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Labour's finance spokesman David Parker talks death of inflation targeting with Daily Telegraph's Ambrose Evans-Pritchard

Posted in Opinion

By David Parker*

I am travelling to the US and UK to discuss my ideas on monetary policy with some of the best economic minds in the world, including former World Bank chief economist Joseph Stiglitz, Harvard academic Jeffrey Frankel, George Soros and former IMF chief economist Olivier Blanchard.

Evans-Pritchard says:

“Inflation targeting is dead”

“Arbitrage opportunity of New Zealand well known in the UK”

Today I met with Ambrose Evans-Pritchard. He is International Business Editor of The Daily Telegraph. He has covered world politics and economics for 30 years, in Europe, the US, and Latin America.

I have followed his writing for a number of years. For a period his by-line was ahead of the curve, and his analysis of the GFC and its consequences certainly has been. So I was keenly looking forward to meeting with him today. I was not disappointed.

We primarily discussed the topic which my study trip concentrates on – monetary policy, and its effects on exchange rates, current account deficits, growth in the real economy and private debt.

Ambrose said the credit inflows from the carry trade caused by New Zealand’s comparatively high interest rates must be a concern. He said that in the UK the arbitrage opportunity in New Zealand was well known.

I said that, in my view, for a number of years the Reserve Bank underplayed the seriousness of this, despite the fact that those credit flows fuelled the consumption binge and asset price bubble that higher interest rates were meant to curb.

I was struck when Ambrose commented that “inflation targeting is dead”. He was interested to know why it has persisted in New Zealand. I said maybe it was because of our experience with stagflation in the 1970s and early 1980s.

Ambrose said Great Britain would be in a far worse position if it had not been able to adjust to its decline in circumstances via a drop in the pound, which has led to resurgence in manufacturing, especially in the car industry. What a boost it would be to New Zealand’s modern manufacturing industry to have a dollar unaffected by arbitrage.

We traversed my view that competitive devaluation is alive in the world. Ambrose said he does not know whether it was an objective of the USA’s quantitative easing, but a consequence has been a 12% pa narrowing of the terms of trade gap between USA and China.

Ambrose believes UK and the USA will embark upon further quantitative easing that will have flow-on effects to the New Zealand dollar. We discussed whether concentrations of wealth born of the huge trade imbalances and settings in some countries means there is a need for greater care or attention to asset price bubbles and whether the globalisation of investment flows  (as opposed to trade flows) is desirable.

We discussed the contrast between New Zealand under Clark/Cullen and the UK under Blair/Brown. Cullen ran budget surpluses, leaving low government debt and countercyclical tax cuts, whereas Brown ran deficits of 3% of GDP when he should have been running a 2% surplus.

That 5% pa of GDP stimulus, and slide in the UK government books, has left a government debt hangover for the UK reminiscent of the debt burden Muldoon left for New Zealand in 1984. I told Ambrose that it took New Zealand a generation to overcome that debt burden, and that my impression, as an outsider, is that the likely length of the consequences of government debt levels in Europe does not appear to have fully sunk in. 

Extremely insightful thoughts overall, especially the death of inflation targeting, the carry trade knowledge in the UK and the possibility of globalising investment flows. 

Next I’m off to the OECD.

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Also see: Labour's Parker to meet with world's top minds on exchange rate settings and monetary policy, including inflation targeting obit writer Frankel, Joseph Stiglitz & IMF's Blanchard

* David Parker is the Labour Party finance spokesman

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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14 Comments

He had to fly to the UK to

He had to fly to the UK to find this out?  Good timing in being there during the northern hemisphere summer/ NZ winter.  Free holiday perhaps courtesy of the NZ taxpayer?

Hi Andy, He's paying for it

Hi Andy,
He's paying for it himself - including it as part of a personal holiday I'm told.

Since when is Joseph Stiglitz

Since when is Joseph Stiglitz one of the best economic minds in the world??

One of the better ones....but

One of the better ones....but most economists dont get Peak Oil....but then Parker doesnt want to hear that.
regards

Good news. At least Labour

Good news. At least Labour aren't keeping their heads firmly stuck in the sand like NACT.
TARA.

Actually he is and he's

Actually he is and he's slapping his butt with a hammer to drive it further down.
regards
 

Parker is a wasted space.

Parker is a wasted space. He's not stupid, but he's kick-starting a dead motorbke.
 
And he's been told!
 
He wants 'growth in the real economy", but is incapable of acknowledging that it would need exponentially more energy/resources, and that we can't 'double' from here.
 
Waste of space and time.
 
Not alone in that, though.......

I also am a big fan of Evans

I also am a big fan of Evans Pritchard; and am pleased to see Parker is talking to him. For those NZers who don't know, the Daily Telegraph is often considered the mouthpiece of the British Conservative Party; more or less in theory similar to National. Except that the Conservatives are somewhat competent, and while they have occasionally huffed and puffed at Mervyn King's management of the BOE, in reality since the GFC, he has saved them from massive overseas borrowing; and helped save manufactturing and other indistries. All this while the Finance industry, in which Britain was strong, has had something of a due comeuppance; and their major trading partner- Europe- has had a crisis. King, along with virtually all other central bankers, was culpable for the initial crisis. But since then in a typical British way,(where they do not always do what they say) he has pretended to target inflation at less than 3%, but in reality encouraged/ caused it to 5% or so for 3 years. Hence a very competitive devaluation, and 400 billion pounds less government debt than would otherwise be.
If we carry on only targetting inflation, and have a freely floating exchange rate, we will absolutely certainly end up as tenants in our own land. Pretty close already.
Ideally the Nats would undestand this also, so change could be urgent, and bipartisan, but they appear to still have their heads in the sand.   Labour just could be the answer.

Stephen L - perhaps you might

Stephen L - perhaps you might like to read what I posted above, before your party political broadcast.
 
Clare Curran thinks we have it good here, so we should invite more folk i to share it. That's crass stupidity (I told her so) and has no place in our getting onto a sustainable footing - which is the only valid goal, if you're capable of thinking.
 
Parker, told about Peak Oil, EROEI and the export land model (producing nations use increasingly more of their oil, even as their fields deplete) just said "I can'r believe we're runningout of oil". Didn't get it (or didn't want to) so a wasted space.
 
Shearer is clearly not there, and all his elevation (by Goff, wasn't it, an original Rogernome?) will do is let the current lot do another 3 years damage.
 
Clark was there when Parker was told - but seems to have ignored that which he said he understood (that wealth is underwritten by work being done, and that we're past peak in that regard) and wastes his time on 'minimum wage' nonsense. It's a nice thought, but money expects to buy bits of the planet. Think about that.
 
Labour currently is the answer to nothing.

PDK, I have not read all your

PDK,
I have not read all your posts; and am not sure if your first priority is worrying about peak oil- that we are running out in other words; or global warming. I respect your passion, and agree that the world should certainly do more on global warming. If we are running out, then that clearly is a different problem, and needs some government action on alternatives; although one imagines most of the real invention will happen offshore.
Either way I'm afraid you haven't convinced me that New Zealand acting on its own will make much difference; nor that we should follow policies massively different to the rest of the world; nor just export our mess or problem by encouraging manufacturing in places other than NZ.
For current account reasons I am keen on us consuming less in the short term, and that actually would I believe be in line with your thinking.

Either way I'm afraid you

Either way I'm afraid you haven't convinced me that New Zealand acting on its own will make much difference; nor that we should follow policies massively different to the rest of the world; nor just export our mess or problem by encouraging manufacturing in places other than NZ.  
Isn't that the quandry that an individual (proverbial) lemming has just before stepping of the cliff?

Sthephen L -   "If we are

Sthephen L -
 
"If we are running out". Spare me, that's the comment Parker made, and that I said was stupid.
 
It's not 'running out' that is the problem. It's attempting to continue beyond Peak, which is (roughly) half-way through. (Peak quality pre-dates peak flow, given that the best is cherry-picked first).
 
Not only can you not grow, beyond the half-way point, but you are faced with decreasing supplies as you go on. Efficiencies can and will be applied, but they a law of dinimishing returns, again it's cherry-pick first.
 
Consuming  less would be a good thing, in import, debt and pollution terms, but would be death to many folk trying to pay existing mortgages. For a long time, here, I've been pointing out that all the 30-year (or whatever) mortgages, are an expectation that folk can trade goods/services in at least a BAU manner (actually I'd argue; in an increasing manner) for that period. Can't happen.
 
Read Bernards No7, Fridays Top 10. There isn't enough to go around anynmore, but those in a position to mop-up, are doing so. Say goodbye to the middle-class.