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Granny says – you can’t do that

Written By: - Date published: 9:30 am, September 21st, 2012 - 16 comments
Categories: economy, exports, jobs - Tags:

The ever forward looking and even-handed Herald devotes its editorial to attacking Labour for supporting Winston Peters’ Bill to make some small changes to the Reserve Banks’ objectives to bring them more in line with Australia’s. Leaving aside the fact that the Herald hasn’t attacked NZF or the 3 other parties who support this, only Labour, isn’t it time Granny got with the programme?

You only need read the business and business opinion pages in the Herald itself to get what is happening. Of the 10 most-traded currencies in the world (and it should ring alarm bells that we’re in that grouping at all), New Zealand has the narrowest monetary policy. Our Reserve Bank considers just one thing in making its interest rate decisions – the impact on inflation. None of the other currencies have such narrowly-focused monetary policy.

Granny heartily approves. But Granny, like National, is fighting yesterday’s war. Inflation in general isn’t a problem any more. We have 1% inflation at the moment, and it won’t get above the 3% top of the Reserve Bank’s target bracket in any of the forecasts for many years. In fact, if big economies weren’t printing money like crazy and inducing some global inflation, we would probably have deflation now.

Now, lets look at those other largely-traded currencies again. These are the currencies with which ours is predominantly traded. The most-traded – US, Euro, Yen, Pounds – are all engaged in forms of quantitative easing. That means that their central banks are creating more of those currencies (decreasing their value/causing minor inflation) – which they then to buy their government’s own bonds, which lowers interest rates in their countries. Both actions decrease their exchange rate and increase ours in turn.

The rest of the top ten have wider objectives for their Reserve Banks than just inflation – they have to consider jobs and growth too. Some are also involved in forms of quantitative easing. The net effect: all these governments are attacking to keep their currencies low so their manufacturers can compete (and it certainly seems to be working for the US, which is seeing manufacturing grow to China’s cost).

Of course, when their currencies go down, ours goes up. They’re running beggar thy neighbour strategies – and we’re the neighbour.

So, what should we do? Well, we’ve got to play the game too. We could undertake quantitative easing – everyone else is doing it and the sky isn’t falling. At the very least, we should lower our official cash rate to make it less attractive for foreign ‘hot money’ to invest here. That would help bring our currency down and let our businesses compete on the export markets and against importers. But to do that, the Reserve Bank would have to be allowed to consider more than inflation – it should have to look at the whole economic impacts of its choices. We should also bring in policies to stop a housing bubble, which is bad, inflationary, and draws in hot money from overseas – policies like capital gains tax. That would allow further reductions in the OCR.

Right now, the Reserve Bank is like a doctor confronting a patient with a range of maladies. But it is only allowed to worry about whether or not a patient is hyper-ventilating – and its only remedy is strangulation. Meanwhile, other countries are giving their doctors the skills and tools to really fix their patients. And (this is where the metaphor breaks down) as they make their patients healthier, it makes ours sicker.

For some reason, Granny Herald thinks that’s just fine. Maybe because Granny Herald isn’t an exporter. Maybe because the Herald isn’t a paper that gives a damn about the 40,000 manufacturing workers who have seen their jobs disappear in the last 4 years.

16 comments on “Granny says – you can’t do that”

  1. tc 1

    WTF would granny know about Finance and economics except rabbiting from a supplied script !

    The manufactured ACC crises should leave no-one in doubt they’re part of the CT NACT spin machine, this is further evidence.

    JA and Fo’S with probably give the same telling off to labour if they haven’t already.

    I don’t bother with it anymore, plenty of other high quality stuff online like this blog…was it an unsigned editorial which effectively means it’s usually signed by A. Hollowman.

  2. Lanthanide 2

    Here’s a policy to help fight the housing bubble while also helping out businesses and directing investment towards them. This idea isn’t mine originally.

    Reduce the OCR by 1% and apply a 1% tax to residential mortgages; both owner-occupied and investment.

    This way banks will be more encouraged to lend to businesses. The government will get more tax revenue. Residential investment won’t be as attractive: at the moment you can write off your interest costs against your income; this change will reduce the interest portion that can be written off but the cost will remain the same, with the difference going direct to the government. The OCR will be lower so foreign investors will gain less return on their deposits.

    This also has the advantage over capital gains tax in that the revenue streams are immediate, based on present capital value (via the mortgage) and there’s no distortion around ring-fencing in or out specific types of assets.

    • deano 2.1

      variable mortgage levy was supported by cullen in 2006 but the Nats and the Herald shourted it down.

      Better (because it applies to all consumers, not just those with mortgages – and it makes them save rather than taking their money and giving it to banks and savers) would be complusory Kiwisaver with a variable contrbiution rate

  3. captain hook 3

    granny has become senile just like armstrong and venal like sullivan and is turning into an alltogether nasty thing.

  4. BernyD 4

    If their workers were in a Union they’d be able to do something about it :-)
    If the editorial policies make us sick, imagine actually working there …. ick

  5. BernyD 5

    Y’know I recall sometime in the 80’s when they were discussing a “Hypocratic” style oath for Reporters to live by, Ultimately the response was “Don’t put your evil censorship/contraints on us buddy”, but today I can see why the civilised people of the 80’s pushed for it.
    Holding a grade average of A++ in the mathematics of nuclear fission doesn’t make them good people nor does it inspire confidence.

  6. All the Herald says is –
    You cannot go back to Muldoonism, because that is what the proposal means.
    He stuffed the economy, by taking control of the Reserve Bank and manipulating it (very badly) – hence the 1986 Reserve Bank Act.
    Douglas had to sort it out.

    • BernyD 6.1

      If Muldoon was alive today he would most likely have sworn off politics.
      No one wanted him to regulate, so he stole our pensions instead, bad for his heart, but necessary.

  7. captain hook 7

    when douglas realised that the Labour Party would never make him him PM he decided to do as much damage to the country and the party that he could because when it came down to it he was personally financially secure.
    He swallowed the 80’s reagan ideology whole and thought he could make up rules that would last forever.
    not so.
    the essence of being a human being is the ability to adapt to the environment and at the moment New Zealand is not adapting at all. and in fact is compounding error upon error by trying to rely on someone elses rules instead of generating new alternatives.

  8. millsy 8

    The Reserve Bank 1989 has succeeded at elimintating double digit inflation but at huge social costs.

    The reduction and slow growth in wages and conditions (esp during the so-called ‘boom’ years — that is what happens when you loosen credit — people burrow to the hilt to buy houses and imported goods), the consistent erosion of social spending starting from Ruth’s cuts back in 1991 and the consequent reduction in edcuation and health services (ie hospital closure) and reductions and pay and conditions for education in health staff.

    Thanks to the RBA, the entire post war 1935-84 welfare state has been dismantled so the rich can enjoy lower mortgages and tax cuts.

  9. mike e 9

    Fortran if we keep importing fuel in the amounts we are ,we are going broke sooner or later we will pay the price!

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