Am I wrong? Tell me so!!

Feb 3rd 2004

Some economists and financial press believe that the US in the 90s and Japan in the 80s experienced economic growth driven by a positive productivity shock. The economic growth was accompanied by money and credit aggregates. Proponents of the real business cycle considered the money growth benign ( no money growth is benign), while adherents of natural rate theory viewed it as beneficial  because either the price level was stable or interest rates were extremely low. A capital-based-macroeconomics shows how and why  the accompanying  growth of money and credit with or without declining interest rates was neither beneficial or benign. Credit creation sets an economy up for a boom and eventual bust.

John P Cochran and Noah Yetter, Metropolitan College of Denver.

My concern in past essays has been that New Zealand was headed for disaster by allowing an expansion of the monetary base. Bought on by immigration and money inflows caused by a strengthening dollar. Whenever I try to discuss the issues with someone in power I am met with silence. I admit, I do not have an economics degree or any degree of any kind. But what I do have is 35 years of experiencing the results that the "degreed" have inflicted on me. What I see now is a cycle repeating. A cycle that was never supposed to repeat because the experts had everything "under control".

New Zealand's Reserve Bank Governor recently gave a speech to the Canterbury Employer Chamber of Commerce, here is the link, <http://www.rbnz.govt.nz/speeches/0145812.html> . The Governor alluded to that which I have been arguing for, but dismissed it as not viable.

Another possible option - at least in theory - is to make more use of prudential regulation. For example, could the capital ratio applied to banks be used counter-cyclically? Could the risk-weight on credit exposures secured by residential property be applied in ways that reduce swings in house prices? From time-to-time we consider these kinds of issues, but have so far always reached the same three negative conclusions.
First, such tools are unlikely to be very effective in addressing asset price cycles. The implementation of policy changes would take time, after which there would be a potentially long and variable lag in the impact on asset prices. ( AL comment. So what if it takes time to implement). Second, although such tools are less blunt than the OCR in targeting particular asset categories, they are nonetheless still relatively blunt instruments, and would have impacts that go beyond those intended.(AL comment. Blunt or sharp, there will be pain) Third, the use of such tools for macroeconomic purposes conflict with the objective for which such tools were originally designed - i.e. financial stability. (AL comment. What were the tools designed for? A stable currency must not have been one of the objectives). Indeed, the use of prudential regulation to moderate asset price cycles might backfire in some circumstances, creating perverse incentives for banks to bias their lending into riskier ends of the lending spectrum, which in turn could reduce the stability of the financial system. ( AL comment. The banks lending policies are the main problem in the first place). These factors have led us to reject the use of prudential tools as instruments for responding to asset price cycles.( AL comment. Pandering to the big money again. What about the little chap who needs stable money so he can save and invest).

Dr Alan Bollard

Maybe he is right, but a blunt instrument is what is needed when the market decides that it is time for our currency to blast into the stratosphere. Am I concerned about the banks lending policies? NO!! It is the process of fractional reserve banking that causes bubbles in the first place. I am quite sure the banks would be more prudent if they knew that capital adequacy ratios could be applied at any time, making the need to use the back of the bat less likely. We do not have financial stability when our currency swings as wildly as it does. The productive base is being flogged to death by the bat from the opposing team.

The tool the Governor uses is interest rates when CPI inflation (Consumer Price Index) gets towards the outer limits. It is my view that his contract only dresses the wound instead of hunting down the rabid dog. What precedes Consumer Price Index inflation by up to 2 years is an expansion of monetary aggregates. Money inflows that are being fractioned into credit lending. That is the real inflation that should be targeted. Those monetary aggregates flow right under the Governors chair.

“an economic policy that aims to achieve growth by wealth creation therefore does not attempt to increase the production of goods and services, except as a secondary objective.” This a perfect description of the corrupted economic thinking that is today ruling.   Kurt Richebächer

"With the exception only of the period of the gold standard, practically all governments of history have used their exclusive power to issue money to defraud and plunder the people." F.A. Von Hayek

Reap as ye sow.

One other possible cure for our ailments is place those with financial power on a salary package that is tied to percentages of values with our trading partners' currencies. Suddenly everything becomes their personal problem. They would view differently the manipulation of currency if their own pocket was at risk. It is all very well sitting in an ivory tower saying "tisk tisk", "I hope this doesn't weed out too many producers." "I'm ok though". "I'm getting paid".

In the end it is production that pays the bills, we must find ways to protect that base at all costs. We must encourage it to thrive, and then as a nation we can prosper.

Who will be the scapegoat when this property price bubble unravels? Dr Bollard?

Alan Lunt

allies1111@tacticalinvestor.com