What’s he offering?

Liam Dann asks a very good question:

What is David Cunliffe offering? A dramatic experiment with a winning formula? A worrying fix for something that isn’t broken?

He’s referring to Labour’s determination to follow Green Party policy to meddle with the Reserve Bank.

Labour’s embrace of Green Party policy to reform the Reserve Bank Act is a big stumbling block for the party if it wants mainstream acceptance from the business community.

It surely gains the party few fresh votes from the wide pool of mainstream voters who find monetary policy debate arcane.

Yet it makes Labour almost impossible to endorse for many of the nation’s most powerful and influential business leaders.

The monetary policy reformists are full of ideas about the magic a broader definition of the Reserve Bank Act might achieve. But they ignore the extent to which having one target – inflation – has worked. And just how fundamental controlling inflation is to creating a stable economy on which growth can be built.

Why, when the Act has just seen us through such an enormous global downturn so efficiently, would you change it. In the hope it might bring the dollar down?

Well, if you damage the economy the dollar will certainly fall. But it seems a brutal path to take.

And why, if you were going to make changes, would you loosen the shackles during the growth phase of the economic cycle – just when inflation starts to become a serious risk.

We should be grateful we don’t have to make radical changes to our economy. We’ve come through the downturn well, and while National can take some credit for steering the ship, so too can the last Labour Government for the healthy growth it oversaw.

Radical change is for those nations that have run out of options. Let’s leave it to the Greeks.

National has generally trod a cautious path, some would say too cautious. But it’s getting results.

The economy is growing, and other economic indicators like business confidence, investment intentions and employment are positive.

All of this would be at risk if inflation is let loose with the inevitable steep increase in interest rates that would follow.

In 2008, when Labour was last in power interest rates were about 11%.

Now they’re about half that and while they’re expected to rise providing inflation is kept under control, they shouldn’t get back to double figures.

But if a Labour/Green government starts meddling with the RBA, inflation will surge and interest rates will  too with the high cost that imposes on business and households.

If people are concerned about the affordability of houses and farms now, how much worse will it be when interest rates are twice the current rate, or higher?

That’s what Cunliffe is offering.

One Response to What’s he offering?

  1. Bulaman says:

    The best way for a government to let the dollar find its true level is to stop borrowing. Government borrowing is providing sovereign debt with all of us “on the hook” for the borrowing. If government gets out of the debt market the true country risk allows for proper trade based currency flows. The simplest way for government to get out of the currency market is to reduce the cost of the public sector so that it is less than the tax take.

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