New Reserve Bank Governor Graeme Wheeler says there's no need for the central bank to follow overseas counterparts and adopt quantitative easing, or money printing, but he isn't ruling out the possibility of intervening in the currency markets to try to weaken the New Zealand dollar.
Speaking at the Admirals’ Breakfast Club in Auckland In his first speech since succeeding Alan Bollard last month, Wheeler - who left the Official Cash Rate (OCR) unchanged at its record low of 2.5% yesterday - said pursuing price stability and using its prudential powers to promote financial system stability and efficiency, were the greatest contributions the Reserve Bank can make to New Zealand’s long-term economic growth.
"We do not see any reason to adopt quantitative easing in New Zealand," he said.
"Quantitative easing is being adopted by central banks that have little or no scope to lower interest rates in economies experiencing major deleveraging, and where deep concerns exist about generating and sustaining economic growth. It is a sign of desperate times for central banks, who in some instances are shouldering the burden of domestic policy paralysis over fiscal policy," Wheeler said.
"Since the onset of the global financial crisis, the Federal Reserve has expanded its balance sheet by 13 percent of GDP, the European Central Bank by 16 percent of GDP, the Bank of Japan by 10 percent of GDP, and the Bank of England by around 20 percent of GDP. In all four cases the official cash rate is 0.75 percent or less. In all four cases there is little evidence of any appreciable impact on economic growth. New Zealand is in a very different situation."
The New Zealand economy is growing at an annual rate of about 2% and the Reserve Bank has scope to lower interest rates if needed, he added.
"While annual Consumer Price Index (CPI) inflation has fallen to 0.8 percent, we expect inflation to head back towards the mid-point of the (1% to 3%) target range. We will continue to monitor inflation indicators, such as pricing intention and inflation expectation data, closely over the coming months as stronger residential investment gets into full swing," Wheeler said.
The Reserve Bank didn't see any scope for directing monetary policy to achieve target rates of economic growth, saying this was beyond monetary policy's capability.
"Trend rates of economic growth depend largely on the quantity and quality of human capital and the amount and productivity of the capital that labour has to work with. But, we do examine the state of the economy very closely when setting monetary policy. We study a range of economic indicators such as building and manufacturing activity, measures of capacity, conditions in the labour market, trends in competitiveness, and forward indicators of orders and investment intentions," Wheeler said.
"Doing so enables us to get a better feel for the pressures on resources and to assess whether there is scope to support stronger growth in demand while achieving our inflation objectives."
New Zealand dollar 'high'; RBNZ wants to see it lower
He noted considerable public debate on the exchange rate with external commentators, such as the International Monetary Fund (IMF), suggest the New Zealand dollar, at US81.60 cents this morning down from as high as US82.40c before Wheeler's speech, is over-valued in terms of New Zealand's economic fundamentals. Wheeler noted some of the strength in the Kiwi reflects the weakness of the US dollar.
"On a bilateral basis the New Zealand dollar is especially strong against the US dollar, Euro and Sterling. Against the Australian dollar, it has tracked slightly below average. Ultimately, it is the relative rates of return between New Zealand and the rest of the world that explains the strength of the New Zealand dollar. These returns reflect developments in the economy and international demand for our products and services. Over the longer haul the dollar is very strongly correlated with measures of the terms of trade or commodity prices, and much of the strength of the New Zealand dollar is due to our terms of trade being close to a 40 year high," said Wheeler.
He said exchange rate movements can also reflect differences in growth rates between economies, differences in interest rates, perceptions of safe havens, and fluctuations in investor risk appetite, with New Zealand not alone in experiencing upward pressure on its exchange rate.
"The appreciation in our exchange rate has affected the tradables sector of the economy. Manufactured export volumes, although growing at around 3 percent a year since the global financial crisis, are lower than they would otherwise be; investment in industries such as tourism has declined; and the profitability and output of import competing industries is reduced," said Wheeler.
"On the other hand, resources shifted to the more sheltered and less competitive non-tradables sector where producers find it easier to raise prices. The high exchange rate does however, generate some important benefits to the economy. Consumers and producers benefit from lower import prices, and interest rates are lower than would otherwise be the case."
The Reserve Bank did want to see a lower exchange rate, Wheeler added, provided this can be achieved without damaging price stability and financial stability.
"In the wake of the global financial crisis, institutions such as the IMF, are reviewing the scope for managing capital flows. Capital controls may be appropriate in some circumstances, perhaps to mitigate problems arising from temporary surges in capital inflows in economies with weak financial sectors. For a debtor country like New Zealand, an open capital account is essential. Introducing capital controls, instead of making the necessary adjustments, would damage the credibility and stability of New Zealand’s financial sector, and increase the real cost of capital for New Zealand," he said.
'Prepared to intervene' in the currency markets
He noted that cutting interest rates can at times reduce pressure on the exchange rate. However, analysis of past OCR cuts in New Zealand shows on average minimal or no intra-day impact on the exchange rate, and even less impact on a weekly basis. Furthermore, analysis of "unexpected" OCR changes with Trade Weighted Index changes following a rate decision still doesn't show a strong relationship to subsequent New Zealand dollar movements.
"This reinforces the idea that the exchange rate primarily reflects returns in the broader economy rather than simply returns in the money market. We set the OCR such that the inflation outlook remains consistent with the Policy Targets Agreement (PTA) and the financial markets understand this. If we reduced the OCR without sound reasons the exchange rate might drop initially but rise later when the inflationary implications of the rate cut became clear, especially if the belief was formed in the meantime that the central bank’s commitment to price stability was wavering," Wheeler said.
"Foreign currency intervention is unlikely to have a sustained impact on the New Zealand dollar, but can have an impact in the short term if the Reserve Bank makes the right calls about the exchange rate departing from fundamentals."
He noted the Reserve Bank's four criteria to assess whether intervention should be undertaken;
1) Whether the exchange rate is exceptional relative to history;
2) Is the exchange rate justified;
3) Would intervention be consistent with the PTA;
4) Whether the market conditions exist to successfully shift the value of the currency.
"Even if the first three criteria are satisfied at a point in time, it makes little sense to risk incurring losses to taxpayers by intervening when currency flows supporting the New Zealand dollar are particularly strong."
"But we will remain vigilant on these criteria and will be prepared to intervene if all conditions are met," said Wheeler.
However, to achieve a sustained reduction in the New Zealand dollar he suggested it would be necessary to alter the overall level and pattern of saving and investment in the domestic economy. This would especially require tackling "our addiction of depending on foreign savings to finance our consumption and investment." Wheeler said this dependency means New Zealand has consistently needed interest rates above those in most developed economies to maintain inflation at target levels similar to those being followed elsewhere.
"Policies that increase domestic savings, including reducing the government’s fiscal deficit, and to reduce the flow of resources into the public sector and other non-tradables sectors, would help to achieve a sustainable reduction in the exchange rate."
Under his watch Wheeler said the Reserve Bank will be consistent, open, and flexible in reflecting on new information and data. Its focus will stay on meeting the PTA objectives and maintaining New Zealand’s reputation for "credible monetary policy outcomes and financial stability."
"This is the best contribution we can make to help bolster New Zealand’s rate of economic growth and serve New Zealanders."
Working with Bill English and Treasury on macro-prudential tools including housing loan-to-value ratio limits
Meanwhile, Wheeler said a Memorandum of Understanding between Minister of Finance Bill English and himself was being discussed with the Treasury.
"It will confirm the guidelines under which the (Reserve) Bank should operate macro-prudential instruments in 'promoting the maintenance of a sound and efficient financial system'. It will also outline the consultation processes with the Minister and the Treasury if macro-prudential intervention is under consideration, and prior to any decision to deploy macro-prudential policy instruments," Wheeler added.
The macro-prudential tools the Reserve Bank is focusing on include the core funding ratio, a counter-cyclical capital buffer, adjustments to sectoral risk weights, and housing loan-to-value ratio limits.
"These instruments are expected to reinforce the overall tougher approach to prudential regulation and supervision under the new Basel III (bank regulation) regime. We need to ensure that we have well governed and well capitalised financial institutions, with strong funding and liquidity buffers, and sound risk management practices," Wheeler said.
Although New Zealand was vulnerable to global economic shocks, Wheeler noted the country faces the world with 'tremendous" assets.
"The World Bank suggests that on a per capita basis, New Zealand is ranked eighth for natural capital (pastoral and crop land, forest resources and subsoil etc) with only oil producing countries ahead of it. We lead the world in renewable natural resource related capital. OECD comparisons of high school student attainment place us seventh among 71 countries," said Wheeler.
"Transparency International considers New Zealand the least corrupt country in the world, and the World Economic Forum ranks New Zealand among the best for the quality of its institutions, and the efficiency of its product markets and its financial markets. With these assets we should be capable of stronger economic growth. Internationally, and particularly in smaller economies, economic growth is driven by the private sector and its ability to compete on global markets."
"We need to reverse the slowdown in multifactor productivity growth since 2005 and the decline in value added in our tradables sector. And we need to reverse the shift of resources into the public sector and other non-traded activities," he said.
See Wheeler's full speech here on the RBNZ's website.
Economists' reaction
ANZ's Economists
The Governor confirmed previous RBNZ signals that macro-prudential tools are coming. A Memorandum of Understanding is to be signed with the Minister of Finance, an important step forward. · We see such tools as eventually supporting and complementing monetary policy.
Such tools will have long lead times and will never displace the OCR. · In other regards, Governor Wheeler reiterated that it is business as usual:
– The existing inflation-targeting monetary policy framework is best practice.
– He sees no reason to introduce quantitative easing.
– Any assault on the exchange rate, through cutting the OCR or direct intervention, would be short-lived in its impact, and is thus highly unlikely. ·
We concur. A timely reminder of the Reserve Bank’s role was appropriate, given some of the hubris in the political arena surrounding what monetary policy could or should be doing. ·
The “Reserve Bank has scope to lower interest rates if needed” (the global scene and transmission from a higher currency via inflation expectations and unemployment are key to watch in our view), though it is clear that rebuild-related support to growth has the RBNZ watchful: “we will continue to monitor inflation indicators, such as pricing intentions and inflation expectation data, closely over the coming months as stronger residential investment gets into full swing.” ·
The outlook for monetary policy still looks veiled in uncertainty, and we reflect such uncertainties by playing down the spectre of the OCR moving for some time.
Westpac's Economists
The speech set out Mr Wheeler's approach to central banking in today's world. We would describe the speech as fairly standard macroeconomics. The speech explained clearly what it is that a central bank can achieve, and what it can't. The points Mr Wheeler made were things that most macroeconomists and central bankers would agree with:
- The best contributions central banks can make to society's well-being are to keep inflation low and stable and maintain a sound financial system.
- Monetary policy cannot be used to achieve target rates of economic growth.
- Quantitative easing makes no sense for NZ because we still have room to reduce the OCR if needed, and because our economic situation is less dire than that of countries that been forced down the path of QE.
- The high exchange rate is undesirable, but monetary policy cannot affect the exchange rate without damaging price stability and financial stability. OCR reductions have minimal or no impact on the exchange rate, because markets understand that reducing the OCR today would only necessitate more OCR increases later, once the inflationary consequences of the OCR cut becomes clear.
- Much of the strength in the exchange rate is to do with New Zealand's terms of trade being at a 40-year high, although some may have to do with our savings and investment choices. Mr Wheeler suggested that a sustained reduction in the exchange rate might be achieved by policies that increase domestic savings.
- Intervening in the exchange rate is unlikely to have a sustained impact on the New Zealand dollar.
- The Reserve Bank's macroprudential tools (core funding ratio, counter-cyclical capital buffer, adjustments to sectoral risk weights, housing-to-loan value limits) will be used infrequently and for the purpose of maintaining a sound and efficient financial system, rather than as a replacement for the OCR (although the use of macroprudential tools would normally support monetary policy).
Market implications - Mr Wheeler seems to be adopting a straightforward approach to monetary policy. Based on this speech, it seems that Mr Wheeler's view on the appropriate OCR will depend on the medium-term outlook for inflation. That outlook currently sits close to 2%, so the outlook for the OCR at this stage is "on hold."
First NZ's Chris Green
Graeme Wheeler’s first speech as RBNZ Governor outlined three key points surrounding (i) NZ’s Vulnerability in International Markets, (ii) The Importance of Price Stability and an Efficient and Stable Financial System, and (iii) Quantitative Easing, Targeting Growth and the Exchange Rate.
· On the whole, the key message of this speech is a broad defence of the RBNZ’s price stability and financial stability objectives as providing the best framework for achieving stronger growth in output and employment over the longer term.
· In terms of market implications, the speech provides a strong counter response to the suggestion that the RBNZ should look towards undertaking a quantitative easing program. In particular, Governor Wheeler suggests that such a policy response is not required as;
o The NZ economy is growing at an annual rate of around 2 percent, and
o the Reserve Bank has scope to lower interest rates if needed.
· Governor Wheeler’s speech also further reinforces our perspective that a near-term currency intervention to weaken the NZD is unlikely. In particular, while he notes that a number of metrics suggest that the NZD remains overvalued, some of the strength is a reflection of US dollar weakness. Moreover, he also comments that much of the NZD appreciation is due to our terms of trade being close to a 40-year high and that several other commodity currencies have similarly experienced substantial currency appreciations.
· While the Governor readily acknowledges the negative impact that the appreciating NZD has had on the tradables sector and also encourages substitution toward imported goods and services, he points out some important benefits in the form of lower import prices and interest rates lower than would otherwise be the case with a lower currency.
· These comments together reinforce our perspective that the RBNZ does not currently assess the NZD to be “exceptionally” overvalued. Moreover, Governor Wheeler even raises concerns that the use of the more orthodox policy option of cutting interest rates to weaken the NZD has historically had little sustained impact on reducing exchange rate pressures.
· From a fundamental perspective, Governor Wheeler notes that “in order to achieve a sustained reduction in the New Zealand dollar, it would be necessary to alter the overall level and pattern of saving and investment in the economy. In particular, it will be necessary to tackle our addiction of depending on foreign savings to finance our consumption and investment.”
· On the whole, the tone of these comments underline the new Governors comfort with the current “orthodox” monetary policy tools at his disposable and suggests little likelihood of any near-term intervention to attempt to weaken the NZ dollar. Moreover, while not as explicit as the comments regarding the NZ dollar, the underlying tone reinforces that of the October OCR Review, suggesting broad comfort with current OCR settings and little near-term pressure to look to cut rates.
(Updated with detail from the speech, reaction from economists).
65 Comments
This is what the bankers want us to think. If they can keep us fearful of the deflation "threat" we will willingly acquiesce to having our wealth slowly stripped away and handed to these same bankers via inflation of the money supply. The governments are in on it too.
Mr Wheeler said that foreign currency intervention is unlikely to have a sustainable effect on the NZ dollar, although it can have an impact in the short term. The Bank will remain vigilant on its criteria for intervention, and will be prepared to intervene if all its conditions are met.
Paragraph above requires Banks to play their part on foreign borrowing, so it's a bit like needing to lose an eye plus ear plus arm on a moon flight to collect the outcome........see next paragraph
“In order to achieve a sustained reduction in the New Zealand dollar, it would be necessary to alter the overall level and pattern of saving and investment in the economy. In particular, it will be necessary to tackle our addiction of depending on foreign savings to finance our consumption and investment.”
If that's not a contradiction in terms I don't know what is.
The addiction to borrowings traces straight to the property bubble, so you have a direct conflict of interest between the guardians of the economy overall , and the internal banking industry currently enjoying profit like pigs in wallow......as there is no indication of imposing further regulation to banking interests, the statement by Wheedler is piffle bordering on mock sincerity.
Anyone out there who thinks the RBNZ isn't a captured organisation ? anyone..? oh I do mean apart from it's captors.
Overall the policy to continue focus on inflation is an insult to intelligence, an embarrassing position of looking the other way to allow the bubble blowers free reign to maximise their profits and continue to borrow at exceptionally low rates.
At least Bolly had mastered the concerned look.
I don't quite see why the sincerity need be mock.
The Bank will be vigilant for it's limited area of responsibility.
Tackling the structural national borrowing addiction is not within the Banks area of responsibility.
So the first statement is strong because he's committing to do it.
The second as sideways advise to government.
He's tasked with the stability of the current system and has neither power nor mandate to make major structural changes to that - let alone wider parts of the economy.
Thanks Ralph....we'll agree to differ..mock ...mock...mock sincerity...by your words.... neither power nor mandate to make major structural changes to that - let alone wider parts of the economy.
Then what T F do we need him for..? to announce statistical information..?, you are obviously unaware of the....advice ...he can give to Government, the tools he can employ should the need be deemed drastic.
Please cast your mind back to the Governor of the day during Muldoon's currency devaluation..
Not apples with apples I grant you but we are discussing the Governors unexercised powers here...and the potential backlash should he invoke or seek permission to invoke them again in the future.
BTW...what happened when the big four got the wind up about core ratio's.....they were reduced from the proposed levels....
Give me a break Ralphie....! no disrespect intended. A Captured Organisation, redundant in it's impotence, little more than bookeepers.
Never disrepect taken.
Don't get me wrong, I don't believe current economic theory is accurate any more than you do but you do (and should) need some kind of mandate to change a system.
In lessor systems that may be as little as the barrel of a gun.
In our system a government appointed governor of a government owned institution may be the tool for the job he is not the person who wields the tool. Despite the invisibility cloak of independence.
Always back to the voter.
Christov, Lol - as I have noted many times - why pay a central banker of a country the size of a medium sized US city three times that of the Chairman of the Federal Reserve?
I could turn many blind eyes for NZD 600,000.00 pa - and it has to be borrowed as the government fails to run a sustainable surplus.
Well I know where I could save them $600,000 of borrowing for a start StephenH, because I'm bloody positive I could have used an (outsourced) taped speech from Bollard on the last 12 announcements...
Crikey I'll do it for $500 bucks, the speech I mean, it's not as if I'd have any new material to learn, and I know the current mantra off by heart now....but I'll give you...emotion...you'll see sympathy...you'll see despair....overworked (my specialty when the wife's around), chuck me a bonus and I'll turn on a tear.
It does seem an awful lot to pay someone to walk up to a lecturn every six weeks and go "nah, no change." However, I suggest we go further than a pay cut: get rid of the bloody Reserve Bank altogether. Can anyone give me a reason why we need it or an example of how it has been good for New Zealand's economy and monetary system?
Who would save the banks each time there's a crisis? They were toast without the RBNZ's liquidity injections in 2008. Without the RBNZ to backstop them they wouldn't be able to create as much credit or profits as they would have to keep higher reserves/capital than now. That or a govt guarantee. At moment the banks have both.
The governor's $600,000 salary while excessive pales next to some of the SOE executive salaries. Mighty River's Doug Heffernan just got a $500,000 retention bonus for "staying on" to assist with the as yet incomplete sale, on top of his $1.4m salary.
http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=10841749
promote financial system stability and efficiency,
Oh dear, efficiency and stability. To do both at the same time may not give you the answer you are looking for. Stability , robustness require multiple redundancy, slack, many operators- a large and deep market, you name it they need it, and none of those things are efficient. Or at least not efficient in the regular way of thinking about efficiency. Efficiency is an objective that has no real meaning. or at least it means whatever it is you want it to mean. Efficiency is definitely not the answer- it just sounds like it is. Saying something is efficient is tha same as saying that it is good. Markets of course, real functioning markets are not efficient at all. They are only good at one simple thing- conducting experiments, Experimentation is what our way of life is all about and it is how we are where we are, for good and bad. But experiments are not efficient.
He didnt say that, at least I think he didnt, he said he has OCR room to move so no need to print until that is used up at say 0.25% then he'll print.
Mind you he also thinks that inflation will 'recover' to 2%....i think its mpore like praying but there you are.
regards
I usually like your posts but I have become less enthusiatic since you threw your brain out the window on the Maori Issue.
If you were consistent with that then no immigrant could ever become a citizen of New Zealand and never be entitled to to land rights or use of the Justice system.
Sorry Scarfo not sure whether your talking to me or SoreL , but I'm sure any number of us reach a point of conflict in ideology for whatever reasons . Try not to carry grudges, it reduces the number of things we can talk about, or conduits to resolve our differences if you like.
Sorry for the ambiguity Count, that was for SoreL. Not carrying a grudge either, I respect SoreL's comments so it is more a matter of disappointment that he doesn't engage upstairs properly on the Maori Issue. Same for Ivan having a dig further down the thread.
Last time we thrashed this out it wasn't me that bought up the fact of Maori being denied land title on the basis that they were savages. Of course it was the Justice system that was the mechanism to deny this right, otherwise guaranteed to them by the treaty. Hence my comments about consistency in applying the rules. You could go further and even deny voting rights to immigrants. Lets do all that and see who turns up on the wrong side of the statistics in a generation or two.
Gonna disagree with you there christov. For those of us who were born here and grew up here, with, and among the maori, it gets into the blood. Can't be helped. It's important. We have a different outlook. I challenge you to go back and reconsider your claim last week of your "assimilation". Next week I will suggest what I demanded of Kunst a couple of years ago: go down to the local marae and mingle and assimilate. Kunst failed that command. Time to get a moko.
More correctly iconoclast, it was the assimilation of a peoples I referred to...as a process of watering down their culture, diluteing their heritage , stealing their sense of identity in an effort to overcome them passively...I didn't agree with it then...I still don't.
I have no regrets about any comments I made in regard to the issue, even though it may have alienated me further to some, I stand by those comments.
I mingle my freind,a lot more than you may think.
Oh BTW.iconoclast when I said don't get hung up on it , I did not mean the issue, I meant the person or persons who refuse to see any merit in what he(scarfie) had to say on the matter, there were any number of us who did....and we...count too you know.
Happiness.
I'm a common sense person. The problem as I see it is the debt to earnings ratio. Our debt is to high for our earnings or is it our earnings are to low for our debt?
So if our debt is to high how do we go about reducing it.
1) Debt forgiveness - instant NZ doing = zip
2) Debt repayment - time frame 10-20yrs NZ doing = minimal
3) Inflation - increase values & or "QE 3-6yrs" NZ doing = minimal
4) Increase productivity - 10 - 20yrs NZ doing = minimal
Maybe its a combination of all 4 but it needs to be more than is happening at the moment Mr "Wheels" if we are going to see the beginnings of prosperity this side of 2020.
Apparently it's our trees and dirt; "The World Bank suggests that on a per capita basis, New Zealand is ranked eighth for natural capital (pastoral and crop land, forest resources and subsoil etc) with only oil producing countries ahead of it. We lead the world in renewable natural resource related capital. OECD comparisons of high school student attainment place us seventh among 71 countries," said Wheeler.
Einstein said this: "We can't solve problems by using the same kind of thinking we used when we created them."
Inflation targeting by independent central banks who ignored the real world effects of rising household debt to income ratios failed abysmally. They allowed and encouraged asset bubbles to form by cutting interest rates and then were shocked (shocked!) when a financial crisis caused deleveraging that stops the economy from growing 'normally'.
Yet our new Reserve Bank Governor is utterly wedded to this failed policy.
If the Labour/Green coalition win in 2014 the PTA discussion could be interesting and short.
cheers
Bernard
I prefer this quote , in a letter from Albert Ironsides to Otto Juliusburger :
" People like you and I , though mortal of course like everyone else , do not grow older no matter how long we live ..... We never cease to stand like curious children before the great mystery into which we were born . "
.... but then again , who needs old Albert for pearls of infinite wisdom ..... just give Winston Peters a call !
Good on you Bernard for putting it out there....I'm pretty sure your name just got scratched from lockdown announcements, just can't have any dissenters in the room making the New Governor feel a little sweaty and compromised.
that said....I do hope Einstein wasn't including the proliferation of man in that statement..!
you'd have to think some on it..( : >I....?
" Learn from yesterday , live for today , hope for tomorrow . The important thing is to not stop questioning . "
........ question ...... why not give Wheeler his money upfront , but on one condition .... if at the end of each year we don't think he's added positive value to the balance of the NZ economy , we have the right to take the $ 600 000 back .......
No point in standing on the shoulders of pygmies then !
Wheeler needs to make sure he is not pressured by politicians on decision making to buy unsafe securities just because its politically correct. New Zealand needs to adapt to a higher currency exchange rate and look to new markets for business trade ie African nations, South America, fast growing Indonesia and the Phillipines to offset lower margins on exchange rates. We need to sell more in new markets and encourage New Zealand businesse to hunt for more business overseas. Now is the time to step up a gear and sell the products that these new markets want, and the only way to make this happen is to go out and find them.
Here's Westpac's economists summary of Wheeler's speech:
"We’d describe today’s speech as fairly standard macroeconomics – that is, what was considered good practice in the pre-crisis world still largely holds true in the post-crisis world."
It's meant as a compliment.
I actually think it's a criticism.
The Reserve Bank and Treasury (and Government) appear to have learnt little from the drama of the last 5 years or from the very active debate now happening in the rest of the world.
New Zealand's policymakers seem to have fallen down the rabbit hole (as Alice did in Alice in Wonderland) in the late 1980s and are stuck there in a parallel universe.
cheers
Bernard
Possibly the herd instinct at work. Doesn't want to stray too far from the "herd of economists" general beliefs.
I suspect we will have to wait until the students who have been at Uni from the start of the GFC get into power and start implementing policies based on their observations that the policies of the current inept bunch were pretty well naive and stupid
http://michael-hudson.com/2012/09/modern-money-and-public-purpose/
Randall Wray, Research Director of the Center for Full Employment and Price Stability and Professor of Economics, University of Missouri-Kansas City
watch from about 4.45min , Randell Wray helps explain how countries with their own currencies operate and why. It is also quite funny.
Thanks for the link, which was informative and entertaining. I do think central bankers, bankers generally, and pollies all try and mystify money and taxes, I think to protect their supposed expertise premium. If you challenge them, they tend just to say "we're the experts trust us"; which I did for a while, but then wondered why the experts appeared to be making such a hash of managing it. So you gradually peel away the onion and realise its all pretty simple and common sense; but being so isn't in the bankers' interests.
Nice to have it explained as simply as in fact it is by another expert withoutt a vested interest.
The Reserve Bank should be cutting the official cash rate by as much as 50 basis points, given inflation is likely to remains extremely low, according to Berl chief economist Ganesh Nana.
http://www.stuff.co.nz/business/money/7865362/Economist-Why-not-cut-rat…
"We’d describe today’s speech as fairly standard macroeconomics – that is, what was considered good practice in the pre-crisis world still largely holds true in the post-crisis world." Hmm ... I think we are actually in a very different world calling for unorthodox approaches ....
Provincial NZ is will be hitting the skids shortly without some sort of stimulus.... This National Government has just slashed 3 or 4 million from every regional Polytechnic & given it to to PTEs & the Wananga elsewhere - & more Govt slashing on the way to regional Hospitals etc.... so we have a combination of Govt spending cuts & tight monetary policy ...
Oh well, the quicker the RBNZ ignores the new reality & runs a high interest rate policy (relative to all other developed economies) then the quicker National gets the boot....
Where possible in life, business, and I would have thought running a government and Reserve Bank, if you identify a significant problem, then you are best to try and fix that problem. Separately, worry considerably less about fixing other theoretical problems that right now do not exist.
And use the right tools in the tool box to fix any particular type of problem.
Wheeler acknowledges the following problems:
A too high exchange rate, causing real problems for exporters, import substituters, tourism; and consequently very reduced productivity, and loss of employment or productive people overseas.
Low domestic saving (or if you look at the supply side, over high foreign investment- being the same thing). This has led to minimal NZ wealth accumulation, or in fact real wealth loss.
And the following are not currently problems:
Housing market prices are plenty high already; GDP growth is probably acceptable; and inflation is actually too low at 0.8%- but certainly way below a problem area.
So I accept that dropping the OCR would disincentivise saving; stoke up the housing market further, and probably not lower the exchange rate much if at all. Consumption does not really need a lift. The wrong tool in other words for our current problems.
Wheeler then just seems to put his hands up in defeat. He talks of capital controls, but without any apparent real intent.
Following is a capital management tool that comes to mind that could easily be used.
Tthe government this week found new foreign investors to stump up $2.5 billion, at at least 2% interest (so at least $50 million a year in interest going overseas). What if we had printed that money? It could not in itself be inflationary, because it would only be replacing money coming in, and in any case, we don't have an inflation problem. Wheeler says it would not lower the exchange rate (I think it would); in which case absolutely no inflation impact. It would be more NZ saving, by $2.5 billion- helping solve that problem. If it did lower the exchange rate, then yes a little inflation (but we right now have a lot of margin); and that inflation would be in exactly the right imported goods to give our own productive industries a fighting chance by comparison.
There may be other tools, but this type of area is an obvious one, that would not obviously penalise anyone, and certainly not NZers.
Despite whispers to the effect, it's not apparent that any international body of any authority is telling us not to do it.
If not that type of measure, Mr Wheeler, how do you plan to address the problems that you have identified, other than preaching at people to save more? If not your remit, what would you suggest the government do?
Alex,
Can you not see the difference - in terms of inflationary impact - between printing your own money and borrowing from others?
Besides, if it ain't broke don't fix it.
Seems to me there is zero difference to the NZ money supply whether you borrow foreign money and have the commercial banks turn it into new NZ dollars (as the current process is); or you print that money yourself. And so the inflation impact from the money supply is identical. Where there may be some inflation impact, is if not taking the foreign money, but printing, causes the exchange rate to drop; and thus causes imported prices to rise relative to local ones. I actually believe that's a necessary process if we do wish to address the low savings/massive current account deficit; and to help our domestic industries. And no better time than when inflation is verging on deflation, as it is now.
Even the Reserve Bank admits that it is broke, and they've even defined the problem; which as it happens I strongly agree with it. So it needs fixing. But they just put their hands up, and say it's either too hard or not their problem.
By all means explain how you think printing in this case would be more inflationary than borrowing to create new money.
Here's a link for Gummy Bear...something to have on his toast this Sunday...http://www.marketoracle.co.uk/Article37211.html
No point in pasting bits of the report...you got to go read it and gork at the graphs.
Gummy finds the general tone around here hickeysterical enough , without venturing into the markert-oracle zone as well ....
.... given that the greenback is the reserve currency of the world ..... they can simply print any amount they wish ..... America does not have a problem , we do .... and the sooner Wheeler realises that dropping the OCR hard , to get the $NZ down , the better .... the risk to re-inflating the housing bubble is less than the unbalancing of the Kiwi economy from the high dollar ...
Exporting of jobs to Asia has got to stop ...
.... now , back to the nasi goreng ... on toast , of course !
GBH, I had to pinch myself there. I actually agree with something you wrote :-)
You're quite tight. The Americans have had it off with the global economy since 1971....coming off the Gold Standard, allowed them to flood the world with their reserve currency, craftily created at Bretton Woods, against the wishes of the Uk et al.
We should cut interest rates, as this will bring down the cost of domestic funding, thus reducing the amount of overseas borrowing (which is cheaper for the Aussie banks).
We can restrain the house bubble by increasing bank capital requirements and zoning new land for building.
Might even boost the real economy!
We can restrain the house bubble by increasing bank capital requirements
As I said upstairs there RAF....the RBNZ already backed away from proposed Capital requirements when backlash pressure from the Big Four was applied.
Not going to happen anymore than FTT's.......check.
Christov,
You have to expect some blowback from the Big 4. They are defending their patch. However, that doesn't mean it's a non starter.
Greens should really be running with this now that they have the floor. Capital Gains Tax and LTV's won't make much difference. The root of the problem has been the excessive money printing by the banks (expansion of credit) based on inflated house price valuations. It's quite incredible that policy makers stood back and just watched this happen. Now people get apopletic about a proposal to print money and spend it directly into the real economy.
I think Jonathan Haidt is spot on. It's very difficult to move people fron their fixed views
http://opinionator.blogs.nytimes.com/2012/10/07/reasons-matter-when-int…
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