Inflation is theft

Some things are too important for politicis – monetary policy is one of them.

But Phil Goff has turned his back on 20 years of concensus with his announcement that fighting inflation is no longer the most important priority.

“Our Reserve Bank policy targets are not well designed to produce a stable and competitive exchange rate, nor to keep interest rates as low as possible,” Mr Goff said in a speech to Federated Farmers in Wellington.

The battle against inflation was no longer the most important priority — growth and wealth creation were equally vital, Mr Goff said. . .

He might have remembered that you can’t have real growth and wealth creation with inflation if he’d read Eric Roy’s post on the National Party MP’s new blog:

In the mid eighties . . . I had just purchased an additional block next door.  The budgeted $40K surplus I calculated disappeared to a $90K deficit as interest rates soared to, in my case, 23.5% . . .

Those interest rates were driven in large part by soaring inflation.

Inflation is theft.

It erodes the real value of investment, adds to the cost of doing business and makes exports more expensive. Just look at Zimbawe.

Goff spent nine years in a government which undertook several reviews on monetary policy. He could have changed it then but did nothing, now he’s decided from opposition, where he can’t do anything, that he wants to something.

Not just one thing, but four: he wants a stable and competitive exchange rate; reduced interest rates for businesses and home owners; continued priorities of price stability and low inflation; and to guard against expectations of price rises.

Matt Nolan at the Visible Hand in economics explains the flaws in that wish-list:

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

With 2 they want to punish savers.

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

 He has related posts here,  here and here.

Offestting Behaviour seconds that.

BK Drinkwater says reads Nolan’s posts and weep for the integrity of the Labour Party, who are leveraging public ignorance of economics to embark on a feckless campaign of populist short-termism.

Kiwiblog says if inflation gets out of control we all get poorer.

Not PC doesn’t want tinkering he wants abolition.

Federated Farmers president Don Nicolson says government spending is the root of the monetary policy problem.

Macdoctor counters some fiscal ignorance.

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