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<\/p>\nOPINION:<\/strong><\/p>\n
Is New Zealand about to descend into the crazy, price-controlled, inflationary days of the1970s?<\/p>\n
Or do we now live in a magic world where money is free and debt doesn’t matter?<\/p>\n
The<\/span> answer to both questions is: no.<\/span><\/p>\n
There’s two sides to every debate. One of them is usually wrong.<\/p>\n
But the more polarised a debate becomes, the more likely it is that both sides are wrong.<\/p>\n
Take the endless left\/right battle.<\/p>\n
At the extreme left we get Soviet Russia and with its terrible state-controlled consumer goods.<\/p>\n
The commies might have won the race to space but they couldn’t design a decent pair of jeans.<\/p>\n
On the far-right we eventually get to the zero-state, warlord model.<\/p>\n
A world of unfettered libertarianism sounds fun – until you realise freedom is just another word for a machine-gun-mounted jeep and a gang of well-drilled teenage boy-soldiers.<\/p>\n
In the world of economics there is a very important debate about inflation right now – which is also polarising into absurdism.<\/p>\n
On the right there seems to be a very worried bunch who think social measures to address rising inequality will coincide with loose fiscal and monetary policy to plunge us back into the darkest days of Muldoonism.<\/p>\n
These people seem to have missed that fact that we still run an open, globalised, free-market economy with rapid real-time price signals.<\/p>\n
Where are the tariffs and subsidies of the 1970s? Where are the nationalised corporations?<\/p>\n
Where is the exchange rate control?<\/p>\n
Muldoonism wasn’t an economic switch that got turned on in 1975.<\/p>\n
It was a case of clinging far too long to the command-and-control policies of the post-war recovery.<\/p>\n
Meanwhile, on the left there are those berating Grant Robertson for not borrowing more to fix everything that is wrong with the world.<\/p>\n
This assumes that the Government is able to deploy the money it borrows efficiently.<\/p>\n
Even if you give our politicians the benefit of the doubt on competence, now is not an easy time to get things done.<\/p>\n
The economy is running hot and bumping up against capacity constraints.<\/p>\n
In other words, getting staff and supplies to build things is very hard.<\/p>\n
That’s a big part of what is driving inflation and points to the flaw in another common argument for more borrowing.<\/p>\n
It has never been cheaper to borrow, people say.<\/p>\n
This assumes that the cost of borrowing is defined by the rate we borrow at today.<\/p>\n
It isn’t. It’s defined by the average rate we pay for the money \u2013 usually over 20 or 30 years.<\/p>\n
When we borrow, we should consider what rates might look like in a few years’ time.<\/p>\n
Reserve Bank Governor Adrian Orr has been saying as much in his post-monetary policy briefings.<\/p>\n
He’s warning about mortgage borrowing, not fiscal policy – which is outside his brief.<\/p>\n
His concern is with ordinary New Zealanders who may find themselves over-exposed to housing debt when rates rise.<\/p>\n
Which they will, eventually.<\/p>\n
In what should come as great relief to mainstream New Zealand, the plan is to raise them in an orderly, well-signalled manner.<\/p>\n
In a big symbolic call last week, the Reserve Bank published a forward rate track for the first time in more than a year.<\/p>\n
That track forecast rates to start rising in the second half of next year as inflation pressure builds.<\/p>\n
Conditional on assumptions (which could change) – it assumes that the OCR will be back at pre-Covid levels by the middle of 2024.<\/p>\n
That’s an OCR at about 1.75 per cent, which is still historically on the low side but could easily see mortgage rates rise by more than 50 per cent.<\/p>\n
That, says Orr, is simply because the economy is “evolving back to a more normalised position”.<\/p>\n
Getting rates back to neutral is important because it renews the capacity of central banks to apply stimulus when the next crisis hits.<\/p>\n
The fact that New Zealand may step out on this path sooner than many other nations is a very good thing.<\/p>\n
It reflects the relative strength of our economy.<\/p>\n
<\/p>\n
It’s not just that a strong economy and inflation pressure will require rates to rise. It’s that our economy is strong enough to handle them rising.<\/p>\n
Perhaps they won’t rise as fast or as far.<\/p>\n
Orr appears open to all possibilities on inflation and that is a very good thing too.<\/p>\n
He and the Reserve Bank are not backing themselves into a corner – debating whether rising inflation is a short-term Covid phenomenon or whether it reflects a deeper structural shift.<\/p>\n
This debate swings on whether traditional drivers – like shocks to the supply of goods and labour – will dominate.<\/p>\n
Or whether the power of the internet and globalised pricing – which has restrained inflation for at least a decade – will dominate.<\/p>\n
On balance, Orr says, the world is still “more the same than different”.<\/p>\n
But he remains open to the possibility of structural change.<\/p>\n
There’s no reason to assume that deflationary pressure of the past decade or two will be any weaker, he says.<\/p>\n
Especially given the acceleration of tech adoption we’ve seen through Covid.<\/p>\n
This is the grown-up thinking of someone able to hold two or more complex ideas in his head at once.<\/p>\n
It shouldn’t be surprising.But it is reassuring.<\/p>\n
Don’t believe the hype. Our Reserve Bank remains cool, calm and focused on a careful balanced path out of the Covid era.<\/p>\n
Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"