RBNZ to monitor asset prices more

New Reserve Bank Governor Wheeler to target 1-3% band; New PTA eyes stronger focus on financial stability, by including asset prices in range of indicators RBNZ monitors

20th Sep 12, 3:48pm by Alex Tarrant

By Alex Tarrant

Incoming Reserve Bank Governor Graeme Wheeler will keep a closer eye on asset prices and has been given a more specific inflation target than his predecessor.

The Government and Reserve Bank have also made it clearer that it may be appropriate to use monetary policy - ie. the Official Cash Rate - to lean against the build-up of financial imbalances to prevent sharper economic cycles in the future.

The mandate to keep a closer eye on asset prices implies the Reserve Bank might hike the OCR earlier than it did during the 2000s in response to another house price boom.

Signing a new Policy Targets Agreement (PTA) with the Finance Minister on Thursday, Wheeler was given a focus to keep future inflation near the 2% mid-point of a 1-3% target band on average over the medium term.

The previous PTA signed between English and outgoing Governor Alan Bollard, which also called for the 1-3% band, did not include the 2% focus. Wheeler said that focus on that midpoint would help better anchor inflation expectations.

Finance Minister Bill English said some additional wording in the PTA had been agreed to with the new Governor to reflect lessons from New Zealand’s last economic cycle and the Global Financial Crisis.

The new PTA includes a stronger focus on financial stability, by including asset prices in the range of indicators the Bank monitors, and requiring the Bank to have regard to the soundness and efficiency of the financial system in setting monetary policy, English and Wheeler said.

"The PTA’s stronger focus on financial stability makes it clearer that it may be appropriate to use monetary policy to lean against the build-up of financial imbalances, if the Reserve Bank believes this could prevent a sharper economic cycle in the future,” Wheeler said in a statement.

Despite the new wording in the PTA, the Reserve Bank has effectively been following this line since the financial crisis. Outgoing Governor Alan Bollard has said that, in retrospect, the Reserve Bank should have started raising the Official Cash Rate sooner than it did in the early 2000s.

Earlier this year, Assistant Governor John McDermott said in a speech that the Bank was taking more notice of credit growth data when deciding whether to raise the Official Cash Rate to cool price rises, following last decade's house price boom.

If this were the case before the boom began in 2002/03, the Bank would likely have raised the OCR sooner in its effort to douse the rampant housing market, McDermott indicated in a speech to the Bank for International Settlements in Hong Kong in June.

'OCR could be hiked even if inflation low'

Westpac chief economist Dominick Stephens said that, along with the 2% mark tightening the definition of price stability, the other key change was the requirement to monitor asset prices.

"The RBNZ would now have a mandate to increase interest rates in response to a house price boom, even if consumer price inflation was low," Stephens said.

"Were this PTA in place last decade, the RBNZ would have been able to hike interest rates earlier in response to the house price boom (which we think would have produced better results). Equally, the RBNZ would have a mandate to lower interest rates if falling asset prices were a threat to the financial system, even if consumer price inflation were on target," he said.

"In a similar vein, the RBNZ has been required to take into account the soundness of the financial system when setting monetary policy. This would allow the RBNZ to increase interest rates if it felt, for example, that excessive credit growth was imperilling the financial system."

To some extent, these changes were "fighting the last battle" - last decade's dangerous build-up of asset prices and financial system imbalances would be easier to combat under this PTA, Stephens said.

"But there is also relevance for today. Inflation is currently low (but forecast to return quickly to 2%), while house prices are rising at a decent clip. If the housing market heated up further, the new Governor may be willing to increase interest rates. Indeed, Mr Wheeler emphasised that 'it may be appropriate to use monetary policy [interest rates] to lean against the build-up of financial imbalances,'" he said.

So more of a focus on house prices?

The Consumers Price Index - the measure of inflation released quarterly by Statistics New Zealand to indicate changes in the general level of prices, and which the Reserve Bank's primary task is measured against - only captures a portion of house price changes.

The CPI measures the price changes for the purchase of new housing - new residential builds - not overall house price measures like those released by the Real Estate Institute of New Zealand each month.

The CPI does, however, capture rents.

The Reserve Bank has worked with the Institute over recent years to develop a stratified house price index to better help capture trends in house price movement across New Zealand.

New tools

Wheeler also emphasised that the macro-prudential policy tools currently being developed by the Bank should be separate from, but complementary to monetary policy.

“The primary purpose of such tools will remain to promote stability of the financial system," he said.

Westpac's Stephens interpreted these comments as Wheeler hosing down the possibility of deploying 'alternative tools' instead of the OCR.

"He endorsed the RBNZ's current stance, which is that alternative tools will be separate from monetary policy and would mainly be used to promote stability of the financial system," Stephens said.

Here is the text of the new PTA:

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

1. Price stability

Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices.

The Government's economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective.

2. Policy target

In pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including asset prices, as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term, with a focus on keeping future average inflation near the 2 per cent target midpoint.

3. Inflation variations around target

For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its medium-term target.

4. Communication, implementation and accountability

On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target.

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner, have regard to the efficiency and soundness of the financial system, and seek to avoid unnecessary instability in output, interest rates and the exchange rate.

The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

Read the release from English and Wheeler below:

Finance Minister Bill English and incoming Reserve Bank Governor Graeme Wheeler today signed a new Policy Targets Agreement, which sets out specific targets for maintaining price stability.

The new Policy Targets Agreement takes effect on 26 September, when Mr Wheeler starts his five-year term as Governor.

The agreement continues to require the Reserve Bank to keep CPI inflation between 1 per cent and 3 per cent on average over the medium term.

Within this target, the new agreement now requires the Bank to focus on keeping future average inflation near 2 per cent.

The PTA also includes a stronger focus on financial stability, by including asset prices in the range of indicators the Bank monitors, and requiring the Bank to have regard to the soundness and efficiency of the financial system in setting monetary policy.

“I believe that the existing policy targets agreement has served New Zealand well and there are benefits in maintaining consistency in the agreement,” Mr English says. “Therefore, I did not feel that any major changes were required.

“However, the Global Financial Crisis has focused some attention on monetary policy frameworks, and I want to ensure the PTA continues to reflect best international practice.

“Consequently, some additional wording has been agreed with the new Governor to reflect lessons from New Zealand’s last economic cycle and the Global Financial Crisis.

“As we’ve said before, the Government is also working with the Reserve Bank and Treasury to assess whether further macro-prudential tools could help moderate credit cycles, by building additional resilience when it is likely to be needed. That work will continue.”

Mr Wheeler says the new PTA remains focused on maintaining price stability, as well as avoiding unnecessary instability in economic output, interest rates and the exchange rate.

“The focus on the 2 per cent midpoint will help better anchor inflation expectations,” he says.

“In addition, the PTA’s stronger focus on financial stability makes it clearer that it may be appropriate to use monetary policy to lean against the build-up of financial imbalances, if the Reserve Bank believes this could prevent a sharper economic cycle in the future.”

Mr Wheeler also emphasised that the macro-prudential policy tools currently being developed by the Bank should be separate from, but complementary to monetary policy. “The primary purpose of such tools will remain to promote stability of the financial system.”

Mr Wheeler will send a letter to the Finance Minister setting out how he plans to manage his relationship with the Minister, recognising the Bank’s operational independence.

“It will ensure the Government and the Reserve Bank keep each other fully informed about fiscal and monetary policy issues,” he says.

Wheeler takes up the Governorship of the Bank on September 26, replacing Alan Bollard, who held the role for ten years. Reserve Bank Governor terms are for five years. He will not be commenting on the PTA until he takes up the new role.

Reserve Bank Act

The Policy Targets Agreement (PTA) is mandated by Section 9 of the Reserve Bank of New Zealand Act 1989. The Act legislates "the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices."

The PTA is effectively a contract between the Governor of the Bank and the Government, setting out the change in the level of prices the Reserve Bank should target over the medium term.

Other roles and powers given to the Reserve Bank, such as foreign exchange intervention, issuance of currency, and financial supervision, are dealt with in the Act itself.

The Reserve Bank Act allows the government to override the PTA and direct the Bank to use monetary policy for a completely different primary objective than price stability - for a 12 month period (for which a new PTA outlining the different targets must be signed), and only if the order is made public.

If a new PTA cannot be negotiated - both the Governor and Minister of Finance have to agree on it - then the Governor can be dismissed.

Read our preview of the announcement here.

Read a Reserve Bank factsheet on the Policy Targets Agreement here.

Below is the previous Policy Targets Agreement between English and Alan Bollard:

This agreement between the Minister of Finance and the Governor of the Reserve Bank of New Zealand (the Bank) is made under section 9 of the Reserve Bank of New Zealand Act 1989 (the Act). The Minister and the Governor agree as follows:

Price stability

Under Section 8 of the Act the Reserve Bank is required to conduct monetary policy with the goal of maintaining a stable general level of prices.

The Government's economic objective is to promote a growing, open and competitive economy as the best means of delivering permanently higher incomes and living standards for New Zealanders. Price stability plays an important part in supporting this objective.

Policy target

In pursuing the objective of a stable general level of prices, the Bank shall monitor prices as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand.

For the purpose of this agreement, the policy target shall be to keep future CPI inflation outcomes between 1 per cent and 3 per cent on average over the medium term.

Inflation variations around target

For a variety of reasons, the actual annual rate of CPI inflation will vary around the medium-term trend of inflation, which is the focus of the policy target. Amongst these reasons, there is a range of events whose impact would normally be temporary. Such events include, for example, shifts in the aggregate price level as a result of exceptional movements in the prices of commodities traded in world markets, changes in indirect taxes, significant government policy changes that directly affect prices, or a natural disaster affecting a major part of the economy.

When disturbances of the kind described in clause 3(a) arise, the Bank will respond consistent with meeting its medium-term target.

Communication, implementation and accountability

On occasions when the annual rate of inflation is outside the medium-term target range, or when such occasions are projected, the Bank shall explain in Policy Statements made under section 15 of the Act why such outcomes have occurred, or are projected to occur, and what measures it has taken, or proposes to take, to ensure that inflation outcomes remain consistent with the medium-term target.

In pursuing its price stability objective, the Bank shall implement monetary policy in a sustainable, consistent and transparent manner and shall seek to avoid unnecessary instability in output, interest rates and the exchange rate.

The Bank shall be fully accountable for its judgements and actions in implementing monetary policy.

Economist reactions

Here's the First Impressions on the new PTA from Westpac Chief Economist Dominick Stephens

Today the Minister of Finance Bill English and RBNZ Governor-Designate Graeme Wheeler signed a new Policy Targets Agreement (PTA). The Reserve Bank Act states that the Governor is accountable for maintaining price stability. The PTA provides the practical definition of "price stability". There have been a couple of quite significant changes compared to the PTAs that prevailed under Alan Bollard. In our judgement, the balance of these changes amounts to a "tightening" of the definition of price stability.

This is a real break from previous PTA renegotiations, which have tended to loosen the definition of price stability and give the Governor more latitude. Under the last PTA, the target was to keep future consumer price inflation between 1% and 3% on average over the medium term. In the early part of his Governorship, Dr Bollard chose to use the full latitude of that range, consciously allowing inflation to rise towards 3% on average. But the new PTA is tighter.

The Governor is now required to focus on the 2% mid-point of the target range. 1% and 3% should now be considered contingencies, rather than permissible targets. Graeme Wheeler commented that this will better anchor inflation expectations, and we tend to agree (surveyed inflation expectations have been closer to 3% than 2% most of the time in recent years). Another key change is a requirement to "monitor" asset prices. The RBNZ would now have a mandate to increase interest rates in response to a house price boom, even if consumer price inflation was low. Were this PTA in place last decade, the RBNZ would have been able to hike interest rates earlier in response to the house price boom (which we think would have produced better results).

Equally, the RBNZ would have a mandate to lower interest rates if falling asset prices were a threat to the financial system, even if consumer price inflation were on target. In a similar vein, the RBNZ has been required to take into account the soundness of the financial system when setting monetary policy. This would allow the RBNZ to increase interest rates if it felt, for example, that excessive credit growth was imperilling the financial system.

To some extent, these changes are "fighting the last battle" - last decade's dangerous build-up of asset prices and financial system imbalances would be easier to combat under this PTA. But there is also relevance for today. Inflation is currently low (but forecast to return quickly to 2%), while house prices are rising at a decent clip.

If the housing market heated up further, the new Governor may be willing to increase interest rates. Indeed, Mr Wheeler emphasised that "it may be appropriate to use monetary policy [interest rates] to lean against the build-up of financial imbalances."

There has been discussion recently about the possibility of deploying "alternative tools" instead of the OCR. Mr Wheeler's comments seemed to hose these ideas down a bit. He endorsed the RBNZ's current stance, which is that alternative tools will be separate from monetary policy and would mainly be used to promote stability of the financial system.

Ben Jarman from JP Morgan Australia:

Incoming RBNZ Governor, Graeme Wheeler, together with Finance Minister Bill English signed a new Policy Targets Agreement (PTA) today, formalizing the policy objectives for Governor Wheeler’s first five year term. The new agreement is pretty well summarized by Mr English’s statement that he “did not feel that any major changes were required.” The PTA is always given a little spring cleaning coming into a new term, and the changes that have been made today are not surprising, and should prove cosmetic in most circumstances given how we believe the Bank already exercises policy in practice.

Price stability, specifically, the requirement of keeping CPI inflation “between 1 percent and 3 percent on average over the medium term” remains front and centre. But this has now been supplemented by the requirement of “keeping future average inflation near 2 percent”. This is clearly an attempt to galvanize inflation expectations at the mid-point of the target band, but in practice is basically redundant. The horizon for “future inflation” is similarly vague to “medium term”, and any reasonable monetary policy reaction function that was targeting the 1%-3% band should be aiming “near” 2% anyway.

There is also a reference to diminishing unnecessary volatility in “output, interest rates and the exchange rate”. It is far from automatic that a point target for inflation achieves that, particularly for a small open economy, which is prone to being buffeted by external shocks. If anything, a harder policy target could, in the presence of external shocks, prove counterproductive to stability, and while the incoming Governor is somewhat of an unknown commodity, we doubt that the incumbent top brass at the RBNZ would fall into the trap of over-engineering the cycle, which should render that tweak to the PTA also somewhat toothless.

The most significant alteration is that the new PTA embeds asset prices and financial stability into the policy targeting mix, though even this is more subtle in the official document than it is made to sound in the Finance Minister’s press release. The RBNZ already has macro-prudential responsibilities, and the requirement of implementing policy with regard to “the efficiency and soundness of the financial system” falls into the “communication, implementation and accountability” section, rather than the policy targets section itself. Plus, once you’ve decided to mention financial stability at all, it’s hard to imagine what the alternative to pursuing “soundness” in monetary policy could reasonably have been either.

The explicit reference to asset prices, which now are pushed into the bucket of the “general level of prices” the Bank will “monitor” looks to have somewhat deeper implications for the ideology of policy. We suspect that in most circumstances though, the punch-line will be whether asset price dynamics have implications for future CPI inflation, and we know that is already a big part of the way the RBNZ thinks about policy anyway. The lessons of the housing boom in the middle of the last decade, and the associated hangover, which has been a huge drag on real activity, are well-appreciated. And from a formal perspective, the RBNZ’s DSGE modeling has explicitly incorporated the link between house prices, household wealth, consumption, and CPI inflation for several years now. So we see the asset price consideration as being a fairly redundant constraint given that policy already is set with a broad view on the determinants of future inflation.

The asset price remarks are more interesting, though, in the current context, in which expectations for the first RBNZ rate hike are pushing deeper into 2013, while the housing market is a clear bright spot of activity. If we take the RBNZ’s model transmission seriously, the question is whether the improvement in housing market activity starts transmitting to genuine strength in consumption outcomes. Here we think there’s not much to get excited about yet. The housing market is frothing up, but only in Auckland, New Zealand’s largest city, and in Canterbury, where there is the obvious catalyst of earthquake reconstruction activity. We suspect that a situation of increasing rents and prices in those pockets of the nation will be respected as relative price shifts that reflect supply-side fundamentals, and do not have broader inflationary implications. The better news on housing does, though, represent another factor that will make the new Governor reluctant to cut the OCR below the current level of 2.50%.

(Updated with statements from Wheeler, full PTA, and reaction from Westpac's Stephens)

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68 Comments

by Bernard Hickey | 20th Sep 12, 4:11pm 1348114274

FYI from a reader via email:

Bernard, as a reader of your column and a concerned small exporter regarding the current state of the NZ dollar, would you comment on the merit or otherwise of the following: It seems that quantitative easing by large economies and the relatively high NZ interest rate is making the NZ dollar too attractive to overseas investors.

Our high dollar is not a true reflection of the NZ economy. Would it be possible to protect ourselves from undesirable international influence while managing our local economy as needed by reducing interest rates for just overseas funds? A response to such a question comes often and rapidly cutting off debate; it is not practical or too complex to implement.

Yet, large money flows in and out of NZ is electronic and therefore smart technology can be applied to manage it.

by raf | 20th Sep 12, 5:17pm 1348118239

Yes there are a couple of very simple ideas.

1) Replacing public debt with pubic money whilst controlling the overall money supply to achieve "price stability".

http://sustento.org.nz/wp-content/uploads/2012/07/NZ-Investor-Piece-Mon…

2) Implementing a Foreign Transactions Surcharge to help balance the current account deficit.

http://sustento.org.nz/wp-content/uploads/2007/05/FTS-paper-version-3.p…

by Justice | 21st Sep 12, 9:04am 1348175082

Having a good idea means nothing without the power to make it happen. If we can't even get these traitors to move the exchange rate to the REAL benefit of the NZ economy then what hope of anything else?

National & Labour don't get it , and if they do they refuse to act...............so who? The Greens?

Who? we need a NEW party full of economic realists with good ideas like yours. How do we make that happen?

My point is ........we are at war already......we really are.......with our own governments. They no longer represent us and our collective interests. They have been bought and sold. Now every election all we do is buy the latest BS product/spin line to keep the status quo.........

1%'s control everything and the 99%'s work for em

by MortgageBelt | 20th Sep 12, 4:24pm 1348115095

Now that the NZ economy is being killed by larger global forces, the role of the Reserve Bank (to kill all signs of green shoots should they appear) is largely side-lined.

No need to keep hiking the OCR at the first sign of recovery - the patient is nearly dead now. RBNZ = redundant (job done).

by Andrewj | 20th Sep 12, 4:30pm 1348115442

Wait till assets are at record bubble levels then put them into the CPI and use the fall as an excuse to keep rates low. When they bottom out remove them from the CPI untill they reach the apex of the next bubble.

by Gummy Bear Hero | 20th Sep 12, 4:53pm 1348116792

..... leemee add to that list of perfect timing :

Gordon Brown , wait til gold slumps to $US 250 / ounce ..... then sell the Bank of England's entire gold stock .......

Wayne Swan , wait until commodities have peaked ..... then introduce a super profits mining tax .......

Alan Greenspan , damn near wreck the entire global financial system ...... then have a re-think of your theory ......

..... what , I ask , is the common denominator here ? ....... Bureaucrats ! .... governments & their toadies screwing up the economic system ....... they are the problem , not the solution , as ever ...

by Bernard Hickey | 20th Sep 12, 4:53pm 1348116803

My early reading of these basic and first comments from Wheeler in this statement are that he will be more hawkish (ie more likely to hike rates) than Bollard.

Firstly, his target will be to keep future average inflation near 2%, rather than just within the 1-3% target band.

CPI inflation averaged 2.7% during Alan Bollard's 10 years as Governor. Wheeler will be required to keep that average nearer to 2%, which implies a tightening of monetary policy relative to the previous PTA, all other things being equal.

Secondly, he has commented about using monetary policy to 'lean against financial imbalances'.

Given he has also said any macro-prudential tools are complementary, but separate from monetary policy tools, he is implying that any leaning will be done with the OCR.

Again, this very early days and it could all change after we hear him comment at more length, but he seems more hawkish at first glance.

All other things being equal, that would imply a higher OCR sooner, and higher interest rates in the coming 5 years. We'll see.

cheers

Bernard

by iconoclast | 20th Sep 12, 5:03pm 1348117398

Property is included in GDP but excluded from CPI.

by Berend de Boer | 20th Sep 12, 6:31pm 1348122707

The CPI measured correctly: in 2002, gold was $663 an ounce. In 2012 it is $2120. Actual inflation over 10 years: 320%.

Our central bank kills savers, so why save?

by steven | 20th Sep 12, 6:48pm 1348123717

Gold isnt a stable measure, and your economics it seems is limited to austrian version...

You save like many japanese and chinese and indeed many in the developing world so you dont starve to death....

regards

by economist | 20th Sep 12, 8:27pm 1348129647

Actually Steven, gold is the stable measure, its just that governments (esp US) and the banking establishment keep trying to manipulate to hide what they are really doing, so they can keep their fiat game going. At the end of the day it doesnt change the long term effect anyway, as the markets are too big.

Anyone can look at a simple graph of gold and make a comment, but if you look into the reason why gold declined from the early 80s you'll find thats when paper gold (fake gold) was introduced and flooded the market - until that is, Gordon Brown had to eventually bail out the big banks with the bank of England's physical real gold, that marked the beginning of the end of the paper game, and the beginning of the end of the gold price manipulation and suppression scheme, since then gold has been clawing its way back, only because the bankers are relunctant to supply unlimited paper - esp as Asia is tending to actually take delivery. You can't just look at a manipulated paper market game price and say its 'not stable' ... in the end it will be paper that's not stable.... be it paper gold or paper paper (which is basically the same thing).

Rgds.

by iconoclast | 20th Sep 12, 10:16pm 1348136206

Check the RBNZ Housing Inflation Index - if you believe it

http://www.rbnz.govt.nz/statistics/0135595.html

Housing Index in 2000 = 703

Housing Index in 2012 = 1497

It's only gone up by 113% in 12 years

But 213% using Berend de Boer's method of calculation

by steven | 20th Sep 12, 6:59pm 1348124368

Of course if we get deflation, or I should say when, I wonder what he is going to do (POssum in headlights?). If he's aiming for 2% then that implies he's going to have to drop further and faster as this "recession" worsens against AB's stance.

Or he might do like the RBA, BofE, ECB etc and try and rise early and watch our economy stagger....

regards

by speckles | 20th Sep 12, 9:02pm 1348131737

Well it sounds a lot of bluster with blunt instruments at ones disposal. We have a two speed economy and if CHCH goes the way I expect will make that three cycles all in one little economy.

Which cycle to focus on..the largest one that will help achieve the CPI target...

by raf | 20th Sep 12, 5:22pm 1348118522

Asset prices are not in the CPI so why would you monitor them, when it's been shown that they have limited impact on the actual CPI? It's like watching the weather forcecast for Auckland, when deciding what to wear in Christchurch.

"In pursuing the objective of a stable general level of prices, the Bank shall monitor prices, including asset prices, as measured by a range of price indices. The price stability target will be defined in terms of the All Groups Consumers Price Index (CPI), as published by Statistics New Zealand."

by steven | 20th Sep 12, 6:53pm 1348124019

Or even saying its raining in Auckland now so I'll take a coat next month.

The key word is probably "general" CPI is volitile and specific so you need a range of indicators.

regards

by Berend de Boer | 20th Sep 12, 6:28pm 1348122535

Why do we need a single guy to centrally plan our interest rate anyway?

by steven | 20th Sep 12, 6:50pm 1348123844

Because thats the policy of our voted in Govn. Ppl wanted price stability and minimal inflation.

In effect though trying to control inflation is now moot.

regards

by Berend de Boer | 20th Sep 12, 7:16pm 1348125390

People want stable prices? Checked the fuel prices between 2002 and 2012? Checked any other price? If price stability was the goal, our reserve bank has been an utter failure.

by steven | 20th Sep 12, 8:35pm 1348130151

economics 101, suppoly and demand of an in-elastic item means shortage huge price jump

regards

by economist | 20th Sep 12, 8:37pm 1348130252

'People want stable prices?'

I think Berend de Boer people what moderate deflation. As manufacturers acquire interllectual and physical capital and workers skills increase the result is that the quality of goods and services improve, prices decrease, and the quantity of goods and services increase. This is what an increasing standard of living means: more and better goods and services at cheaper prices. This was the experience in the US after President Grant signed the Resumption Legislation in 1874 after the Civil War.

'Price stability' steals this effect away from the common man.

by Anarkist | 21st Sep 12, 12:26pm 1348187214

Economist,

This hasn't happened on a consistent basis since the 1920s. Why? Because the business community, particularly the financial sector won't allow it to happen. Economy wide "deflation" due to systematic productivity improvements, which though improves worker's wages, harms business profit margins. An economic paper which recently reappraised the so-called Long or Great Depression in the 1870s, found that only the business sector had anything to complain about. Worker's real wages were rising as prices were falling, but their pay kept pace with productivity improvements. This general trend continued through to the late 1920s, though its a period that Austrians interpret as inflationary merely because the money supply purportedly increased, though the historical record fails to reflect their claims. The price level didn't actually rise, which is somewhat of a conundrum when your basic argument is predicated on the assertion that prices are determined by an increase in the money supply.

"1. Inflation as price change: Let’s start with the obvious, the 1920s was a decade of deflation; prices fell. Indeed the 1927-29 expansion was the only deflationary expansion of the entire 20th century. That’s right, believe it or not the price level actually declined during the boom at the end of the 1920s.

2. Inflation as money creation: At this point commenters start claiming that inflation doesn’t mean rising prices, it means a rising money supply. I think that is absurd, as that would mean we lack a term for rising prices. But let’s assume it’s true. The next question is; which money? If inflation means more money, then don’t you have to say “base inflation,” or “M2 inflation?”

http://www.themoneyillusion.com/?p=12111

Why was the trend disrupted after the Great Depression? Well the occurance of the Great Depression gave a veneer of intellectual credence to the call for a more tightly regulated and managed commercial environment under the aegis of a State with markedly greater economic influence. The development of the Liberal Corporitist State as Austrian economic thinker, Joseph Stromberg calls it. As Jim Cox reveals, the introduction of anti-trust legislations was more about thwarting efficient and productive businesses, which was engineered by politically connected rivals, than a economic measure meant to help te consumer.

"Actually, the origins of the anti-trust laws lie in politically influential businesses getting a national law passed to pre-empt state laws, to use the power of the state against their business rivals, and from a political vendetta by the bill's author against the head of a major firm. Likewise, the laws have not served the consumer but have done the exact opposite, harming productive, cost and price-cutting businesses to the detriment of consumers."

http://www.conciseguidetoeconomics.com/book/antiTrust/

What may suprise many is that Roosevelts New Deal, was built upon the foundation of corporate liberalism which had been fashioned by certain sectors of American industry that had emerged in the beginning of the 20th Century and only gained fresh impetus during World War I under the aegis of the War Industries Board.

In the postwar years, many corporate liberals who had been associated with WIB (e.g., Bernard Baruch, Gerard Swope, George Peek, and Hugh S. Johnson) agitated for the establishment of such a corporatist system in peacetime.²¹ This line of thought bore fruit, finally, in the Swope Plan which was the basis of the New Deal's short-lived NRA system of "codes."

http://tmh.floonet.net/articles/strombrg.html

by Gummy Bear Hero | 20th Sep 12, 8:51pm 1348131065

B de B : ...... it's probably because the married guys are under enough stress as it is at home , without being locked up once a month with Bernard Hickey at work , as well .. .....

by notaneconomist | 21st Sep 12, 1:21pm 1348190515

Berand de Boer - haha - love that question ! Answer - because that is all the sheeples know !

We don't need a central bank and Govt controlling the legal tender but it is how they control all the people and fleec..em all.

by Poission | 20th Sep 12, 7:06pm 1348124804

The problem that arises is the cross over between monetary policy and fiscal policy is fuzzy, the later being the specific responsibility of the Govt.

The retooling of the RBNZ with large instruments of mass destruction such as a hike in interest rates to curb investment forced property prices in AK will still impact on the productive sector.

The hike in the OCR will still impact on the TWI if real growth in overseas economies rotates around the mean.

The high TWI is stiil the fundamental cause of instability,and both the decrease of manufacturing output and employment,transfering fiscal responsibilty is transfering accountability.

by Grant A | 20th Sep 12, 7:56pm 1348127815

Steven - other than for one qtr in 2008 there has been zero global deflation in the world in the past 60 years - zero deflation since the whole world, for the first time in history, all went off the gold standard atnthensame time. There has never been a period like in history, and for the moment, there remains no restriction on central banks printing as much as they like for as long as they like.

True, the inevitable INflation will ultimately change that, and ultimately lead to DEflation, but hell,, anyone listening to your deflation calls, and clinging to cash, will be a long dead through that INflation period first.

No deflationarist has ever explained convincingly to me how we're going to that deflationary point in a total fiat world, without that very nasty bout of Inflation first - you could be the first ?

by powerdownkiwi | 20th Sep 12, 8:20pm 1348129201

Grant A - I listened to Nicole Foss, preaching deflation recently. She is not stupid, and presented a coherent argument. She was staying with friends of ours, and we all adjourned there apres her talk for a long debate into the night.

Where I differ from her, is that she thinks Peak Oil (lets call it: maximum global energy flow-rate) has yet to appear. She thinks this is solely a fiscal overshoot, building since '45 or so. She thinks it has to re-balance, but (unlike HughP here) doeswn't expect that process to involve increased incomes. No growth, in other words.

Folk like me (and Prof Bob Lloyd) reckon the 'peak flow' is past, and we're on a bumpy plateau before the descent. That says we get dwindling incomes, but increasing demand for necessities will see inflation ramp. Prices of discretionary items will presumably tank, so it would be fair to call them deflationary... They won't displace the inflation pressure, though.

Throughout, interest rates have to trend to zero, then below. If they don't, it's because a clique are milking the system, and someone else is subsidising them. Bankers are gonna be unpopular if we go down that track.

by Grant A | 21st Sep 12, 12:38am 1348144735

Psk - I agree Nicole is a very smart lady and I listen to and read her stuff often. However her arguments havent convinced me and I remain of the mind that you just described, falling prices in discretionary stuff, and rising prices for nessesities, staring probably a couple of years out.

Eirherway it will be inflation because central banks will be continuing to expand the monetary supply until they hit the wall - that wall will be a level of inflation that will be well recognized as such, and ultimately terminal for those seemingly perpetuating it by the public mind - then we get the "reset", something that will impact us all to varying extents, most likely based upon how well understood the likely process is, and how well you're prepared yourself for it. I'm not so sure aout your lower interest rates call though, in fact I think higher rates will be part of the reset as the rebalancing occurs.

I think an exciting time after that, but it many years away yet.

by steven | 21st Sep 12, 7:32am 1348169551

I'd be surprised if we have a couple of years, but then I thought that 27months ago when I sold all my shares...

The problem with printing is inflation is its too focused on just that one aspect...its not just the printing the spending has to happen....

I certainly dont agree its going to be rising interest rates, the OCR will collapse....the only reason the retail rates will rise is no one will lend to us cheaply...however if the carry trade continues I cant see that....The Fed btw seems to think 2015 and beyond before the US interest rates "recover" I dont think they ever will.

But it sure is a complex issue....and its not many years.....not unless many in your mind is < a decade. It would be "nice" for me personally if it was....but I dont believe it.

regards

by steven | 21st Sep 12, 7:24am 1348169041

Im not sure NF thinks that peak flow is much in the future, I just think her expectation is that the financial mess will impact first....Peak energy shortly afterward....

I dont agree on overall inflation as you have to consider the purchasing power of all the ppl. So the ones working in the sectors that are descretionary; the DSE's Briscoes, coffee shops, lots of services of this world will suffer huge deflation and un-employment and that will be a bigger impact than the necessities that will inflate. You just have to look around to what was about in the 1920s and what wasnt.....Sure there were some of everything but really they are few as the rich are/were few.

Now in the future once the Greatr depression has played out, then yes we will see inflation in necessities, it will go back to the %s our [grand-]parents spent, say instaeed of 15% on food, 50%. This means of course other things just have to go bye bye, house prices for instance, NF sees a 90% collapse in those.

regards

by economist | 20th Sep 12, 9:07pm 1348132028

The US gov co is running a real GAPP accounting deficit of around 5 trillion. As the baby boomers retire it can raise taxes massively, cut spending massively, or print massively into oblivion (or all 3) - but why tax or cut when you can print? Neither Mitt nor Barak or their fun spending parties plan to do anything like raise taxes or cut spending like that (Mitt/Ryan 'cut' is just a decrease in the rate of increased spending...), it would be political suicide. Nor are Americans saving at anything like that rate (meaning the savings dont exist to borrow that amount), nor are they repaying debt anything like that, so that leaves my vote for option 3, (not that I would choose it - just think thats the more likely logical option) as having the reserve currency means they can in effect export their inflation around the world and make everyone else on the planet 'share the load', until that is, others have enough and create another system not on the current USD - which will bring all those trillions (held off shore) of USD coming home to the good old US of A. Thats if the US doesnt beat them to it and go back on a gold standard of some sort, - unlikely as the government couldn't then borrow what doesn't exist and would have to live within its income (which is the same as options 1 and 2 in effect)....

by Anarkist | 20th Sep 12, 11:45pm 1348141524

The Federal Reserve Bank isn't creating money that doesn't already exist. They don't need to. Congress creates money as it carries out its daily operations. Treasuries are just a way for the U.S. government to settle the obligations that it had earlier assumed, gives financial markets a virtually risk free interest generating investment, and a way for the Federal Reserve to carry out its monetary policy. Federal Reserve Management is just a mechanism through which it targets the Federal Fund Rate, through open market operations, though an open mouth policy, where the Governor of the Central Bank seeks to communicate his desired policy goal without the need to engage in actual monetary operations can be effective too. This is the primary way the New Zealand Reserve Bank carries out its monetary policy.

“But here is the essential fact I want to emphasize and have you think about today: The Fed could not monetize the debt if the debt were not being created by Congress in the first place….The Fed does not create government debt; Congress does.”

http://pragcap.com/pomo-flip-matter

Even in Quantitive Easing, the Federal Reserve isn't providing banks with new liquidity, it just alters the composition of their balance sheets. It just changes the duration of Federal Reserve liabilities.

Now, what these reserves are is essentially deposits that commercial banks hold with the Fed, so sometimes you hear the Fed is printing money, that’s not really happening, the amount of cash in circulation is not changing. What’s happening is that banks are holding more and more reserves with the Fed.

http://pragcap.com/ben-bernanke-explains-fed-qe

The greatest worry that concerned U.S. policymakers in the 1990s during the Clinton Administration was the fear that the Government would pay off the National Debt. Imagine the world if banks didn't have risk free returns from Treasury bonds, the Fed would lose a tool with which to carry out monetary policy, China would no longer be able to manipulate exchange rates to favour their export orientated industries, other economies would no longer have such a consistent reference for the value of their own currencies. The implications are profound. Would be a very different world, its hard to imagine. You have George W. Bush and Osama bin Laden to thank for that to be no longer a concern.

http://www.npr.org/blogs/money/2011/10/21/141510617/what-if-we-paid-off-the-debt-the-secret-government-report

by Nic the NZer | 21st Sep 12, 1:22am 1348147352

Well said, and in my own understanding fully correct, however I am afraid the intended targets were brought up with a slightly different idea about money,

http://www.takelifeback.com/moltz

and you are unlikely to change any conceptions by trying to push facts and ideas into the reality free zone.

by economist | 23rd Sep 12, 5:01pm 1348376518

1. Most people understand that 'printing money' is not actually necessarily cash Anarkist.... its just creating electronic digits in a computer. The Fed does create this 'money' by monetising the treasuries - it doesn't have to - they could just let the market buy them and treasuries would decline in value (and therefore interest rates would jump up - rewarding savers and penalising borrowers - which is what should have happened). Instead the Fed is choosing to not let the bubble deflate but to expand it ever more. Next I suppose, you are going to suggest that the Fed doesn't create money when it buys MBS off the banks - infact you would suggest it is Congress who does this, and they are too blame? (Congress is to blame for a lot of things, but at least not money creation).

2. If you read a number of comments on interest.co.nz you will find that treasuries are not risk free, infact I think they are probably in the biggest bubble of all time. The Fed is stuck with trillions that it can not get rid of or exit from. Once more they keep buying them as if there is no tomorrow - if they don't they will have a bond crash of biblical proportions, so in the end they will end up monetising the entire debt. It would have been better off in the long run for them never to buy them in the first place, now they have created the mother of all bubbles.

3. ...'the Fed would lose a tool with which to carry out monetary policy' who cares???Ultimately the Fed is destroying the currency, not saving it, history shows in the end it will not have a currency to manipulate with monetary policy. Countries, including both the US and China have been manipulating their currencies for many decades. Of course countries have a consistant reference for their own currencies, now your just being silly Anarkist.... its spelt... g...o....l....d....

by Justice | 20th Sep 12, 8:49pm 1348130989

BE with more of his utter and complete BS!

Why would ANY economy allow banks to create cash loans from THIN AIR to fund the largest pool of ASSETS (namely property) in the WORLD and then...............NOT think it would effect inflation (purposely left out of the CPI) at all, hence "don't bother monitoring that" attitude?

Who do they think they are kidding? It was left out of the CPI simply to ALLOW the ponzi fiat currency system to continue to function!

Every Bank and Western government should be going to prison for running PONZI SCHEMES! The whole global monetary system is a sham............and THIS BS is just trying to hide that fact yet again.

by Gummy Bear Hero | 20th Sep 12, 8:58pm 1348131504

Yes , even BH would agree that BE is full of BS , and frankly , BO ......

..... something seriously stinks , and this time , it's not BP .

by Anarkist | 20th Sep 12, 10:37pm 1348137471

"Why would ANY economy allow banks to create cash loans from THIN AIR to fund the largest pool of ASSETS (namely property) in the WORLD and then...............NOT think it would effect inflation (purposely left out of the CPI) at all, hence "don't bother monitoring that" attitude?"

Because an increase in asset values doesn't qualify as inflation. Inflation is a persistent rise in the price level and debt financed investment doesn't allow that because its merely a lien on future incomes which must be paid back. It only lasts as long as a buyer can be found who is willing to pay more money that the current owner in expectation of rising earnings and that has never happened. A bust always follows a boom. Asset price rises is only ever a temporary phenomenon. The only way it drives inflation is through demand pressure from workers, but the world's labour markets won't accomodate that. Wages have consistently lagged productivity increases since the 1970s and comments from the likes of Alan Greenspan and Stephen Toplis testifies to the fact that our "flexible" labour markets are meant to work that way. They want workers to feel insecure in their jobs so they're not making demands for improved living standards (effectively wage increases). They don't want them to have the ability to leave their job with the goal of improved working conditions. They want workers to suck it up and make do with what they have. "Inflation targetting" is just one of the tools these policy wonk have at their disposal to ensure workers don't have that freedom.

"To be sure, an acceleration in nominal labor compensation, especially its wage component, became evident over the past year. But the rate of pay increase still was markedly less than historical relationships with labor market conditions would have predicted. Atypical restraint on compensation increases has been evident for a few years now and appears to be mainly the consequence of greater worker insecurity.... Thus, the willingness of workers in recent years to trade off smaller increases in wages for greater job security seems to be reasonably well documented."

http://www.federalreserve.gov/boarddocs/hh/1997/february/testimony.htm

The Bank of New Zealand's head of research, Stephen Toplis, said the tightness of the labour market was the single biggest problem facing the economy. Job security left people feeling "bullet-proof" and comfortable spending up large both on housing and through the retail sector and becoming less resistant to price rises, he said.

http://www.propertytalk.com/forum/showthread.php?2738-Ron-Hoy-Fong-Will-The-Next-Boom-Be-The-Boom-Of-All-Booms/page52&ei=RfBaUIrNCfH3mAWE8YC4Cw&usg=AFQjCNElNYY9ynx1A7Py1ntrIGYmTvVPbw

by wtf | 20th Sep 12, 11:51pm 1348141864

Yep wage suppression is the objective. Once unemployment gets down to 4% the powers that be start getting twitchy. They call it structural unemployment. To them you can't have full employment because that would give too much power to employees. Employers would have to, horror of horrors, offer to pay them more to retain and attract new staff. Can't have that.

Don't know what labour market Toplis is talking about. What's U6 - about 13%? Employers claiming they can't find skilled workers. Rubbish, they can't find workers with the perfect match of skills so they don't have to spend any money and time giving a bit of training.

by Justice | 21st Sep 12, 8:31am 1348173061

They also want genius's who will work for peanuts! I can't imagine how some are working for $13.50 and surviving even if i was single with no children.

This is why I as a business owner( self employed product designer) /taxpayer are currently subsidizing their mortgages and savings via the WFF & KS benefits! The NZD is being subsidized so they can afford that mortgage, food and petrol at the EXPENSE of NZ exporters! Just thucking ridiculous!

Is THIS what socialism is about? Robbing people who produce REAL productivity and others to pay for those that fell for the globalized property ponzi scheme?

Will this ideology continue? Yes..........and our country will continue to go down the toilet

by Anarkist | 21st Sep 12, 11:25am 1348183545

At the end of the day, the financial sector is holding the reins. All policy is geared towards satisfying the demands of the financial wizards who know nothing of how real commerce works. Ben Bernanke's recent comments are illustrative of this.

To the extent that the prices of homes begin to rise, consumers will feel wealthier, they’ll begin to feel more disposed to spend. If home prices are rising they may feel more may be more willing to buy home because they think they’ll make a better return on that purchase. So house prices is one vehicle. Stock prices – many people own stocks directly or indirectly. The issue here is whether improving asset prices will make people more willing to spend. One of the main concerns that firms have is that there is not enough demand…if people feel their financial position is better they’ll be more likely to spend….”

http://pragcap.com/a-disturbing-look-inside-the-mind-of-ben-bernanke

Precious few are the modern business leaders who like Henry Ford and the Filene Brothers who recognize the necessity of funnelling adequate levels of spending power to workers which determine sustainable profits.

"In his book “Successful Living in This Machine Age” (1932), Filene argued that the drive for lower wages and the privileging of investment over consumption had produced chronic overcapacity: “At a time when more buying was the need of the hour, [capitalists] were still calling upon the masses to refrain from buying goods, and to invest their savings in more production; and when industries languished from want of customers, they advised reducing wages, a process which must result in a further falling off of sales.”

http://www.salon.com/2010/10/05/lind_america_plutonomy/

Modern conceptions of commerce and economics are more reminiscent of mystical pre-Copernican cosmology than a practical understanding of the workings of the economic process. The elegant, though unrealistic mathematical models of neoclassical economics are analogious to Platos Epicycles use to prove his belief that the Earth was the Centre of the Universe.

by notaneconomist | 21st Sep 12, 12:58pm 1348189095

Justice - correct on all accounts. If you take the minimum wage and the WFF it creates a channel on a graph for a large percentage of employees incomes. The minimum age being the bottom of the band and WFF suppliment the top. The chanel is not that wide but large numbers of people fall into it.

The reasons provided by the Politicians for implementing the WFF in 2006 never made any sense and goes against all the normal ups and downs that occur within markets. If the WFF had not been implemented it appears the housing market would have had a natural price correction as the numbers of people needing WFF subsidy is quite high.

When you look at total debts to agriculture and business it appears they are well within acceptable ranges to what they are capable of producing so I don't believe these two groups were any threat economically to the country. Unless of course there are dollar issues on those who export.

When you view household debt levels there is to a definite threat to the economy. So it appears that the Socialist Labours have used Agriculture and Business to bail out the householders. Govt used the same group of people to bail out NZ during the 1980's and it worked for them then and they have just applied a different method this time.

I am grumpy that National have persued these same policies and I think they have been too scared to pull the plug and let a few people sink and that is exactly what is needed.

I am even grumpier that off-shore investors are allowed to continue purchasing NZ assets. When these investors repatriate profits this also affects the exchange rate. I would have thought that would have contravened the Overseas Investment Act as it directly harms our economy.

We have systemic problems in NZ and I don't see them ever going away as a large population is now relying on employment in the public service and they will fight change at every opportunity and we have many people relying on handouts as well.

The Libertarianz political party is looking better and better and they would not have a RBNZ which is interesting. Could mean exporters could have some choice about which dollar they choose to exchange goods in. It would certainly create a bit of competition within the market.

by Anarkist | 21st Sep 12, 9:39am 1348177195

"Don't know what labour market Toplis is talking about. What's U6 - about 13%? Employers claiming they can't find skilled workers. Rubbish, they can't find workers with the perfect match of skills so they don't have to spend any money and time giving a bit of training."

Its an old article from 2007. I was using because its a into the mindset of these banking economists.

Heres another where he derides discussions by Alan Bollard about possible monetary management tool other than the overnight cash rate, which could be used to control inflation.

"Toplis said what came out of yesterday's mess was an easing of monetary conditions instead of a tightening -- the opposite to what was intended. The dollar fell sharply and bank bill futures rallied.

By raising the issue of the "supplementary tools", Toplis said the bank signalled Bollard didn't want to raise interest rates again."

http://www.sharechat.co.nz/article/fa74d836/opinion-what-on-earth-was-the-reserve-bank-thinking-about.html

by Justice | 21st Sep 12, 8:17am 1348172258

I agree, hence the GCC and what it was funding

by economist | 23rd Sep 12, 5:10pm 1348377046

Absolutely mist42nz.... and further all those paper assets have equal paper liabilities.... that's where the problem really lies.... it's the shaddow banking system that's going to blow up the world financial system... its not mum and dad who cant pay the mortgage.... thats only a tiny fraction in the financial la la world...

And just incase someone thinks its 'a zero sum game' they should go look up the meaning of 'counter party risk' and think again.

by Justice | 21st Sep 12, 8:34am 1348173244

"Because an increase in asset values doesn't qualify as inflation. Inflation is a persistent rise in the price level and debt financed investment doesn't allow that because its merely a lien on future incomes which must be paid back. It only lasts as long as a buyer can be found who is willing to pay more money that the current owner in expectation of rising earnings and that has never happened. A bust always follows a boom. "

That statement is incorrect:

How are the asset values influenced?

Access to Borrowing via credit creation, hence this is EXACTLY the same as printing money!

Why is there a 'constructed' (they do it on purpose) bust and boom at all?

To continue indebting as many citizens as possible to produce a 'forced labour effect' (voluntary slavery)

What happen to interest rates (way too late) leading up to the peak of the GCC ?(global credit crisis) They rose significantly but too late and too slow. Now they try and restart the ponzi scheme with some of the lowest OCR's in history!

Perpetual economic growth vs "A bust always follows a boom. "That add up does it?

Growth = more debt to these neo economic clowns

by Anarkist | 21st Sep 12, 10:58am 1348181885

"Why is there a 'constructed' (they do it on purpose) bust and boom at all?"

Well economic booms have been occuring since the Black Death, before the modern social democratic state and the high developed banking structures we have today. Generally booms occur following dramatic social and politic dislocations, which have significantly altered the economic landscape. In terms of the Black Death, labour shortages drove rising wages, gradual recovery of the population increased demand for goods and services, labour shortages stimulated investment in labour saving productivity improvements, improvements were being made in the productivity of agriculture, particularly in England etc. Its a natural phenomenon. Money supply growth only accomodates real tangible growth in economic activity. It doesn't create it. Even during the Great Inflation between 1520 and 1640, the development of new financial instruments by Italian merchant bankers and use during the Champagne Fairs only magnified the effect of fundamental structural changes occuring in Europes economic landscape, introduction of State mandated monopolies, population growth, tangible economic growth, and I'm sure attempts were made to control price which wouldn't have allowed demand to adjust to the new price structure.

Today busts are manufactured to target labour by causing job inseurity so as to suppress wages, though arguments with Puritan overtones are used to justify monetary management. They even see recessions as a good thing.

"[T]o see recessions in such exclusively negative terms suggests a misunderstanding of what a recession is. According to a classic economic view, recessions can play a painful but healthy role in the cycles of the economy. They wring inefficiencies, imbalances, and dangerous levels of risk out of the market."

http://esoltas.blogspot.co.nz/2012/05/schumpeter-was-wrong.html

I'm sure I've read Alan Bollard admitting that a property investors focus on ROI disrupts the ability of the Reseve Bank from controlling asset bubbles witout jeopardizing the stability of the rest of the economy.

In our economy, property owners are price makers and their ROI can be significantly more than the interest rate that business can afford to pay for their productive investment. Productive business will be harmed well before the cost of mortgage debt cuts into the ROI of property investment. After all, under rhe Basel Accord, banks have to risk half the capital in financing property than in business investment so they can afford to offer lower rates for mortgage debt.

by iconoclast | 20th Sep 12, 10:32pm 1348137145

Hedonics and CPI and the "Substitution Effect"

http://www.freerepublic.com/focus/f-news/2705333/posts

In the early 1990’s the "substitution effect" was introduced as a result of the Boskin Report which deemed the fixed basket of goods was irrelevant. For example if the price of steak went up ‘too much’ the price of hamburger, chicken, or Spam was substituted. The CPI morphed from the cost of maintaining a certain standard of living to the cost of maintaining a declining standard of living.

Hedonics adjusts the prices of goods for the increased pleasure the consumer derives from modifications or quality changes to those goods, e.g. if you pay more for petrol because of federally mandated additives, the additional cost does not count toward the CPI because of your increased pleasure in breathing "cleaner air".

by wtf | 21st Sep 12, 12:01am 1348142464

Wonder what you substitute for spam? Pedigree? Chef?

Everytime inflation or unemployment has got too intransigently high the measurement or reporting methodology is changed. Headline unemployment used to be U6, now its U3 from memory. GDP used to be GNI but that included transfer payments overseas. Oops can't have that, might look negative.

by economist | 23rd Sep 12, 5:13pm 1348377221

and whats more those guys in Wellington are currently looking at changing the way stats are calculated yet again...

by Realistic view | 21st Sep 12, 3:26am 1348154769

Excuse my ignorance but I just don’t see how these new targets are going to work?? Take right now for example, we have a housing boom happening again with borrowed money of course (once again they are ignoring it and the debt growth figures are too slow coming out to make decisions in time, everyone on the street knows its happening but the RB and government apparently don’t). We also have a high dollar which is killing our only true income, the exporters. So ok let’s raise interest rates to stop the housing boom and lower it at the same time to drop the value of the dollar. How does that work??

I am genuinely starting to believe that it is the banks that run this country. Maybe I spend too much time on this site. Anyway the bigger the bubble the bigger the pop, they can only save it for so long 1,2 -5 years lets see.

by Wolly | 21st Sep 12, 5:29am 1348162184

Let's cut thru the fluff and get to the truth....Wheeler has but one goal as informed by Tweak who was told what to demand by the parasites...do not do anything that might damage the ongoing extraction of wealth from NZ by the master banks. That means the banks shall continue to have a free hand to flog their credit and to work together to ensure they manage the market. If they are in need of an injection of cheaper drugs, the RBNZ will without delay reduce the ocr by whatever % the parasites say they need.

Proceed to allow whatever real rate of inflation you are told is needed to ensure the demand for credit does not drop.

Remember Mr Wheeler, the vast bulk of all politicians, especially those in power, have invested heavily in property and in farms. Land and property values must be kept at the current bubble levels for as long as the politicians shall milk the capital gains to be had.

by Realistic view | 21st Sep 12, 7:03am 1348167826

Sadly Wolly the longer this game goes on the more I am starting to believe you. I guess they would never admit what you are saying but it very much appears that it is a case of too big to fail and they will do whatever they can to keep it going. They may be willing to admit that, indirectly i.e secure banks is key to the econmy blah blah. The usal spin etc.

by Andrewj | 21st Sep 12, 5:51am 1348163512

Hypertiger

The previous global trade system was based on the roman model...

The roman model had the city state of Rome as and the silver Denarius as the demand and the rest of the world as teh supply...key problem.

The demand became greater than supply and rome collapsed.

The Roman model was tried again and was based in Venice...It basically collapsed in the 14th century before it could consolidate.

Now comes the previous system which was based in Londinium which is now called London...and it had the nation of England and the British pound of stirling silver as the demand...It inflated for centuries but eventually like rome...the demand became greater than supply and it collapsed.

But this was known to be an eventuality...which is why the USA was created to take over.

Which is what happened during the 1933-1945 bankruptcy reorganization

The USA and the US dollar which started out silver but was changed into a measure of gold so it could be taken over and controlled by the gold standard of london fix.

was made the demand of the global trade system in 1944.

and after the roaring 6 decades...The demand has again become greater than supply and the global system is imploding.

China and the EU depend upon the demand of the USA to supply them with inflation.

The economy is global.

The owners of the global trade system based in Europe use divide and conquer to rule the world...nationalism.

Basically nationalism is like racism but totally legal and acceptable.

How divide and conquer works is by supplying power to one side until it becomes too powerful and then cutting the power off and supplying the other side.

but there is no replacement for the USA as the demand.

and to make everyone the demand and supply...nationalism has to go...

The only way I see it going the way of the Dodo is if it's percieved like racism currently is.

At least considered a barbarous relic

Imagine the cataclysm that is going to be required...Imagine the spanking all you naughty children are going to get to stop you from sucking the thumb of nationalism and embrace globalism.

The collapse you currently see in progress is nothing compared to what you all are heading into.

by steven | 21st Sep 12, 7:42am 1348170160

Nope.....globalism takes energy, energy output will decline, local fiefdoms maybe....one "group" "leading" the planet, no.

regards

by Vera Fayed | 21st Sep 12, 8:42am 1348173734

Andrewj - Dude, awesome post. Gotta ask, this; "Basically nationalism is like racism but totally legal and acceptable." Is that borrowed or an Aj original.? I'd like to use it and always try to give credit where it's due.

by Andrewj | 21st Sep 12, 10:56am 1348181776

Stephen Hulme put me onto him.

http://forums.wallstreetexaminer.com/topic/1046525-euro-zone-slump-deep…

by Justice | 21st Sep 12, 8:47am 1348174052

"The collapse you currently see in progress is nothing compared to what you all are heading into."

exactly! Most people have no idea where we are headed and that is just scary. Any kid born today will have a career ( a very short one) in the military of the future.

by Finance Gal | 21st Sep 12, 10:45am 1348181140

Man you must be fun at parties.

The sun is actually shining today, and it will come up tomorrow as well. Smile - you'll feel better.

by Andrewj | 21st Sep 12, 10:50am 1348181442

Its ok, I take pills when its time to party.

http://www.youtube.com/watch?v=tn3sCfBV1y4&feature=related

by splineman | 21st Sep 12, 7:42am 1348170141

I'm really uncomfortable about the clamour of people to make us all poorer. An internal devaluation will simply do this. With the higher, relatively, dollar we have a valuable medium of exchange and also choices on price. An exporter can lower his/her price to reflect market conditions without the problems that internal devaluation can produce.

Workers in a stable enviroment will not be agitating for wage rises input prices, mostly imported, remain more stable.

People need to be careful about this siren song of internal devaluation.....the carrot of not having to pay off what you have borrowed is seducing many.

Cheers

by Les Rudd | 21st Sep 12, 8:04am 1348171484

Will Wheeler learn from Bollard's mistakes?

"Wheeler also emphasised that the macro-prudential policy tools currently being developed by the Bank should be separate from, but complementary to monetary policy.

“The primary purpose of such tools will remain to promote stability of the financial system," he said.

"He endorsed the RBNZ's current stance, which is that alternative tools will be separate from monetary policy and would mainly be used to promote stability of the financial system,"

What did Bollard admit about this?

by Kunst | 21st Sep 12, 9:16am 1348175815

Different approach

Les/ Wally – why are you guys riding the same wave again and again – without actually having success ? I made several attempt on www.interest.co.nz with a new idea how to stabilise and lower the NZ$, unfortunately without responses from you guys. Here are the links again.

http://www.youtube.com/watch?v=GXC44l942bE

http://www.youtube.com/watch?v=eJuyL84cdWQ go to 6:30min.

I think you could start a petition/ initiative with some of the parliamentarians/ parties interested and in support of such an idea.

(see comments on your website also)

by raf | 21st Sep 12, 9:31am 1348176690

Kunst,

There is no need for a gold link. In fact, that would be extremely destabilising for the global economy, leading to all kinds of unintended consequences. If the problem is one of quantity, then it is far simpler to control the actual supply of money, rather than using gold to do the same job.

The continued targeting of the CPI is a massive cop out and allows the expansion of the money supply to continue ad nauseam (until lack of effective demand in the economy sees a collapse in new credit).

The government has missed an opportunity here to address a serious malfunction in the economy and, in my very humble opinion, is being negligent in its management of NZ's monetary conditions.

by Justice | 21st Sep 12, 8:40am 1348173643

And WHY THE HELL are the NZ media so complacent with this idiots (BE) answers? They ask questions like sheep, sound like sheep, and report back like sheep!

Even in Muldoon's days the media got "stuck in", sure they got abused by MP's but that is the point is it not of the "FORTH ESTATE"?

Just gutless! Our media are 'accessories to murder of the economy'

by Christov | 21st Sep 12, 1:12pm 1348189966

Even in Muldoon's days the media got "stuck in", sure they got abused by MP's but that is the point is it not of the "FORTH ESTATE"?

Just gutless! Our media are 'accessories to murder of the economy'

Can I get a halleujah for Justice.....!..?

I said..........CAN I GET A HALLEUJAH FOR JUSTICE..!..?

Lemme hear you say now brothers and sisters..!....Our media are 'accessories to murder of the economy'

Anna.. AMEN...AMEN ...AMEN.....Geesus.!

by Les Rudd | 21st Sep 12, 1:26pm 1348190764

http://www.realeconomy.co.nz/309-pta_same_old_same_old.aspx

“The decision to take asset prices into account as a measure of financial stability is a helpful tweak but it is only the tip of the iceberg. Without changes to the targets of the Reserve Bank Act we will only see a continuation of conditions that suit banks, and currency and asset speculators, rather than those earning export incomes.” etc.

Also have a listen to these two:

http://www.realeconomy.co.nz/308-options_for_curbing_the_high_n.aspx

Bill E being called on the bs that we need massive reserves to bring NZD down.

http://www.realeconomy.co.nz/307-brian_willoughby_making_life_e.aspx

NZMEA President on Breakfast telling it like it is.

by Stephen L | 21st Sep 12, 8:53pm 1348217599

Les,

Thanks as usual. I missed the part where someone stated that you don't need massive foreign reserves to bring the dollar down, but that is surely right that you don't. You need massive reserves potentially to keep your currency up, but a very common step to get it down, is in fact to buy foreign reserves, which would be a useful benefit of doing so. (In our case I would start by buying back some of our debt, so no eventual regret risk).

Some of the surplus countries doing so, like Japan or Switzerland, will eventually have their currencies appreciate, and so may well take losses on their foreign reserve buying; but will have significantly helped their export, manufacturing and tourism industries, and have in any case just printed the money to buy the reserves with in the first place, so are quids ahead. Not much sign of inflation in Japan; or Switzerland come to that.

by steven | 23rd Sep 12, 9:06am 1348348003

"The only reason for the Fed to have tightened in the naughties would have been concern about asset prices — which is the same kind of concern that is apparently dastardly now.

I don’t think any of this makes sense. I think it’s just about looking for reasons to oppose easing now."

http://krugman.blogs.nytimes.com/2012/09/22/self-contradictory-fed-bash…

Kind of suggests we have a political issue more than anything else. Its not a lack of will to do something, its a will not to do something "they know is wrong" even with no logic or proof...ideology.

Heaven help us.......if so.

regards