgment, and believe that they were behaving prudently provided they were observing all the rules.

Often a problem – a minimum standard becomes a target.

Gould seems not to have noticed that the crisis emerged not in the essentially unregulated hedge fund industry, or even among private equity funds, but in the most highly regulated part of the financial sector, namely banking.


Gould argues that “Government involvement in the management of the economy is essential”, implying that that has not been the case in recent decades. Again, that could hardly be further from the truth.

Government taxation and spending make up some 40 per cent of total economic activity in most developed countries, and in all developed countries regulations of one kind or another tightly control what businesses can do.

It’s not exactly libertarian heaven with the status quo.

Gould in any case asserts that fiscal policy is more important than monetary policy. I would not want to get into a debate about which is more important – both are important. At its most basic, monetary policy is essentially about preserving the purchasing power of money.

Unless that is achieved within some tolerable limits, money can’t fulfil its important roles as a unit of account, a basis for transactions, and a store of value – just ask the Zimbabweans!

When people argue for a bit more inflation they are arguing for a bit less purchasing power.

With the benefit of hindsight, monetary policy was probably too loose in recent years, in some countries at least.

This is the irony – interest rates were probably too low, causing too many people to borrow.

We also know that, in the nineties, the United States Government started putting pressure on American banks to lend to borrowers of quite marginal creditworthiness to prove that they were not discriminating on the basis of race.

It is often the best intended policies that have the worst results.

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Brash defends Reserve Bank Act

December 7th, 2008 at 5:13 pm by David Farrar

Don Brash writes an op-ed in response to Finlay MacDonald’s call for politicians, not the Reserve Bank, to be in charge of determining interest rates. Brash responds:

He then goes on to argue that “plenty of people” see this act “as a relic of failed economic dogma, well past its due date for reform”, although he mentions only two people by name – Jim Anderton and that well-known economist Winston Peters.

Need more be said.

He links the Reserve Bank Act and similar legislation elsewhere to the current financial crisis.

Whatever the cause of the current crisis, nobody that I know of seriously suggests it was caused by our Reserve Bank, or other central banks, focusing monetary policy on keeping inflation under control by keeping interest rates too high. Indeed, there are many observers who believe that the trigger for the current crisis was interest rates in the US being kept too low for too long, with the result that banks were encouraged to lend to a large number of borrowers of very marginal creditworthiness.

Excellent point.

First, the central banks of virtually all developed countries – certainly the United States, the United Kingdom, Canada, Australia, and the countries of the European Monetary Union – have removed monetary policy from the day-to-day influence of politicians. Why? Because experience over decades has shown that politicians have a tendency to manipulate monetary policy for their own political advantage, to the economic cost of their countries.

I can’t comprehend why anyone would want Rob Muldoon setting interest rates again.

Fourth, nothing about New Zealand’s experience since we reached price stability in 1991 suggests that focusing monetary policy on keeping average prices stable damages growth or employment. We’ve had some of the best growth in our history over the past 16 years, and, until recently, we had the lowest level of unemployment in the developed world.

Exactly. Emperical evidence is overwhelming that you can have low unemployment with monetarist policies. Likewise overwhelming evidence that you can eliminate protectionist trade barriers and have low unemployment.

Fifth, while dropping interest rates can stimulate economic activity in the short-term, all countries have learnt from bitter experience that, in the longer-term, using interest rates to try to get faster economic growth results only in damage to economic growth, as inflation makes it harder to interpret the price signals coming from the market. Sustainable economic growth ultimately depends on increasing output per person employed in other words, on productivity and tolerating higher inflation does nothing to achieve that goal. If it did, Zimbabwe (with high inflation) would be enjoying fantastic economic growth and high living standards, and the United States (with low inflation) would have poor growth and low living standards.

Whatever the problem is, high inflation is never the answer.

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Fiddling with Monetary Policy

July 4th, 2008 at 3:02 pm by David Farrar

It is a sign of the desperation in Labour’s ranks that both Mallard and Cullen are now hinting at abandoning the 20 year consensus on monetary policy being used to keep inflation low.

Using the cash rate to keep inflation low is not perfect. People accept that. In fact one of the best criticisms I have seen of the model came at the Business Roundtable Retreat of all place.

But just as Winston Churchill said democracy is the worst way to choose a Government, except all the other way – the same tends to apply to monetary policy.

Despite what WInson Peters says, there is no evidence at all that having higher inflation will lead to lower unemployment. We have emperical evidence for this in NZ, where we have had one of the lowest unemployment rates and low inflation.

If you go easy on inflation, you may get a short-term economic boost, but in the medium to long-term you are worse off. This is why almost evert OECD country has a similiar monetary policy to New Zealand. Only fringe dwellers seriously disagree with the basics.

Now as I said the status quo is not perfect. The question is whether one can find a better solution. The Visible Hand in Economics is canvassing that issue.

The most appealing proposal I have seen is from Don Brash who has an unorthdox solution that the Reserve Bank be given an additional weapon or lever – the rate of petrol tax. Brash advocates that as petrol consumption is fairly price inelastic, an increase or decrease in petrol tax could warm up or dampen the economy in a similiar way to changing the cash rate. But with the benefit that exporters are not so badly affected by the exchange rate going up due to higher interest rates.

There are constitutional issues around such a move (Brash suggests over the long term it would have to be revenue neutral so the RBNZ is not making profits from it).

I certainly think it is an idea worthy of study. My initial question (and I would love it if an economist could crunch some numbers) is how much would one have to increase or decrease the rate of petrol tax to be equal to say a 25 point change in the cash rate?

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An economic outlook

February 27th, 2008 at 10:31 am by David Farrar

A leading economist did a presentation to the Business Roundtable Retreat on Friday. It was Chatham House Rules so I can report some of the detail – but not who said what. It was an analysis of the trends and issues in the economy, and then some possible solutions.

  • The 90 day bill rate predicted to drop in 2009 to 6% but then to increase and stabilise at 7%
  • A small increase in the unemployment rate reaching 4% in 2010
  • The equilibrium level of inflation may have increased from 2% to 2 1/4 to 2 1/2 per cent.
  • Migration to Australia would continue and this would be of the relatively “more productive” New Zealanders. This isn’t a judgement on education levels or intelligence as much as recognising they are people with “skills established in this economy” so generally more productive here than any replacements.
  • Mining in Australia is only 7% of GDP and 2% of their workforce so incorrect to credit the minerals boom for their economic growth.
  • The big challenge for NZ is to increase our productivity, and it is hard to do this with a declining talent pool. Hence we have a vicious circle – the more people who leave, the harder it is to increase productivity so incomes can increase to keep people here.
  • Agricultural Protectionism is a real issue and hurting the agricultural sector
  • Multilateral trade deals and plurilateral trade deals are better than bilateral deals
  • NZ needs to shift focus in trade deals from purely agricultural access to also have investment rights in agricultural processes and storage facilities.

He also did a very nice summary of one of the problems with the current macroeconomic model. Basically, if I recorded it correctly, it is:

  1. Increasing Inflation –> Increasing Cash Rate
  2. Increasing Cash Rate –> Increasing Interest Rates
  3. Increasing Interest Rates –> Increased NZ$
  4. Increased NZ$ –> Decreasing Exports
  5. Decreasing Exports –> Decreasing Economic Growth
  6. Decreasing Economic Growth –> Decreasing Investment
  7. Decreasing Investment –> Decreasing Productivity Growth
  8. Decreasing Productivity Growth –> Decreasing Aggregate Supply
  9. Decreasing Aggregate Supply –> Increasing Inflation

In one sense it is an argument why it is important to keep inflation under control from the beginning, but it does highlight a weakness in the current monetary policy cycle. Whether there is a better solution though is the real question.

It was suggested that the RBNZ targets should have the emphasis on targeting inflation over the medium term removed, as it has led to timidity with the RBNZ late to act, with the consequence being inflation and interest rates stay higher for longer than they otherwise would have been.

He also highlighted some ways to increase productivity:

  1. Encourage people to stay in NZ
  2. Increase the returns for effort
  3. Reform and reduce tax levels
  4. Get rid of redistribution policies which just redistribute money back to those who pay it, and adds a deadweight cost to the economy
  5. Reduce the rate of growth in the public sector relative to the private sector
  6. Make it easier for employers to release lower productivity staff

Now people can make arguments against each and every one of these on grounds of social justice or fairness etc. I mean for example I wouldn’t advocate being able to get rid of staff at whim. But the point the economist was making is that if you don’t do these things, you will find it harder to increase productivity growth. So it is all a trade off – if you do not do any of the above you’ll watch the gap with Aussie grow even faster.

There is also a list of what not to do:

  1. Don’t discourage the able from staying
  2. Don’t discourage more effort
  3. Don’t discourage investment
    1. Don’t ignore property rights
    2. Don’t have costly planning requirements
    3. Don’t increase the regulatory burden
    4. Don’t impose climate change policies which have large risks for investors

It was clarified this wasn’t an argument for having no policies to mitigate climate change. It was for uncertainty and risks to be minimised.

And again people can argue for or against each of the above – it was just a reminder that there is a cost to productivity growth if you do discourage effort and investment etc.

To some degree it was a bit gloomy.  The vicious cycle with migration and the impact of monetary policy on productivity growth make it very clear that closing the gap with Australia will not at all be easy.  It won’t just happen by chance without a change in policies.  And there will be no one or two simple things to do – it will only happen as a result of taking action in a dozen different ways, each incrementally helping increase productivity growth.

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