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Bollard concerned about "very nasty" inflation building globally

Posted in News

Alan Bollard has testified in front of Parliament's Finance and Expenditure Select Committee in Wellington on his decision to cut the Official Cash Rate by 0.5% to 3%. The following comments were made over a 35 minute hearing, including a surprisingly hawkish statement about a "very nasty" global inflation problem building up because of heavy money printing and deficit spending in Britain and the United States.

Bollard recapped on the decision and reiterated that New Zealand can't cut the OCR below 2% because New Zealand needed to be careful about having a high enough interest rate to encourage international investors to keep funding our current account deficit.

Committee chairman Craig Foss asked about the Governor's comments on interest rates not getting down to "near zero" and whether New Zealand can go below Australian rates. Bollard said the current differential (NZ on 3% and Australia on 3.25%) didn't make too much of a difference, but New Zealand wouldn't want to get too far away.

What about a quantatative easing, Labour Finance Spokesman David Cunliffe asked.

"We've put a small toe in the water with the TAF (Term Auction Facility) and the way we've got a cashed up system for overnight funding. We're watching what the Bank of England and the Federal Reserve are doing,"  Bollard said.

Bollard was asked about inflation and was surprisingly hawkish in his answer.

"I think the world is building up to a pretty nasty inflationary situation in a couple of years," Bollard said. "Internationally there is a big problem, but here we don't see it here, at least for now," he said.

Asked if mass money printing and government deficits were creating inflation globally and whether other central banks and governments should be worried, he said: "Ultimately yes. They should be starting to get concerned about that."

Asked if all of today's cut in the OCR should be passed on in lower variable mortgage rates, he said: "At the floating rate end we'd expect most of that to go through."

Bollard also talked about the Term Auction Facility that allows the Reserve Bank here to provide funds for banks through lending against securitised mortgages. He described this treatment as a type of "dialysis" for banks rather than the full organ and blood transplants that overseas banks are getting.

He later said: "Can I withdraw that analysis and use a flu jab one instead." That tickled the committee's funny bone.

Asked if the bank had been slow to cut rates last year, he said: "From hindsight, we were slow to pick the depths of the global downturn and had we done that we would have cut a bit beforehand, but we did cut in July, which was before the rest and we did get panned for it at the time, so that's not playing on my conscience too much."

 

 

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Where is the inflationary pressure

Where is the inflationary pressure going to come from? There will be no inflation unless the collective money printing activities of central banks around the world outstrip the quantum of deleveraging taking place.

TRY doing the SUPERMARKET SHOPPING......give

TRY doing the SUPERMARKET SHOPPING......give yer wife a break and you have a REALITY CHECK.

Dosser Could you be confusing

Dosser

Could you be confusing asset price deflation with goods price inflation?.

A recent Stats deparment release showed imported prices rising the thick end of 10% when gasoline products were excluded.

What's more the assets we are talking about other than houses are more or less owned by about 10 % of the world's population.

The poor can only get more hungry.

Dosser; Do I understand you

Dosser; Do I understand you correctly:
You're saying that the increase in money supply is just to replace the spending/debt that has already happened, and that all that is going to occurr is that we shall have to repay the debt created by the various Treasuries quantitative easing through our taxes etc. without any imact on prices?
Interesting! A bit Hugh Hendry'ish, and a bit like paying the poacher for the birds he has taken off your own land.

Sooner or later worldwide environmental,

Sooner or later worldwide environmental, political and economical negative impacts lead to massive shortages of essential products/ services, which will lead into (H)- Inflation.

The poor can only get more hungry. Well said Stephen !

Stephen - I use the

Stephen - I use the term inflation to describe an increase in the supply of money, rather than its distant cousin, consumer price inflation. As you say, some will lose out more than others, mainly as a result of our falling dollar. Once that process is complete I expect consumer goods prices to fall.

Janet - basically, yes, in that the whole point of QE is to maintain prices at their existing levels, i.e., avoid deflation. QE is the socialisation of past excesses, and we will all pay for it by servicing increased levels of government debt.

“I think the world is

"I think the world is building up to a pretty nasty inflationary situation in a couple of years," Bollard said. "Internationally there is a big problem, but here we don't see it here, at least for now," he said.
Bollard was asked about inflation and was surprisingly hawkish in his answer.
"I think the world is building up to a pretty nasty inflationary situation in a couple of years," Bollard said. "Internationally there is a big problem, but here we don't see it here, at least for now," he said.

What goes up hast to eventually go down...OH yeah we are seeing that..
What goes down eventually hast to go up..if it still exists..

They called it the elastic effect in my economics classes in to 70s....about the time of the fuel crisis recession.

The subject has been touched on here several times over the last few weeks
The banks holding long term interest rates up, about the time inflationary effects will start to take effect.

"The old 1930s concept of print money" no print more then "OK lets fire up the furnaces and burn it."

Bollard may see the statical writing on the wall...even so it is simple commonsense, and backed by historical events.

Maybe investors are pulling out

Maybe investors are pulling out of Stocks, commodities, property (as asset prices globally are deflating) etc to repay debts and to hold cash (or Short term treasuries in the US) due to the deteriorating economy (as is happening).
Governments try to kickstart the slowly economy by printing $$ (as is happening, UK, Fed bailouts), but people still are in the above state so continue to hold cash.
Asset deflation continues until people loose confidence in the govt/economy/(currency??) and so all this cash comes out out once.... inflation sky rockets

The more I read, the

The more I read, the more I think that Bollard has crapped himself about the idea that no-one will lend to us if our interest rates are below Austalia's, and has worked backwards from there. That's why he has:

(a) Implausibly strong growth forecasts for NZ - "everything's OK here, we don't need to cut any further" - in the context of:
(b) Extremely ugly world growth forecasts, so that when the world does take another lurch lower he can say "I expected this, so we don't need to cut any further"; and:
(c) A massive inflation problem globally, because "the rest of the world has got it wrong; we shouldn't cut any further".

Needless to say that this is riddled with contradictions.

Miguel Sanchez Says: "The more

Miguel Sanchez Says:
"The more I read, the more I think that Bollard has crapped himself about the idea that no-one will lend to us if our interest rates are below Austalia's, and has worked backwards from there. That's why he has:...."

There certainly has been a change in Bollard with the new Government....
Rather than trying to reverse the down slide...which is a waste of time...it is now more a gentle tweak to accommodate the current situation with a longer term view to placing us in a good position for recovery when things bottom out.
Or as an old saying goes " count to 10 sloooowly THEN panic in an orderly fashion"

The big difference between the RB and Government and bank/real estate, farmers, manufacturer, Round table economists is their point of perspective.
The RB Gov is looking down at the big picture, the rest are 'pressure groups' lobbying for their personal interests.

Nice little link to JK

Waymad...You beat me to it..Read

Waymad...You beat me to it..Read his blog everyday, amazing views and ideas worldwide, sounds like our man J.Key is da man..

Steps: nope, Bollard has been

Steps: nope, Bollard has been if anything even more panicky since the election. Do you think it's coincidence that he's started with this line about "retaining competitiveness in international capital markets" just a few weeks after going on a global road trip to try to convince foreigners to buy our bonds?

Anyone who actually follows Lew

Anyone who actually follows Lew Rockwell.Com or the Ludwig Von Mises page or the Foundation For Economic Education page; or Peter Cresswell's excellent work in connecting New Zealanders to Austrian Economics, will understand the inflationary hazards that are looming. Don't say Bollard has been straying off the monetarist reservation?

# Dosser Says:
March 12th, 2009 at 2:40 pm

"Where is the inflationary pressure going to come from? There will be no inflation unless the collective money printing activities of central banks around the world outstrip the quantum of deleveraging taking place."

You are onto it, Dosser, but if Paul Krugman has his way, that is exactly what the central banks would do.

But when the deleveraging stops, what then?

Newly created base money will

Newly created base money will be hoarded by the banks and not lent out. Even if they do decide to lend money out, they will have few takers. The public mindset has changed to one of debt reduction. For a number of years, the reduction in credit will outweigh the increase in base money supply, and there will be no inflation.

the bottom has been called

the bottom has been called way too early in NZ. Key's strategy is either completely misguided/over optimistic or he needs to call the RBNZ into account. I think the former is more likely.

Interesting, Dosser. Have you been

Interesting, Dosser. Have you been reading Steve Keen on this?

What will the borrow-and-spend activities of the US government and other big governments do to credit? Will we see a reduction of Private Debt and increase in Public Debt?

PhilBest, I think Mish Shedlock

PhilBest,
I think Mish Shedlock has been pushing the line that the banks are hoarding the money. And that there are few, in the US, who are both credit-worthy and want to borrow extra money. He puts forward the view that the banks are not that keen (in the US) on lending to those that do want to borrow.

From my reading of Keen, his Minskyian stance is that if the popular psychology has changed and the population has realized there is considerable risk with lots of debt, then people are going to, as a herd, start paying down the debt rather than taking more on.

My understanding of Keen's view on Minsky's Financial Instability Hypothesis is that, with respect to increasing levels of debt, that over the past 40 years or so, there have been much in the way of rewards and little in the way of consequences and people became more and more comfortable with taking on heaps of debt. Lenders became more and more comfortable in extending more and more money. Going from lending 75% of a house valuation in the 60s to 100% of a purchase price in this decade.

Hence the move from Houses selling at 3X median household income to selling at 6X median household income.

Keens take seems to be that if the population changes its view and realizes there are consequences to too much debt then the change in attitude is the driving force for a while.... And if they see asset prices decreasing, then why buy today when you can buy cheaper next month..

Its an interesting time we live in. Keen has just put up another post on his blog where he returns some fire to Chris Joye (AU property Spruiker) and Rory Robertson (neoclassical economist).

http://www.debtdeflation.com/blogs/2009/03/14/rory-robertson-designs-a-car/